Section 3 Trade structure underlying East Asian growth Advancement of triangular trade <Section 3 Key points> 1. Trends in trade from the perspective of production stage If we classify trade goods by production stage and analyze the international competitiveness of intermediate goods and final goods by industry, a spiral pattern of industrial development is observed for industries such as the textile and miscellaneous goods industries. Within the East Asian region, Japan, the NIEs, China, and ASEAN each have industrial competitiveness based on the characteristics of their respective economic bases, with a complementary economic zone for production in place. Moreover, this complementarity is not static but rather changes dynamically according to stages of economic growth and production technology. Japan is maintaining superiority in East Asia for high-tech products which require advanced production technology. China produces a low proportion of comparatively high-priced goods. On the other hand, various trends are seen in ASEAN, possibly because each country in the region specializes in goods in which they have strengths. Trade transactions for high-tech products suggest that technology levels are somewhat dispersed among the countries in East Asia. 2. Advancement of triangular trade Among the United States, Europe, and East Asia, a cross-industrial Triangular Trade Structure is formed so that Japan and the NIEs produce intermediate goods, China and ASEAN import intermediate goods, assemble them into final goods, and then export to the United States and Europe as the final consumption markets. Not only is the amount of triangular trade rapidly increasing, but its share of total trade is increasing as well, which indicates that the Triangular Trade Structure is expanding. The unit price of goods traded within the Triangular Trade Structure are increasing comparatively, which means that triangular trade has advanced in quality. 3. Summary The strengthening and deepening of triangular trade can be attributed to the growth of supporting industries in East Asia and the solidification of a capital-intensive industrial base. Triangular Trade Structure is not a closed structure limited to the region; it is becoming a source of dynamism which stimulates growth in the world economy by deepening trade relationships between East Asia and the United States and Europe. The expansion of triangular trade provides resources for growth for East Asia, which has come to handle aspects of the production stage that have higher added-value. This in turn stimulates demand within the region, creating an economic chain that provides desirable external demand and investment opportunities to the world economy. - 237 - *This section is written based on the results of a joint project conducted by METI, the Research Institute of Economy, Trade and Industry (RIETI), and the Institute of Developing Economies. For details please refer to Okamoto (2005a) and Okamoto (2005b).
Sections 1 and 2 of this chapter indicated that East Asia has started to establish foundations for both production and consumption and is showing signs of becoming an economic region capable of autonomous growth. We also evaluated the business activities of Japanese companies which are expanding in the region through direct investment and the investment climate. In this section we will attempt to analyze the great East Asian economic structure formed by the activities of these companies. Regarding deepening economic relations in the East Asian region, last year s White Paper on International Economy and Trade used trade statistics to show that complementarity was increasing within the region and that the intra-industry production network, which is centered on the machinery sector, was contributing to increased closeness. This year we use trade data classified by production stage to examine how divisional structures are developing in each industry and what kinds of characteristics the divisional structures in each country have. We go on to highlight a trade structure which is forming between the East Asian region and consumer markets, particularly in the U.S. and Europe, as one example of economic relations reaching beyond the region. Through this analysis we will show that in addition to bringing depth and closeness to the intra-regional economy, the intra-industry production network developing in the East Asian region is forming a structural foundation which will facilitate open economic activity based on extra-regional trade and, in doing so, support high economic growth in East Asia. 1. Trends in trade from the perspective of production stage Last year s White Paper on International Economy and Trade pointed out that the trade amount within the East Asian region was continuing to increase, and that trade closeness as indicated by the trade intensity index and trade complementarity indices were both increasing. 1 Here we will use data classified by production stage and trade goods to illustrate that, from the perspective of the intra-industry production network, complementarity is dynamically increasing within the East Asian economy and an optimal production structure is forming. (1) Complementarity in East Asia seen from the perspective of production stage In order to analyze the trade structure characteristics of the East Asian countries and regions we created a Protection Stage Classification Table and sorted all trade goods by stage as either materials and raw materials, intermediate goods (parts and components, processed goods), or final goods (capital goods, consumption goods). 2 Figure 2.3.1 shows the trade structure of the East Asian countries with trade data classified by production stage. 1 White Paper on International Economy and Trade (2004). 2 Please refer to Appended Figure 2.3.1 for an explanation of methods used to create the Protection Stage Classification Table -238-
