Intra-Regional Trade in Intermediate Goods and Macroeconomic Interdependence in East Asia

Abstract

Over the last few decades there has emerged quite a unique and interesting trade structure in East Asia, in which countries in the region trade intermediate goods heavily with themselves while trade more final goods with the rest of the world. This paper discusses the facts about this trade structure in detail and empirically investigates how it is related to the macroeconomic interdependence in East Asia using a VAR model and data of nine major countries in the region. Our main findings are as follows. First, a positive USA output shock raises exports, imports and GDP in most of the East Asian countries, and USA output shocks explain a larger fraction of output in an East Asian country where exports to East Asia are more concentrated in intermediate goods. Second, an export shock of an East Asian country that raises its exports also raises its imports, and the contribution of export shocks in the variance of imports is increasing in the share of intermediate goods in imports of the country. Third, compared to output shocks from Japan, those from China appear to be more influential to the East Asian economies.