The Pattern of International Trade Between Japan and the Pacific Basin Countries
A Comparison Between 1975 and 1985
Author: Sayuri Shirai1
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
Publication Date:
01 Jan 1995
eISBN:
9781451842562
Language:
English
Keywords:
WP; consumer product; industry trade; import share; capital product; export share; manufacturing industry; metal product; manufactured product; transport equipment industry; textile product; equipment product
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Using the international input-output tables between Japan and five Pacific Basin countries (Indonesia, Korea, Malaysia, Singapore, and Thailand) for the years 1975 and 1985, the paper examines the trade structure in 1975 and how it had shifted by 1985. It shows that intra-industry trade in manufactured products expanded as Japan increased imports of more capital-intensive products from these countries. Intra-industry trade of intermediate inputs increased substantially more than of final products, reflecting a trend by manufacturers to subdivide the production process of intermediate inputs and to shift their locations to different countries. This suggests a more active development of international labor in the intermediate stages of production and a deepening of regional linkages.

Abstract

Using the international input-output tables between Japan and five Pacific Basin countries (Indonesia, Korea, Malaysia, Singapore, and Thailand) for the years 1975 and 1985, the paper examines the trade structure in 1975 and how it had shifted by 1985. It shows that intra-industry trade in manufactured products expanded as Japan increased imports of more capital-intensive products from these countries. Intra-industry trade of intermediate inputs increased substantially more than of final products, reflecting a trend by manufacturers to subdivide the production process of intermediate inputs and to shift their locations to different countries. This suggests a more active development of international labor in the intermediate stages of production and a deepening of regional linkages.

I. Introduction

In recent years, so-called “new” theories of international trade have rapidly developed to provide a better explanation of the actual pattern of trade. These new trade theories, based on the concepts of product differentiation, imperfect competition and economies of scale, seek to explain why trade takes place even when countries do not differ much in relative factor endowments or labor productivity. Compared with so-called “conventional” trade theories, such as those of Hecksher-Ohlin and Ricardo, the new trade theories focus on five main facts: (i) a large part of trade consists of two-way flows of products with similar factor intensity; (ii) countries with similar relative factor endowments participate actively in trade activities; (iii) intermediate inputs account for a large part of trade flows; (iv) intra-industry trade in manufactured products occurs mainly between technologically-advanced countries or countries producing high-quality products; (v) intra-industry and intra-firm trade associated with foreign direct investment (FDI) take place frequently.

The new trade theories provide three main conclusions on the static pattern of trade (e.g., Helpman and Krugman (1985)).

  • (i) Relatively capital-rich (labor-rich) countries are net exporters of capital-intensive (labor-intensive) products and net importers of labor-intensive (capital-intensive) products.

  • (ii) Inter-industry trade dominates between countries that differ significantly in relative factor endowments, while between countries with similar factor endowments, intra-industry trade is dominant.

  • (iii) Intra-industry trade in manufactured intermediate inputs and final products takes place even when countries have the same relative factor endowments.

The new trade theories also seek to explain the dynamic pattern of trade (e.g., Flam and Helpman (1986) and Shirai and Huang (1994)). According to the theories,

  • (i) Industrialization that takes place in developing countries and results in (a) quality improvement; (b) technology advancement; and (c) an increase in factors specific to manufacturing industries, expands intra-industry trade toward more capital-intensive or higher-quality manufactured products. In other words, industrializing countries increase exchanges of manufactured final products that differ in variety and quality.

  • (ii) Industrialization increases intra-industry and intra-firm trade in manufactured intermediate inputs if the production process is subdivided across countries and each country specializes in different intermediate inputs.

  • (iii) FDI in search of a low-cost labor force promotes conditions (a) and (b) by shifting production locations of labor-intensive products to developing countries (Helpman (1984) and (1985)). As a result, when developed countries expand exports of capital-intensive intermediate inputs and final products and imports of labor-intensive products, both intra-industry and intra-firm trade increase.