Figure 2.3.1 Composition of trade goods in East Asian countries and regions according to production stage Japan Thailand Export (1980) 24.7% 0.7% Export (1990) 17.5% 0.4% Export (2003) 20.7% 0.6% Import (1980) Import (1990) Import (2003) China South Korea 0% 20% 40% 60% 80% 100% 30.1% 19.9% 13.8% 22.9% 32.6% 28.2% 35.6% 25.8% 58.7% 31.8% 25.2% 15.3% 24.6% 6.4% 7.5% 13.2% Raw materials Manufacturing goods Parts Capital goods Consumption goods Export (1990) Export (2003) Import (1990) Import (2003) 9.5% 2.3% 10.0% 11.9% 16.9% 23.2% 15.1% 37.9% 34.5% 4.1% 12.6% 23.8% 16.1% 27.2% 50.5% 32.5% 23.6% 20.4% 27.8% 2.2% 5.9% 8.6% 24.1% 26.4% 0% 20% 40% 60% 80% 100% 41.9% Raw materials Manufacturing goods Parts Capital goods Consumption goods Export (1980) 3.0% Export (1990) 1.3% Export (2003) 0.4% Import (1980) 30.2% 25.1% 27.3% 48.0% 8.7% 11.4% 15.8% 16.7% 28.0% 26.6% 21.8% 46.7% 41.2% 26.8% 8.5% 8.2% 17.5% 4.6% 0% 20% 40% 60% 80% 100% 2.6% 14.3% Export (1980) 0% 20% 40% 60% 80% 100% 18.6% Export (1990) 8.0% 20.8% Export (2003) 5.2% 20.3% Import (1980) 30.5% Import (1990) Import (2003) 10.1% 14.5% 30.8% 5.9% 1.1% 11.3% 10.6% 22.1% 20.2% 37.1% 33.1% 40.1% 21.6% 26.0% Raw materials Manufacturing goods Parts Capital goods Consumption goods 43.6% 49.3% 32.1% 11.8% 9.7% 8.0% 21.7% 9.5% 18.1% 8.3% Malaysia 0% 20% 40% 60% 80% 100% 2.0% Export (1980) 46.9% 31.4% 12.1% 7.6% Export (1990) 23.9% 28.0% 19.5% 11.0% 17.7% Export (2003) 4.5% 21.5% 39.5% 24.3% 10.1% 16.4% Import (1980) 15.1% 34.8% 18.0% 15.6% Import (1990) 4.7% 30.4% 26.0% 27.5% 11.4% Import (2003) 5.2% 23.9% 47.9% 15.0% 7.9% Raw materials Manufacturing goods Parts Capital goods Consumption goods Philippine 0% 20% 40% 60% 80% 100% 1.4% Export (1980) 26.4% 33.6% 11.6% 27.1% Export (1990) 8.6% 24.5% 17.8% 8.0% 41.1% Export (2003) 6.9% 55.6% 21.8% 13.5% 2.3% Import (1990) 19.6% 32.5% 16.6% 25.4% 5.9% Import (1980) 34.6% 34.5% 10.5% 15.4% 5.1% Import (2003) 19.5% 33.0% 23.0% 15.3% 9.2% Import (1990) 20.7% 38.7% 15.6% 14.4% 10.6% Raw materials Manufacturing goods Parts Capital goods Consumption goods Import (2003) 9.9% 25.8% 48.8% 7.9% 7.7% Taiwan Raw materials Manufacturing goods Parts Capital goods Consumption goods 0% 20% 40% 60% 80% 100% Indonesia Export (1990) 0.8% Export (2003) Import (1990) Import (2003) 0.4% 16.3% 13.3% Source: RIETI-TID (2005). 27.6% 30.2% 29.2% 16.9% 37.2% 33.9% 19.0% 28.3% 17.9% 23.4% Raw materials Manufacturing goods Parts Capital goods Consumption goods 35.7% 17.6% 20.7% 12.2% 11.1% 8.6% 0% 20% 40% 60% 80% 100% 0.7% 0.1% Export (1980) 70.8% 25.2% 3.2% Export (1990) 29.4% 50.4% 1.2% 0.8% 18.2% Export (2003) 18.7% 42.7% 9.1% 9.2% 20.2% Import (1980) Import (1990) Import (2003) 23.7% 12.2% 20.3% 37.2% 42.4% 46.1% 15.2% Raw materials Manufacturing goods Parts Capital goods Consumption goods 8.5% 17.9% 7.4% 28.4% 7.1% 13.5% 12.6% 7.6% First of all, these graphs tell us that, according to 2003 data, Japan s largest percentage of exports was for parts and components, with intermediate goods accounting for a slightly higher percentage than final goods. They also show that although Japan s largest percentage of imports was for consumer goods, it had high percentages for materials, raw materials, and intermediate goods as well. This characteristic of Japan indicates that Japan imports materials, raw materials, and intermediate goods and exports domestically produced intermediate goods and final goods, including parts and components and capital goods. Another characteristic of Japan is that the percentage of consumer goods it exports as final goods is decreasing. China has a different structure from Japan, with consumer goods accounting for an overwhelming share of exports, and final goods, including capital goods totaling more than 60%. Parts and components and processed goods both have high percentages for imports, and if materials and raw materials are included the total exceeds -239-
70%. This is clear evidence of an assembly production type structure, in which intermediate goods are imported and final goods are exported. South Korea and Taiwan show characteristics which lie between those of Japan and China. While intermediate goods make up slightly less than 60% of their imports, their exports of final goods are decreasing and their exports of intermediate goods are increasing. We can thus view them as in the process of shifting from an assembly production type structure like that of China to an intermediate goods-specialized production type structure like that of Japan. For ASEAN, intermediate goods constitute a high proportion of both imports and exports. For intermediate goods, Indonesia trades heavily in processed goods and the Philippines and Malaysia trade a large number of parts and components. Thailand is characterized by a high trade in intermediate goods as well as a high export rate for final goods, particularly consumer goods. The results of the analysis show a lively trade in processed goods such as textiles, pulp, and paper in Indonesia and in parts and components including electrical equipment and electronic appliances in the Philippines and Malaysia. 3 The above analysis of trade structure in East Asia from the perspective of production stage shows that Japan, the NIEs, China, and ASEAN each have unique characteristics. It also suggests that East Asia may be developing into a complementary economic zone that includes both assembly production type and intermediate goods-specialized production type structures. (2) International competitiveness from the perspectives of industry and production stage - East Asia where Spiral Pattern Development is observed - We evaluated complementarity in East Asia above by looking at countries characteristics using trade data classified by production stage. Here we will use the same data to examine temporal changes in international competitiveness 4 by industry and country. Up until now the flying geese pattern industrial development model has been the theoretical pillar for industrial development patterns in East Asia. According to Akamatsu (1962), the flying geese pattern of development consists of three theoretical concepts: 1) industries in certain countries go through the process of import, domestic production, and export; 2) industries in certain countries become advanced as the country develops; and 3) if one looks at factors such as industrial competitiveness for countries attempting to develop economically by catching up to developed countries, a flying geese pattern is observed. Most research up until now, including research on the flying geese pattern model, has looked at the competitiveness of industries themselves. However, in East Asia, which has a highly developed production network, any industry-level analysis which fails to consider cross-border production is no longer relevant because it cannot thoroughly evaluate complementarity or the competitiveness of development patterns and the economic zone. In order to reflect the characteristics of the East Asian production structure, we conducted a broad-ranging analysis upon developing international competitiveness two-dimensionally by setting intermediate goods and final goods as 3 Analyzed using RIETI-TID (2005). 4 The international competitiveness index is defined as a numeric value which shows trade balance (exports imports) as a proportion of trade amount (exports + imports). Indexes range from -1 to 1, with values close to 1 indicating strong international competitiveness and values close to -1 indicating weak international competitiveness. -240-
