FACTORS PROPORTION IN TRADE PATTERN AND INTERNATIONAL CAPITAL FLOWS INTERACTION IN ASEAN+4 COUNTRIES

Abstract

The classic thesis by Mundell, with the modification of Heckscher-Ohlin model, stated that a substitution relation flows between trade and international capital. Mundell showed that the equilibrium price of a commodity can be obtained through international factor mobility in the absence of trade in goods or vice versa, if the trade barriers of the factor price equilibrium are eliminated. Therefore, the factor price equalization will be achieved without requiring the exchange of goods between countries. Consequently, the study of international trading and capital flows is more frequently studied separately. However, empirical data have shown the contradictory phenomena in which both of them are interrelated and complementary, but how the two interact is still relatively rarely observed.Some constructions of new theories indicate that interactions between them can be studied through several channels; one of them is through the change in comparative advantage. This paper tries to analyze the interaction between trade and international capital flows in ASEAN countries + 4 (ASEAN plus India, China, Japan, and Korea). The countries included in this group are important players in international trading and represent the world's largest trading integration. The interaction between trade and international capital flows is linked via change of trading structure, as seen from the intensity of the use of production factors in the industry in each country. The results of the study are consistent with the theory that capital will flow to countries that have a capital-intensive industrial structure. This then leads to an increase in the deficit in the country?s current account balance.