These explanations of the static and dynamic trade patterns seem to fit the pattern of trade between Japan and the rapidly industrializing Asian countries. Since the post-war period, these Asian countries have promoted industrialization policies that have led to strong economic growth in the 1980s. From the beginning, the Newly Industrializing Economies (NIEs)--Hong Kong, Korea, Singapore, and Taiwan Province of China--selected an export-promoting industrialization policy because they lacked natural resources and had small domestic markets. By contrast, the Association of Southeast Asian Nations (ASEAN), which includes Indonesia, Malaysia, the Philippines, and Thailand, initially selected an import-substituting industrialization policy and later adopted an export-promoting industrialization policy. In both cases, the rapid pace of industrialization in these Asian countries changed their pattern of trade with advanced countries like Japan to a considerable degree.

Appealing to the new trade theories, this paper analyzes the changes in trade patterns between Japan and five other Pacific Basin countries over the 1975-85 period. Indonesia, Korea, Malaysia, Singapore, and Thailand have been selected for the purpose of examining the deepening economic linkages in the region. In order to obtain trade data on intermediate inputs, final products, and on sellers and buyers specified by country and industry, we utilize data of the International Input-Output Tables for the years that were available--1975 and 1985.

It should be noted that deepening economic linkages between Japan and the five Pacific Basin countries were already in evidence before 1985. We therefore believe that a detailed analysis of the structural changes before 1985 is important to understanding the growing international division of labor that has been taking place in the Pacific Basin countries during the post-1985 period.

Before moving to the discussion, it seems appropriate to mention some limitations of the paper. First, it does not examine the impact of trade liberalization on the structure of trade, nor does it cover the changes in international trade that have taken place since the appreciation of the yen in 1985, when Japan increased its FDI to the five Asian countries being examined. Further, it does not analyze the impact of increased FDI from Korea and Singapore to other labor-abundant Asian countries in the 1980s--whether this financial assistance may have contributed to deepening the international trade linkages in the region or led to an expansion of intra-industry trade between the more industrialized and less industrialized Asian countries. Thus, the paper does not consider the impact of the recent movement toward intra-regional economic integration on the structure of trade in the Pacific Basin. Although these issues are beyond the scope of this paper, they are important topics for future research.

This paper consists of six sections. Section II undertakes an overview of the economic linkages between Japan and the five Asian countries. Section III analyzes the static and dynamic pattern of trade between the countries by considering intra- and inter-industry trade. Section IV focuses on static and dynamic import-export structures of the Japanese manufacturing industries. In particular, the section focuses on two types of trade flows of manufactured products. One type is of intermediate inputs imported by the Japanese manufacturing industries and the resulting input relationships established with the interacting industries. The other type is of manufactured products produced by the Japanese manufacturing industries and exported as intermediate inputs, and the resulting output relationships created with the associated industries. Section V undertakes an overview of the trends in trade since 1985. Section VI contains concluding remarks.

II. Overview of the Economic Linkages Between Japan and the Pacific Basin Countries

The intra-regional economic linkage between the Pacific Basin countries has deepened significantly in recent years and is clearly observed in international trade transactions between the countries. More than half the exports and imports of the fourteen Pacific Basin countries (including Canada and the United States) were transacted between these countries. For example, in 1984, exports and imports of countries within the region reached 61 percent and 58 percent of their total exports and imports. This intra-regional trade is considered high, particularly when compared with intra-regional trade in the European Union, whose exports and imports achieved 52 percent and 50 percent, respectively (Kraus and Lutkenhorst (1986)).

While the deepening of the intra-regional economic linkage can be partly attributed to a wave of trade liberalization or a political movement toward intra-regional economic cooperation, it is also the result of strong endogenous market forces along the “international production cycle” (Vernon (1966)). According to the international production cycle theory, in the first stage the production of labor-intensive products takes place, such as consumer electronics, processed food, and textiles. Also, the production of heavy industrial products, such as metals, refined oil products, and chemicals, is initiated at this stage. These products are usually produced through import-substitution programs. In the second stage, countries experience an increase in labor costs. In this stage, countries increase productivity in the labor-intensive industries by introducing advanced technology, upgrading their products, or beginning production of higher value-added products. At the same time, heavy industries become competitive, catching up to international standards. In the third stage, countries finally lose competitiveness in the labor-intensive industries. These industries are gradually phased out and as a consequence, firms shift production locations to other labor-abundant countries or they switch to the production of more capital-intensive or advanced-technology industries.