the axes. Figure 2.3.2 explains how to read the Chart of International Competitiveness Index. 5 If we evaluate the international competitiveness of intermediate and final goods of industries which are classified in the Protection Stage Classification, we see that industries generally follow a clockwise path from the 3rd quadrant as they mature, as is indicated by the numbers in Figure 2.3.2. Each quadrant in the Chart of International Competitiveness Index shows the characteristics of industries in that quadrant. The growth path of an industry can be explained based on the following characteristics. Figure 2-3-2: How to read the Chart of International Competitiveness Index 2nd Quadrant Strong Assembly Production Type Intermediate goods with weak Int l Competitiveness but Final goods with strong Int l Competitiveness Overall Production Type Both Intermediate and Final goods with strong Int l Competitiveness 1st Quadrant International Competitiveness in Final goods Import Intermediate goods and export assembled Final goods Both Intermediate and Final goods with weak Int l Competitiveness 2 1 5 3 4 Exports of both Intermediate and Final goods exceed import Intermediate goods with strong Int l Competitiveness but Final goods with weak Int l Competitiveness Weak 3rd Quadrant Imports of both Intermediate and Final goods exceed exports Differential goods Production Type Weak International Competitiveness in Intermediate goods Export Intermediate goods and Import Final goods as trade balance Intermediate goods-specialized Production Type Strong 4th Quadrant Note: International Competitiveness Index (ICI) = (Export Import) / (Export + Import) First, an industry which began in domestic supply takes advantage of cheap wages and gradually develops strength in the assembly area, shifting to an assembly production type structure in which intermediate goods are imported and final goods are exported. Next, the industry builds competitiveness in intermediate goods in addition to final goods by improving the level of its technology, which enables it to develop into a domestic overall production type industry which is internationally competitive for both types of goods. Once the industry has passed the height of its maturity, however, it loses competitiveness in assembly due to factors such as increasing wage levels, at which point it begins to specialize in intermediate goods, which are more capital-intensive. Finally, the industry as a whole loses its comparative advantage, begins to import a surplus of intermediate goods, and is no longer shown as internationally competitive on the chart. However, the international competitiveness chart shows trends in trade for the industry as a whole. Looking at the overall industry, imports of both final goods and intermediate goods will exceed exports, but it is possible to maintain competitiveness for certain products and fields within the industry through specialization. Normally an industry which has entered the 3rd quadrant will compete in domestic and world markets by specializing and differentiating products with high quality and high function utilizing the established brand names and advanced technology it gained in the development process. This hypothesis is summarized in Table 2.3.3. 5 The International Competitiveness Index Chart is a graph which shows competitiveness indexes for intermediate goods on its horizontal axis and final goods on its vertical axis. -241-
Figure 2-3-3: Hypothesis of Spiral Pattern Development Model Industrial Pattern Location in Chart of Int l Competitiveness Index Added value Wage/Income Tech level Development stage in the industry 1 2 3 4 5 Domestic market Production Type Assembly Production Type Overall Production Type Intermediate goodsspecialized Production Type Differential goods Production Type Third Quadrant Second Quadrant First Quadrant Fourth Quadrant Third Quadrant LOW HIGH Domestic demands for both Intermediate and Final goods exceed domestic productions. The industry has week Int l Competitiveness. Development of capital accumulation and introduction of foreign technology makes the assembly process in the industry stronger in Int l Competitiveness. The industry imports Intermediate goods because it does not have production technology for key Parts & Components. Industrial structure of so-called assembly production type is established. In the course of the assembly production, the industry advances technology and then starts to produce key Parts & Components. The industry, acquiring Int l Competitiveness in both Intermediate and Final goods, comes to the ripening period. Due to the constraints like rising labor cost, the industry loses comparative advantage in the assembly process which weakens Int l Competitiveness in Final goods. Focusing on key Parts & Components with advanced technologies, the industry retains Int l Competitiveness in Intermediate goods. The industry loses Int l Competitiveness in Intermediate goods. It does not, however, mean the industry loses competitiveness completely. In general, the industry competes in both domestic and world markets by specializing the differential product with high quality and high function, utilizing the advanced technologies as well as the established brand names. Note: The number from 1 to 5 corresponds to the same number respectively shown in Figure 2. The hypothesis suggests that industries proceed in a circular, clockwise path around the Chart of International Competitiveness Index, 6 but at the same time industries actually become more sophisticated through the process as they improve their technology. This Chart of