On the Feasibility of Economic Cooperation in East Asia: Perspectives from Trade Creation and Trade Diversion

Abstract

This paper attempts to measure the feasibility of economic cooperation in East Asia from an economic point of view. To approach this issue, we decompose the effect of economic cooperation into trade creation (TC) and trade diversion (TD) by using the well-known revealed comparative advantage (RCA) index. Diversity in the RCA indices among member countries should be closely related to the magnitude of TC. On the other hand, TD occurs in the case of a union in goods in which the outside region as a whole has a comparative advantage. In addition, members who suffer from TD will be those that have a low RCA index and thus have to import. The results show that the export structures differ quite significantly between ASEAN and the NICs. Based on the RCA index, we would expect an intraregional trade creation effect in the case of commodity groups 1 (agriculture), 2 (mining), 31 (food, beverages and tobacco), 32 (textiles), 33 (wood & products) and 39 (other manufactures) if ASEAN and the NICs form a union. Since Japan has a revealed comparative advantage in commodity groups 37 (basic metals) and 38 (metal manufactures), excluding it from the union would induce TD in these goods and the importing member countries will thus suffer. Therefore, if Japan is included into the union, trade diversion in the case of goods 37 and 38 disappears, and trade creation follows. However, for goods 31 (food, beverages and tobacco), 34 (Paper and products), and 35 (chemicals), in which these ten countries, as a whole, have a comparative disadvantage compared with the rest of the world, TD is inevitable. Again, countries that have to import or have a comparative disadvantage in these goods will suffer from trade diversion.