The relationships between Japan and the five Asian countries followed this process of the international production cycle (Mardon and Paik (1992)). Japan, which revitalized the industrialization process in the 1950s, had already experienced an increase in labor costs in the 1960s and subsequently increased productivity of labor-intensive products to deal with high labe costs, or, following the production cycle, it intensified production of capital-intensive products. In the 1960s, Japan gained a comparative advantage in labor-intensive products such as apparels, rubber, plastic, textiles, and nonmetallic minerals. Also during this period, Japan already had a comparative advantage in some capital-intensive products such as machinery and transport equipment. In the 1970s, Japan lost its comparative advantage in the labor-intensive products and gradually shifted to higher value-added capital-intensive or advanced-technology-intensive products. As a result, Japan enhanced its comparative advantage in these products in the 1980s.

In the meantime, the five Asian countries followed the international production cycle on the basis of their relative factor endowments. Among the five Asian countries, Indonesia, Malaysia, and Thailand are endowed with natural resources or a large labor force, while Korea and Singapore are rich in capital stock per capita and have a skilled labor force (Table 1). Korea and Singapore, which lack natural resources or large domestic markets, successfully initiated export-promoting industrialization in the 1960s and since then have moved into higher stages of the production cycle by integrating higher technological processes to advance their industrial production. They increasingly developed a comparative advantage in capital-intensive products such as radio, television, telecommunication equipment, and office and computer equipment products. In the 1980s, the two countries experienced an increase in labor costs and entered the third stage. They upgraded their consumer-oriented products by increasing labor productivity and shifted toward more value-added market niches. They also gained international competitiveness during this period, particularly in capital-intensive industries. As a result, they increased exports of automobiles, fertilizers, machine tools, metal products, and ships.

Table 1.

Factor Endowments of the Countries in the Pacific Basin

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Source: Noland, M., (1990), Table A.2 and A.3, pp. 199-204.

Thousands of hectares

Millions of 1980 PPP dollars

Millions

Millions of barrels

Defined as the average per capita expenditure on education embodied in the labor force and regarded as a proxy for human capital

Indonesia, Malaysia, and Thailand, which are rich in natural resources or have fertile soil suitable for agriculture, initiated their industrialization in the 1960s based on natural resources such as food processing, combined with the development of heavy industries. Thus, during this period exports were primarily of agricultural and mining products. In the 1980s when Korea and Singapore were faced with increased labor costs, these three countries experienced rapid industrial growth in labor-intensive industries by taking advantage of their low cost labor force.

Since 1985, when the yen appreciated sharply, this international production cycle accelerated and as a consequence, Japan’s FDI surged in the five Asian countries. Traditionally, Japan’s FDI in the Pacific Basin region was oriented toward natural resource-based industries for the purpose of acquiring raw materials such as copper ore, iron ore, oil, and natural gas. However, since the 1970s, this type of FDI has gradually declined. For example, Japan’s FDI in mining accounted for 11.3 percent in the 1950s, 31.8 percent in the 1960s, 25.1 percent in the first half of the 1970s, 15.4 percent in the second half of the 1970s, and 9.9 percent in the first half of the 1980s. Japan’s FDI in Indonesia was particularly high.

Meanwhile, Japan’s annual FDI flow in the region’s manufacturing industries swelled from $1.57 billion in 1951-74 to $3 billion in 1975-80. It surged further in the late 1980s, from $2.95 billion in 1981-85 to $11 billion in 1986-90. Originally, Japan’s FDI was concentrated in manufacturing, mainly in response to the wave of Import - substituting industrialization that was under way in the ASEAN countries during the 1950s to the early 1960s. At the same time, Japan provided FDI to manufacturing industries in the NIEs to promote the export of locally-produced products to Japan and to third countries.