International Competitiveness Index develops in two-dimensions, but if axes for wages and the levels of technology and added value are added, the development path for industries looks like industries are growing by ascending along a spiral staircase. Therefore, this idea will hereafter be referred to as the Hypothesis of Spiral Pattern Development. A pattern diagram of this Spiral Pattern Development is shown in Figure 2.3.4. The following analysis assesses the degree to which this hypothesis is realized in each industry and country, and elucidates the economic structure of the East Asian region. Figure 2.3.4 Diagram of spiral pattern development 3rd Quadrant Weak 5 1 Weak High Added-value Wage Technology level 2nd Quadrant Strong 2 4 Low 4th Quadrant 3 International competitiveness in final goods Strong International competitiveness in intermediate goods 1st Quadrant Source: METI. Notes: The numbers from 1 to 5 correspond to the same numbers shown in Figure 2.3.2 and Figure 2.3.3, respectively. 6 Here it is assumed that final goods production processes are more labor-intensive than intermediate goods production processes. -242-
(a) Analysis by industry (Figure 2.3.5 7 ) (Textile products) One industry in which Spiral Pattern Development is clearly evident is the textile products industry. The points showing each country s international competitiveness are lined up in chronological order around the chart s origin, as observed, with Japan being in the lead, followed by South Korea, Taiwan, Indonesia, and China. Japan, which is at the highest development stage within East Asia, has already lost competitiveness in final goods, with its competitiveness in intermediate goods weakening as well. Taiwan and South Korea are maintaining competitiveness for intermediate goods, but losing it for final goods. On the other hand, countries such as Indonesia, China, and Malaysia have maintained competitiveness in final goods and are increasing competitiveness in intermediate goods. The textile industry in the Philippines shows characteristics of an assembly production type structure in which intermediate goods are imported and final goods are exported. PH(90) Figure 2-3-5: International Competitiveness Index Industry Textile CH(00) CH(90) IN(00) IN(03) PH(00) TH(00) 1.0 PH(80) KR(80) PH(03) CH(03) TH(80) TH(90) TH(03) MY(00) KR(90) IN(80) MY(90) IN(90) MY(03) MY(80) KR(00) 0.5 TW(90) TW(00) TW(03) KR(03) Final 0.0-1.0-0.5 0.0 0.5 1.0 Spiral Pattern Development is observed. -0.5 JP(80) JP(90) -1.0 Intermediate JP(03) JP(00) Source: RIETI-TID 2005 Note: JP: Japan, KR: Korea, CH: China, TW: Taiwan, TH: Thailand, MY: Malaysia, IN: Indonesia, PH: Philippines 7 Data for China and Taiwan is from 1990 onwards. -243-
(Chemical products) One characteristic for chemical products is that no country is positioned in the overall production type industry, which has strong competitiveness in both intermediate and final goods. Japan and South Korea are competitive in intermediate goods, while China and Indonesia are competitive in final goods. We can see a complementary relationship in which countries such as Japan supply processed goods while China and other countries export final goods. <Chemicals> PH(90) PH(00) PH(03) IN(80) PH(80) TH(90) MY(90) TH(00) CH(00) CH(90) 1.0 IN(00) TH(03) CH(03) MY(00) IN(90) MY(03) MY(80) 0.5 IN(03) KR(80) TH(80) KR(90) KR(00) TW(90) TW(00) TW(03) Final 0.0-0.5-1.0 JP(03) JP(80) JP(90) JP(00) KR(03) -1.0-0.5 0.0 0.5 1.0 No country is placed in overall production type. Compelementarity is formed between the countries in assembly production type and the ones in intermediate goodsspecialized production type. Intermediate Source: RIETI-TID 2005. Notes: JP: Japan, KR: Korea, CH: China, TW: Taiwan, TH: Thailand, MY: Malaysia, IN: Indonesia, (Iron, steel, and non-ferrous metals) Taiwan and China are strengthening their competitiveness in final goods, and Taiwan and Indonesia are competitive in intermediate goods. Japan is losing competitiveness in final goods, but its competitiveness in intermediate goods has increased, and there is an indication that Japan is specializing in the production of intermediate goods. South Korea is following Japan with a weakening competitiveness for final goods, while at the same time its intermediate goods are on a weakening trend. Thailand, which has moved into the 2nd quadrant, has moved away from domestic supply and is showing increasingly strong assembly production characteristics. This is in accordance with the characteristic seen in the skyline chart analysis in Section 1, Chapter 2. In other words, Thailand has both high imports (intermediate goods) and exports (final goods) for iron and steel. 8 The competitiveness of each country in this industry changes in a complementary fashion, and thus Spiral Pattern Development is observed. 8 It should be noted that it is not possible to distinguish between intermediate and final goods in the data used in the skyline chart analysis. -244-
<Steel, non-ferrous metal> Spiral Pattern Development is partially observed. KR(00) 1.0 KR(03) JP(03) JP(80) JP(00) JP(90) 0.5 TH(00) TH(03) Final KR(90) CH(00) 0.0 TW(90) TW(03) TW(00) -1.0-0.5 0.0 0.5 1.0 IN(03) CH(03) PH(03) CH(90) IN(00) MY(00) KR(80) MY(03) TH(90) PH(90) MY(90) PH(00) TH(80) IN(80) IN(90) PH(80) MY(80) -1.0 Intermediate -0.5 As the competitiveness of each country has changed complementarily, Spiral Pattern Development is observed. Source: RIETI-TID 2005. Note: JP: Japan, KR: Korea, CH: China, TW: Taiwan, TH: Thailand, MY: Malaysia, IN: Indonesia, PH: Philippines (Electrical machinery) Since 1990, when Japan had strong competitiveness for both intermediate and final goods, its dominant position has gradually weakened. In Indonesia and the Philippines, competitiveness for intermediate goods is strengthening due to a large number of transactions for electronic parts and components within ASEAN. Looking at the ASEAN skyline chart, this can also be corroborated by a high production amount and high number of exports of electronic products. South Korea is building all-around competitiveness, and industry in China has strong assembly production type characteristics. <Electric Machinery> Spiral Pattern Development is partially observed. KR(00) 1.0 KR(03) JP(03) JP(80) JP(00) JP(90) 0.5 TH(00) TH(03) Final KR(90) CH(00) 0.0 TW(90) TW(03) TW(00) -1.0-0.5 0.0 0.5 1.0 CH(90) IN(00) TH(90) PH(90) TH(80) PH(80) IN(80) IN(90) IN(03) KR(80) CH(03) -0.5 PH(03) MY(00) MY(03) MY(90) PH(00) MY(80) -1.0 Intermediate Although Japan's competitiveness has weakened, there are many countries in East Asia with strong international competitiveness in both intermediate and final goods. Source: RIETI-TID 2005. Note: JP: Japan, KR: Korea, CH: China, TW: Taiwan, TH: Thailand, MY: Malaysia, IN: Indonesia, PH: Philippines -245-
