Should Exports Be Diversified or Integrated?: Evidence from Asian Countries' Experience

Abstract

The global credit crunch was believed to have no direct effect on the Asian financial sector except for Hong Kong SAR, Japan, and Singapore where financial sectors are highly linked to the United States and the United Kingdom. However, indirect effects may work through a decline in the Asian export incomes. Export rebalancing policy was proposed to offset the external risk. Whether export diversification succeeded in mitigating effects of the global economic crash on the Asian economies has not yet been evaluated. This paper finds that ASEAN+3 economic cooperation has also enhanced regional trade in terms of the higher export growth, and higher trade correlations along with capital market development. Nevertheless, there is still little room for an official Regional Free Trade Agreement (if available) to increase regional trade integration. The analyses find that the current global financial crisis's negative impacts obviously spread to and across Asia and the magnitude of its effects is also greater than the magnitude of Asian financial crisis' effect. The most affected Asian country is Taiwan whose export products and destinations are most concentrated while the least affected Asian country is Indonesia whose export products and destinations are relatively less concentrated. Indonesia's export diversification and low trade dependence on the United States and other Asian countries cause the delay of crisis effects and make negative effects of the global financial crisis on its export growth, economic growth and trade balance position relatively smaller. On the other hand, even though China's export products are most diversified, China becomes more vulnerable to external shocks when its exports are more integrated into regional trade. Thus, exports rebalancing policy will be effective if both export products and export destinations are diversified, and exports are not highly integrated into regional trade.