During the 1980s, however, Japan increased its FDI in the region’s locally-produced products for the purpose of increasing their export to Japan. Between 1951 and 1974, this FDI was concentrated in the textile and consumer electronics industries. Between 1975 and 1980, the FDI was directed to the chemicals, metals, and nonferrous metal industries, while it declined in the textile industry. In the early 1980s, Japan increased FDI to the transport equipment industry and in the late 1980s increased it again in the electronics industry. The increased FDI in the electronics industry was more evident in Indonesia, Malaysia, and Thailand than in Korea and Singapore because of the lower costs of labor in the former countries. Consequently, the export share of manufactured products, which were produced by Japanese-affiliated local firms in the Pacific Asian countries and for shipment to Japan, expanded from 10 percent in 1981, to 12.3 percent in 1984, and to 16.1 percent in 1987 (Uriu, Koishi, and Shinohara (1991)).

In recent years, Japan’s FDI by parts makers has accelerated as they have been shifting their production locations to increase local production networks and raise sales in the region (Japan Export-Import Bank (1992)). As a result, the local content ratio of parts for Japanese firms increased significantly. For example, the share of domestically-produced parts by Japanese-affiliated firms in the Pacific Asian countries expanded from 36.1 percent in 1984, to 42 percent in 1987, and to 49.1 percent in 1990 (Uriu, Koishi, and Shinohara (1991)).

Japan played a dominant role as a major trade partner of the five Asian countries. Japan’s role exceeded that of the United States, except in the case of Korea where the United States was the major export market (Kraus and Lutkenhorst (1980)). Table 2 shows that Japan supplied the major portion of the five countries’ imports in both 1978 and 1984. Japan has been a major supplier of capital-intensive intermediate inputs and of capital products, which helped these countries to industrialize their economies and led to export growth. For example, Japan supplied 40 percent of Korea’s imports in 1978 and still maintained a 25 percent share in 1984.

Table 2.

Japan: Share of Exports and Imports with the Five Asian Countries

(In percent)

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Source: Kraus and Lutkenhorst (1986), Table 22, p. 123.

The rapid progress of industrialization that took place in the five Asian countries changed the trade structure, shifting their economies toward capital-intensive industries. For example, between 1970 and 1991, the value-added share of machinery and transport equipment in manufacturing increased from 2 percent to 12 percent for Indonesia, from 11 percent to 33 percent for Korea, from 8 percent to 35 percent for Malaysia, from 28 percent to 52 percent for Singapore, and from 9 percent to 14 percent for Thailand (World Bank (1994a)). Thus, the shares of these products in merchandise exports increased from 0 percent to 4 percent for Indonesia, from 7 percent to 40 percent for Korea, from 2 percent to 38 percent for Malaysia, from 12 percent to 24 percent for Singapore, and from 0 percent to 22 percent for Thailand. As a result, GNP per capita in 1992 reached $15,730 for Singapore, which, according to the World Bank criteria, is a high-income economy. It reached $6,790 for Korea and $2,790 for Malaysia, both classified as upper-middle-income economies. Thailand achieved $1,840 as a lower-middle - income economy, and Indonesia, whose GNP per capita was $670, remained the low-income economy in the group. 1/

This industrialization process, which was greatly facilitated by Japan’s FDI, deepened the economic linkages between Japan and the five Asian countries by enhancing the international division of labor. The international division of labor is one way to achieve a better allocation of scarce resources among countries and to increase social welfare in the participating countries. The expansion of Japan’s FDI in manufacturing, along with the push toward industrialization in these countries, created an international production network in the region. The production network was effected by the multilateral trade between the six countries of their domestically-produced manufactured intermediate inputs, and through the specialization by each country in the production of the particular manufactured final products in which it had gained a comparative advantage.

III. The Pattern of Trade between Japan and the Pacific Basin Countries

This section focuses first on the static pattern of trade that existed between Japan and the five Pacific Basin countries in 1975, and second, it analyzes how the pattern had shifted by 1985. It covers tradable products exported and imported by the manufacturing and nonmanufacturing industries in Japan and the five Pacific Basin countries. The products are classified as intermediate inputs and final products. On the basis of final usage, final products are subclassified further--as private consumer products, government consumer products, and capital products.