(Transportation machinery) For transportation equipment, Japan continues to have dominant competitiveness in intermediate goods and final goods. South Korea first strengthened its assembly production type characteristics, 9 but has broken free of the assembly production structure and is now closing in on Japan s position. Thailand is quickly increasing its competitiveness in final goods export and is strengthening characteristics of an assembly production type industry, the position vacated by South Korea. China still has yet to reach a level of international competitiveness in either intermediate or final goods. Transport Machinery Spiral Pattern Development is partially observed. KR(00) 1.0 KR(03) JP(03) JP(80) JP(00) JP(90) 0.5 TH(00) TH(03) Final Source: RIETI-TID 2005 IN(03) CH(03) KR(90) CH(00) PH(03) CH(90) IN(00) MY(00) KR(80) MY(03) TH(90) PH(90) MY(90) PH(00) TH(80) PH(80) IN(80) MY(80) -1.0 IN(90) Intermediate TW(90) TW(03) TW(00) Note: JP: Japan, KR: Korea, CH: China, TW: Taiwan, TH: Thailand, MY: Malaysia, IN: Indonesia, PH: Philippines 0.0-1.0-0.5 0.0 0.5 1.0-0.5 9 In data from 1995 South Korea was close to Thailand s 2003 position. Data from 1995 has been omitted here in order to make the chart more readable. -246-
(Miscellaneous goods and toys) As with textiles, we can clearly see characteristics of Spiral Pattern Development for miscellaneous goods, with Japan at the lead. South Korea is still not as competitive as Japan in intermediate goods and is returning to the 3rd quadrant. Taiwan, which was at its peak in 1990, is gradually losing competitiveness in final goods and is complemented by China, which is becoming the most competitive in both final and intermediate goods. Indonesia and Thailand are following China s lead, whereas the Philippines and Malaysia are strengthening assembly production type characteristics. The figure also shows that there is no country in the 3rd quadrant and that East Asia as a whole has competitiveness in overall production for miscellaneous goods. <Miscellaneous goods and toys> Spiral Pattern Development is partially observed. KR(00) 1.0 KR(03) JP(03) JP(80) JP(00) JP(90) 0.5 TH(00) TH(03) Final Source: RIETI-TID 2005. CH(03) KR(90) CH(00) 0.0 IN(03) PH(03) CH(90) IN(00) MY(00) KR(80) MY(03) TH(90) PH(90) MY(90) PH(00) TH(80) PH(80) IN(80) MY(80) -1.0 IN(90) Intermediate -0.5 TW(90) TW(03) TW(00) -1.0-0.5 0.0 0.5 1.0 No country is placed in the 3rd Quadrant, which indicates East Asia as a whole has strong competitiveness of overall production in miscellaneous goods. Spiral Pattern l i b d Note: JP: Japan, KR: Korea, CH: China, TW: Taiwan, TH: Thailand, MY: Malaysia, IN: Indonesia, PH: Philippines -247-
(b) Analysis by country (Figure 2.3.6) (Japan) Japan is characterized by the fact that almost all of its industries are located in the 1st and 4th quadrants. General machinery, transport machinery, precision machinery, and other types of machinery are concentrated in the 1st quadrant, indicating strong international competitiveness. Electronic appliances and electrical equipment are also located in the 1st quadrant, but despite the fact that Japan once dominated in this area, its competitiveness is now on a weakening trend. Japan is also losing competitiveness for final goods in textiles, iron, steel, chemical, and miscellaneous goods, but is maintaining competitiveness in intermediate goods, which gives it an intermediate goods-specialized production type structure. In addition, we observe that Japan has no industries positioned in the 2nd quadrant, meaning that it has no industries with a strong assembly production type structure. Figure 2-3-6: International Competitiveness Index Country Japan No industry in 2nd Quadrant. CR(90) 1.0 0.5 CE(80) CR(80) CE(90) TM(03) TM(80) ST(80) EM(90) PM(90) GM(90) TM(00) TM(90) GM(80) ST(90) PM(80) GM(00) GM(03) EM(80) CE(03) CE(00) MT(80) PM(03) EM(03) EM(00) PM(00) Final FD(80) PP(90) PP(00) FD(03) FD(90) FD(00) -1.0 0.0 CH(90) PP(80) ST(00) CH(03) CH(80) CH(00) ST(03) MT(00) CR(00) TX(80) MT(03) -0.5 PP(03) CR(03) TX(03) TX(90) TX(00) MT(90) -1.0-0.5 0.0 0.5 1.0 Intermediate Many industries with strong competitiveness in Intermediate goods. Source: RIETI-TID 2005 Note: FD: Food, TX: Textile, PP: Pulp, Paper and Wood, CH: Chemicals, CR: Ceramics, ST: Steel, Nonferrous metal and Metal, GM: General Machinery, EM: Electric Machinery, CE: Consumer Electric Appliances, TM: Transport Machinery, PM: Precision Machinery, MT: Miscellaneous goods and Toy. (China) Many of China s industries are positioned in the upper half of the chart, which tells us that China s economic structure is strong in assembly production. China boasts strong international competitiveness for electronic appliances and miscellaneous goods for both intermediate and final goods. Its industries for pulp, paper, iron, steel, and chemical products are formulating assembly production type industries which are strong -248-
in final goods and weak in intermediate goods. Intermediate goods for textiles are also strengthening and are moving away from an assembly production type structure following the electronic appliances. However, China still lacks competitiveness in transport machinery and precision machinery. In contrast to Japan, China has no industries in the 4th quadrant, which tells us it has no industries that have the structure specializing in the intermediate goods production. Furthermore, industries in which Japan has strong intermediate good exports, including the chemical, iron, steel, textiles, and miscellaneous goods industries, are positioned within the 2nd quadrant in China where they are assembly production type industries. This confirms that the production structures of Japan and China have high complementarity. China Many industries with strong competitiveness in Final goods. PP(03) CR(00) 1.0 PP(00) TX(00) CR(90) MT(03) ST(03) MT(00) ST(00) TX(90) TX(03) CR(03) MT(90) CE(00) PP(90) ST(90) FD(90) CH(00) FD(00) FD(03) 0.5 CH(03) PM(00) EM(03) EM(00) CE(03) CE(90) Final TM(00) EM(90) 0.0 PM(90) GM(03) GM(00) -1.0-0.5 0.0 0.5 1.0 TM(03) CH(90) PM(03) TM(90) GM(90) -0.5 No industry in 4th Quadrant. -1.0 Intermediate Source: RIETI-TID 2005 Note: FD: Food, TX: Textile, PP: Pulp, Paper and Wood, CH: Chemicals, CR: Ceramics, ST: Steel, Nonferrous metal and Metal, GM: General Machinery, EM: Electric Machinery, CE: Consumer Electric Appliances, TM: Transport Machinery, PM: Precision Machinery, MT: Miscellaneous goods and Toy. (South Korea) We see that South Korea, which once had strong international competitiveness in textiles and electronic appliances, has fallen in position. It is gradually losing competitiveness in final goods for textiles and intermediate goods for electronic appliances. Filling this gap are intermediate goods for transport machinery, an industry which is increasing in competitiveness and developing from an assembly production type structure to one in which intermediate goods are also exported. The electronics industry has also built up its competitiveness in intermediate and final goods. The iron and steel industries are positioned as assembly industries, and the precision machinery industry is moving to an assembly production structure as the competitiveness of its final goods increases. Given the balance of its industry structures and the dynamic changes taking place, it is evident that South -249-
Korea s economic structure lies between those of Japan and China in terms of international competitiveness. South Korea Final Southe Korea shows the features between Japan's and China's features. PP(00) CR(90) 1.0 0.5 CE(90) CE(80) CR(80) TM(03) TM(80) ST(80) EM(90) PM(90) GM(90) TM(00) TM(90) GM(80) ST(90) PM(80) GM(00) GM(03) EM(80) CE(03) CE(00) MT(80) PM(03) EM(03) EM(00) PM(00) CH(90) PP(80) ST(00) CH(03) CH(80) CH(00) ST(03) MT(00) CR(00) TX(80) MT(03) -0.5 PP(03) CR(03) MT(90) 0.0-1.0-0.5 PP(90) 0.0 0.5 1.0 FD(80) FD(03) FD(90) TX(03) FD(00) -1.0 Intermediate TX(90) TX(00) Source: RIETI-TID 2005. Note: FD: Food, TX: Textile, PP: Pulp, Paper and Wood, CH: Chemicals, CR: Ceramics, ST: Steel, Nonferrous metal and Metal, GM: General Machinery, EM: Electric Machinery, CE: Consumer Electric Appliances, TM: Transport Machinery, PM: Precision Machinery, MT: Miscellaneous goods and Toy. (Thailand) Within Thailand, electronic appliances and miscellaneous goods have strong positions. For miscellaneous goods, final goods have maintained competitiveness despite the decreasing competitiveness of intermediate goods. The textiles industry is developing gradually from an assembly type structure to one in which intermediate goods are exported as well. Some characteristics of Thailand s structure are assembly production type characteristics for the transport machinery, iron, and steel industries and strength in intermediate goods for the precision machinery industry. Thailand is not working to catch up to South Korea and China for all goods, as some of its industries are increasing competitiveness through specialization. This is particularly true of the increasingly competitive sectors which were introduced as strengthened areas of Thailand in last year s White Paper on International Economy and Trade, which included such sectors as the automotive, textile, and food sectors. 10 10 White Paper on International Economy and Trade (2004). -250-
Thailand Many industries with strong competitiveness in Final goods. PP(03) CR(00) 1.0 PP(00) TX(00) CR(90) MT(03) ST(03) MT(00) ST(00) TX(90) TX(03) CR(03) MT(90) CE(00) PP(90) ST(90) FD(90) FD(00) CH(00) FD(03) CH(03) EM(03) EM(00) PM(00) 0.5 CE(03) CE(90) Final TM(00) EM(90) 0.0 PM(90) GM(03) GM(00) -1.0-0.5 0.0 0.5 1.0 TM(90) TM(03) GM(90) CH(90) PM(03) -0.5 Competitiveness No industry in 4th Quadrant. has strengthened in the specialized industries. -1.0 Intermediate Source: RIETI-TID 2005. Note: FD: Food, TX: Textile, PP: Pulp, Paper and Wood, CH: Chemicals, CR: Ceramics, ST: Steel, Nonferrous metal and Metal, GM: General Machinery, EM: Electric Machinery, CE: Consumer Electric Appliances, TM: Transport Machinery, PM: Precision Machinery, MT: Miscellaneous goods and Toy. (c) Comprehensive evaluation of analysis results The above analysis looked chronologically at the international competitiveness of intermediate goods and final goods by industry and country. From the results, it is clear that the competitiveness of industries in each country within East Asia is dynamically changing. First, by industry, a Spiral Pattern Development process was observed overall for textiles and miscellaneous goods. Taking textiles as an example, Japan, which is in the final stage of industrial development, is losing competitiveness for intermediate goods as well as final goods, and is moving from the 4th quadrant to the 3rd quadrant. As if to follow Japan, Taiwan and South Korea are losing competitiveness for final goods and are moving toward the 2nd quadrant. Indonesia, China, and Thailand will fill the place left by Taiwan and others by moving into the 2nd quadrant, after which the Philippines will fill the space for assembly production type industries in the 3rd quadrant. These movements represent a dynamically changing complementarity within the textile industry throughout East Asia. Though partially, Spiral Pattern Development structures are also formed outside of the textiles and miscellaneous goods industries, where China and ASEAN are moving to fill in areas left by Japan and the NIEs. For chemical products, on the other hand, it is evident that amidst dynamic changes, competitiveness is being strengthened in East Asia by separating the roles of assembly production and intermediate goods production. Also, it is thought that the sharing of roles of assembly production structures and intermediate goods-specialized production type structures is less likely to occur because economic incentives for cross-border production are low in industries like the automotive industry where the cost of transporting intermediate goods is high, or in industries that have high customs taxes for intermediate and other goods. -251-