The two subsections each have three parts, the first of which examines trade flows in the three aggregate industries--primary, secondary, and tertiary. Primary industry covers agriculture, forestry, and mining; secondary industry refers to the manufacturing industry (the terms “secondary” and “manufacturing” are used interchangeably in the paper); the tertiary industry covers services. The second part focuses solely on secondary industry and analyzes trade flows of manufactured products in detail by decomposing them into twelve manufacturing industries: (1) food (beverages and tobacco), (2) textiles (and leather), (3) lumber (and wood products), (4) pulp (paper and printing), (5) chemicals, (6) petroleum, (7) rubber, (8) nonmetallic minerals, (9) metal, (10) machinery, (11) transport equipment, and (12) other manufacturing. The results of these analyses are summarized in the third part.

1. Static trade pattern--1975

The new trade theories provide four main implications for the static patterns of trade that existed between Japan and the five Asian countries. First, as previously mentioned, Japan is a substantial net exporter of manufactured products and a substantial net importer of primary products. This phenomenon is more commonplace with the natural resource-rich Asian countries than with the capital- or skilled-labor-rich Asian countries. Second, Japan has a larger share and volume of intra-industry trade in manufactured products with the more industrialized Asian countries than with the less industrialized ones. Third, intra-industry trade in manufactured intermediate inputs occupies a larger part of trade when developing countries are more industrialized. Fourth, reflecting the technology differences between Japan and the five Asian countries, intra-industry trade in manufactured final products is small, especially for capital products--Japan is a substantial net exporter of capital goods.

a. Three-industry analysis

We now analyze the pattern of trade in primary, secondary, and tertiary industry products in 1975 between Japan and the five Asian countries in the context of the new trade theories described above. Furthermore, we utilize a conventional intra-industry trade index to measure the size of this trade. We focus on the index because balanced trade, which the new trade theories assume, does not hold in reality; thus, calculating the share and volume of intra-industry trade is difficult since we need to identify factors that affect trade imbalance (Aquino (1978)). To estimate the relative size of inter-industry trade compared with intra-industry trade, we examine the shares of exports and imports of each industry.

Reflecting the lack of natural resources, Japan specialized in the production of manufactured products rather than primary products. Japan’s production shares of the primary and the secondary industries accounted for 4.4 percent and 42.3 percent of total output, respectively. The shares of the primary industry in total output for four of the five Asian countries were much larger: 30 percent for Indonesia, 14 percent for Korea, 16 percent for Malaysia, and 19 percent for Thailand. The exception was Singapore, where primary industry accounted for only 3 percent of total output.

As the new trade theories have suggested, the value of net total exports shows that Japan was a substantial net exporter of manufactured products and a substantial net importer of primary products (Table 3). Japan’s net imports of primary products were highest from Indonesia, reaching $2.8 billion and reflected the abundance of natural resources in the latter country. Also, Japan’s net imports of the products were modestly high with Korea and Thailand and reached $231 million and $193 million, respectively, reflecting the comparative advantage these two countries had in primary industry relative to Japan during this period.

Table 3.

Pattern of Trade between Japan and the Five Asian Countries (1), 1975

(In US$1,000)

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Source: Asian International Input-Output Table 1975, Institute of Developing Economies.

More than 87.8 percent of Japan’s total exports consisted of manufactured products (Table 4). Japan’s export shares of manufactured products in total exports were higher for intermediate inputs and capital products than for private and government consumer products. Its total import shares of manufactured products were lower than its total export shares. In other words, Japan depended less on the manufactured products produced by the five Asian countries than these countries did on Japanese manufactured products. Equivalently, Japan depended more heavily on their primary products, reflecting its lack of natural resources. For example, 85 percent of Japan’s imports from Indonesia consisted of primary products such as oil, natural gas, and minerals.

Table 4.

Pattern of Trade between Japan and the Five Asian Countries (2), 1975

(In percent)

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Source: Asian International Input-Output Table: 1975, Institute of Developing Economies.