By country, Japan shows dominant strength in areas such as transport machinery, general machinery, and precision machinery. However, South Korea is increasing its international competitiveness in intermediate goods for these machinery types by following Japan. China is exhibiting strength in labor-intensive industries like those for miscellaneous goods and textiles, but at the same time, its electronic appliances industry is in the most competitive position of any country, reflecting the fact that China is upgrading its industrial structure from a labor-intensive structure by implementing more advanced technology. If we look at the relationship between Japan and China, we see that the two countries are forming a structure with high complementarity in areas such as iron, steel, and chemicals in which Japan has maintained competitiveness for intermediate goods, while China is positioned as a center for assembly production type industries. Moreover, we can infer that this complementary structure is changing dramatically as Japan s final goods are becoming less competitive while China s final goods are simultaneously becoming more competitive. Thailand, which was analyzed as an example of an ASEAN country, is following South Korea s example by developing transport machinery as an assembly production type industry. Thailand is also increasing competitiveness in intermediate goods in precision machinery and supplying them to countries within ASEAN which have strength in final goods, such as Indonesia and the Philippines. ASEAN countries other than Thailand have competitiveness in intermediate and final goods for pulp, paper, electronic appliance, and other industries. Across the whole ASEAN region with its low tariff rates, intermediate goods are traded and an economic zone for final goods production is forming. Based on this analysis, we can make the following overall assessment regarding the East Asian region: (1) Japan, the NIEs, China, and ASEAN each have industrial competitiveness according to the characteristics of their individual economic infrastructure, 2) a complementary economic zone for production has been established, and 3) this complementarity is not static, but rather a dynamic complementarity which changes according to stages of economic growth and production technology. (3) Trends in high-tech products The preceding analysis evaluated factors such as the East Asian trade structure and industry complementarity using product data classified by production stage. In the following analysis, we will attempt to analyze trade structure by focusing not on production stage but on the value of the products themselves. Here we have made the subject of our analysis high-tech products, defined in OECD (1994) as products which require advanced technology among trade goods. The high-tech products category consists of 46 product groups used as indicators to measure the level of technology of each country, and includes pharmaceutical products, electronic parts and components, and aerospace equipment. First, we calculated the Unit Price Index for each high-tech product by dividing the export unit price by the import unit price, and then looked at index trends. The idea behind this index is that if the export unit price for high-tech products is relatively higher than the import unit price for a particular country, then that country is importing goods of low added-value and producing and exporting goods of high added-value. In other words, if the index is one or above, we can assume that for that product the country is more focused on producing products of high added value. On the other hand, if the index is below one, it means that the country imports -252-
high-value products for domestic consumption and exports products of relatively lower value. Trends in trade price index by country are shown in Figure 2.3.7 and the index calculated by category 11 is shown in Table 2.3.8. Japan has the highest percentage of trade price indexes of one or above of any country in East Asia. In 2003, the number of Japanese products with an index over one had increased to 65%. Japan also has an increasing number of products with indexes over two, and in 2003 almost 25% of Japan s exported products had a unit price of more than double that of the imported products of the same type. Even if we look by product group, only one index falls below one, indicating that Japan has strength in producing high added-value products using high-level technology. Figure 2-3-7: Change of Unit Price in High Tech Products Trade 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Japan(1995) 20.2% 15.2% 23.2% 32.3% 9.1% Japan(2003) 24.2% 14.1% 27.3% 19.2% 15.2% China(1995) 8.7% 7.8% 21.4% China(2003) 19.4% 2.9% 1.9% 2.9% 3.9% Taiwan(1995) 13.6% Taiwan(2003) 12.6% 2.9% 11.7% 28.2% 32.0% 36.9% 40.8% 34.0% 43.7% 42.7% 32.0% Korea(1995) Korea(2003) 5.5% 9.2% 7.3% 6.4% 11.0% 11.0% 35.8% 43.1% 38.5% 32.1% Thailand(1995) 16.0% 5.3% 14.9% 34.0% 29.8% Thailand(2003) 16.0% 7.4% 4.3% 36.2% 36.2% Malaysia(1995) 10.0% 7.1% 20.0% 27.1% 35.7% Malaysia(2003) 17.1% 11.4% 22.9% 21.4% 27.1% Indonesia(1995) 9.9% 11.9% 14.9% 31.7% 31.7% Indonesia(2003) 25.7% 6.9% 15.8% 31.7% 19.8% Philippine(1995) 24.3% 4.3% 18.6% 24.3% 28.6% Philippine(2003) 22.9% 11.4% 12.9% 35.7% 17.1% 2.0 or more 1.5~2.0 1.0~1.5 0.5~1.0 0.5 or less Source: RIETI-TID 2005 Note: This graph shows the share of Unit Price Index, the ratio of (Export unit price)/(import unit price) for each high tech product. More than 1 of the value of Unit Price Index indicates that the country exports the product with more highly added value in comparison with the import goods. Therefore, if the country has a large share of the items with 1 or more of the value of Unit Price Index, it focuses on the higher value-added products in domestic production. 11 OECD used 11 categories, but here nine categories are used due to limitations in collecting unit price data. -253-
Table 2.3.8 Trade unit price by category Microscopic Industrial Consumer electrics, communication Aerospace Precision Optical Items Medicine Plastics, etc. chemistry automation, etc. devices Electric parts equipment equipment equipment Japan (1995) 1.78 1.31 1.98 1.45 1.30 1.93 7.99 1.28 2.57 Japan (2003) 1.92 1.21 2.36 1.66 2.22 1.58 0.43 2.51 1.35 China (1995) 5.51 1.13 0.97 0.42 0.52 1.22 0.59 0.13 1.51 China (2003) 0.44 1.03 0.69 0.50 0.64 0.56 1.61 0.05 1.01 Taiwan (1995) 0.89 0.88 0.57 0.53 0.87 0.66 0.39 0.32 0.82 Taiwan (2003) 0.80 0.73 0.83 1.04 2.42 0.75 1.23 0.44 1.01 South Korea(1995) 1.63 0.78 0.91 0.47 0.56 0.72 1.89 0.62 1.35 South Korea (2003) 0.73 0.78 0.78 1.16 1.06 0.57 4.08 0.49 1.31 Thailand (1995) 1.23 0.80 1.38 0.55 5.04 1.19 0.27 1.46 2.05 Thailand (2003) 1.26 0.69 0.53 4.13 3.13 0.95 1.26 1.25 2.67 Malaysia (1995) 0.44 1.17 7.20 0.88 0.57 1.08 0.97 2.79 1.21 Malaysia (2003) 0.81 0.93 1.06 1.33 2.08 1.04 1.14 1.15 1.36 Indonesia (1995) 0.80 0.85 0.99 1.65 1.08 2.57 0.49 0.85 1.71 Indonesia (2003) 4.31 0.93 0.97 1.98 2.70 2.87 1.53 1.07 4.45 Philippines (1995) 1.12 1.14 1.23 28.67 1.77 1.25 0.07 1.27 2.18 Philippines (2003) 0.84 1.41 0.94 1.33 4.33 0.92 0.79 2.12 1.73 Notes: The shadowed boxes indicate unit prices over one from the 2003 data. The numbers are an average of export unit prices divided by import unit prices for products within each category. Source: RIETI-TID (2005). Turning to China, in contrast to Japan, almost 80% of product indexes fell below one in 2003, and the proportion of products with an index below one is increasing by more than 10% compared to 1995. As far as high-tech products are concerned, China has a structure in which high added-value products are imported and products of comparatively low added-value are produced domestically and exported. Only 5% of China s products have indexes of two or above so, relatively speaking, China exports few goods with high unit prices. Also, even by looking at product group there are only three items with indexes of one or above. Like China, South Korea and Taiwan do not have high percentages of items with indexes of one or above, and have a structure in which products of comparatively low unit price are produced domestically. It is not possible to determine the reasons for this based on this data alone, but the results generally suggest that technology levels in South Korea and Taiwan are not as high as expected. In ASEAN, 30 50% of goods have indexes of one or above. Looking chronologically, items with indexes of one or above are increasing in Malaysia and Indonesia, yet remain unchanged for the Philippines and are even slightly decreasing for Thailand. For high-tech products various trends are seen in ASEAN, possibly because each country in the region specializes in goods in which they have strengths. Watching by product group, we can confirm that goods in ASEAN with an index of one or above include electronic parts and components, precision apparatus, optical equipment, and consumer electronic communications equipment, and they have a complementary rather than competitive relationship with goods from China and the NIEs. Also, the fact that there are many ASEAN countries with indexes of above one for consumer electronic communications equipment and electronic parts and components presumably reflects the structure in which each country procures cheap parts and components from the supply of electronic components produced within ASEAN and traded in the regional network, and then produce and export high added-value products. With regard to high-tech products, we can generally say that (1) Japan is maintaining its superiority in East Asia, (2) China does not produce a high proportion of expensive goods, (3) there is low competitiveness between ASEAN and China, and (4) it is likely that ASEAN produces relatively expensive goods primarily for trade within the ASEAN region. From these points, it is thought that the trade of high-tech products demonstrates the fact that the technology levels of each country in East Asia are somewhat dispersed. -254-
2. Advancement of triangular trade Up to this point we have discussed trade structure in terms of trade data classified by production stage, country, industry, and by high-tech products. Here we will further investigate relationships between East Asia and the world through trade, especially the trade structure that has been established between East Asia and the United States and Europe by using the structure detailed above as the framework for this analysis. The East Asian production network that developed as companies found optimal locations has a basic pattern, with labor-intensive processes conducted in regions where wages are low. In other words, we can imagine that the high added-value parts, components, and processed goods produced by Japan and the NIEs are imported as intermediate goods by China and ASEAN, where wages are low. They are then made into final goods through assembly production and exported to final consumption markets. Last year s White Paper on International Economy and Trade analyzed production network development by looking at vertical intra-industry trade within the region and trade trends for parts and components. This year we will examine the open trade structure, from the trade within the region to trade with the United States and Europe as the final consumption markets. (1) Trade structure between East Asia and the world from the perspective of production stage Figure 2.3.9 shows trends in trade between East Asia, the United States, and Europe organized by production stage. Trends in the trade value tell us, among other things, that: (1) trade in intermediate goods is increasing both between Japan and the NIEs and between China and ASEAN, (2) there is a striking increase in exports of final goods, particularly consumer goods, from China and ASEAN to the United States and Europe, and (3) exports of intermediate goods and final goods are growing steadily from Japan and the NIEs to the United States and Europe. -255-
Figure 2.3.9 Trends in trade value for triangular trade Japan, the NIEs China, ASEAN 0 20 40 60 80 100 120 140 160 Raw materials 1990 2003 Processed goods Parts and components Capital goods Consumption goods Exports of intermediary goods increased. China, ASEAN Japan, NIEs 0 20 40 60 80 100 120 140 160 Raw materials 1990 2003 Processed goods Parts and components Capital goods Consumption goods Exports of intermediary goods increased. Source: RIETI-TID 2005. China, ASEAN EU, US 0 20 40 60 80 100 120 140 160 Raw materials 1990 2003 Processed goods Parts and components Exports of final goods, especially consumption goods increased. Capital goods Consumption goods Japan, the NIEs EU, US 0 20 40 60 80 100 120 140 160 Raw materials Processed goods Parts and components 1990 2003 Exports of intermediary and final goods increased. Capital goods Consumption goods Source: RIETI-TID 2005. -256-