Total trade values of manufactured products between Japan and Korea were much higher than those between Japan and the other four countries (Tables 3 and 5). Japan exported mainly intermediate inputs and capital products to Korea and imported mainly intermediate inputs and private consumer products from the country. Japan’s exports of intermediate inputs to Korea reached $1.4 billion and accounted for 67.5 percent of its exports of manufactured products. Its exports of capital products to Korea reached $609 million, accounting for 29.3 percent of its exports of manufactured products. Meanwhile, imports of intermediate inputs from Korea to Japan reached $521 million and accounted for 56.1 percent of the country’s total imports of manufactured products. Also, Japan’s imports of consumer products from Korea reached $345 million, accounting for 37.1 percent of its total imports of manufactured products. As a result, Japan was a substantial net exporter of intermediate inputs and capital products to Korea, but was a substantial net importer of private consumer products from the country.

Table 5.

Pattern of Trade between Japan and the Five Asian Countries (3), 1975

(In percent)

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Source: Asian International Input-Output Table: 1985, Institute of Developing Economies.

Total trade values of manufactured products between Japan and the five Asian countries were highest for intermediate inputs and lowest for government consumer products (Table 3). Furthermore, two-way flows of intermediate inputs were larger than those of final products, except for the private consumer products traded between Japan and Indonesia. Among final products, total trade values of capital products were higher than those of private consumer products. However, two-way flows were larger for the latter products than the former. These results suggest that Japan had a strong comparative advantage in capital-intensive products, such as capital products, and thus, flows of these products were rather unilateral from Japan to the five Asian countries. By contrast, trade flows of intermediate inputs and private consumer products were more bilateral, reflecting the comparative advantage that each country had achieved in different types of products at various production stages.

We now analyze the trade pattern between Japan and the five Asian countries using the intra-industry trade index. In particular, we utilize the measure developed by Grubel and Lloyd (1971) since it is the most widely used. We calculate indexes for the four types of manufactured products: intermediate inputs, private consumer products, government consumer products, and capital products. Intra-industry trade of product i is defined as the value of its exports which is exactly matched by the value of imports of the same product; thus, the index for the product measures the share of trade overlap in total trade value for the product. The unweighted index is based on the aggregate value of net exports of the product while the weighted index is based on the weighted average of the index calculated for each industry producing the product.

Unweighted intra-industry trade index:

IITai=100−100*|Σj⁢Exportij−Σj⁢Importij|/Σj⁢(Exportij+Importij)(1)

Weighted intra-industry trade index:

IITbi=100−100*Σj⁢|Exportij−Importij|/Σj⁢(Exportij+Importij)(2)

where

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The unweighted and weighted intra-industry trade indexes for manufactured products traded between Japan and the five Asian countries indicate that intra-industry trade was more active for intermediate inputs than for capital products (Table 6). Indonesia, whose exports of intermediate inputs to Japan mainly consisted of primary products, had the lowest intra-industry trade indexes for manufactured intermediate inputs. Korea, which was the only net exporter of private consumer products to Japan, showed lower intra-industry indexes for these products than the other four countries because its exports substantially exceeded its imports.

Table 6.

Intra-Industry Trade Indexes for Manufactured Products, 1975

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Source: Asian International Input-Output Table: 1975, Institute of Developing Economies.

b. Twelve-manufacturing industry analysis

We focus here on the secondary industry, analyzing the twelve major manufacturing industries mentioned at the beginning of this section. Many manufactured intermediate inputs are produced at the different production stages, thus, they include both capital- and labor-intensive products. Since intermediate inputs are broadly defined in the industrial classification used in this paper, statistics include most of these inputs and indicate that intra-industry trade in manufactured intermediate inputs take place actively between Japan and the five Asian countries. Tables 7 and 8 provide the data for this subsection.

Table 7.

Pattern of Trade in Manufactured Products between Japan and the Five Asian Countries (1), 1975

(In US$1,000)

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Source: Asian International Input-Output Table: 1975, Institute of Developing Economies.
Table 8.

Pattern of Trade in Manufactured Products between Japan and the Five Asian Countries, 1975

(In percent)

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Source: Asian International Input-Output Table: 1975, Institute of Developing Economies.