Should Exports Be Globally Diversified or Regionally Integrated? Evidence from ASEAN+3 Experience

Abstract

I. Introduction Since the early 1990s, many Asian countries, known as emerging economies, have begun to play a more significant role in the world economy. Since most Asian countries are export-oriented, many economists expected the Western economic downturn to have a significant contractionary effect on these economies. Export rebalancing policy was proposed, therefore, in order to deter the external risk. However, whether export market diversification has actually deterred, lowered or even retarded the effect of the global economic crash on Asian economies is still questionable. The ASEAN+3 regional cooperation was founded by the Association of Southeast Asia Nations (ASEAN), (1) together with the People's Republic of China, Japan and the Republic of Korea after the Asian financial crisis. It aims to further strengthen and deepen regional integration at various levels and in various areas. In particular, the ASEAN+3 economic cooperation was first developed in May 2000 with an aim to resolve mismatch problems which caused the Asian financial crisis. While maturity mismatch can be resolved domestically by improving corporate governance and management in the banking sector, currency mismatch can be resolved more efficiently by promoting local funds to finance local investments and development. Under the Asian Bond Market Initiative (ABMI) and the Chiang Mai Initiative (CMI), regional financial integration has been improved. This helps facilitate flows of funds and thus promotes trade of goods and services among member countries. Some member countries have bilateral agreements, such as a Free Trade Agreement (FTA) between ASEAN and Japan, FTA between Malaysia and Japan, and FTA between ASEAN and South Korea. However, the ASEAN+3 has not had an official regional FTA. While the member countries are discussing the deeper economic cooperation through an ASEAN+3 regional FTA, its potential impacts on each member economy and neighbouring economies have not been thoroughly evaluated. Some economists support more trade integration within the region, believing that it enhances the strength of the regional economy and simultaneously protects the region from external shocks such as the 2008 global financial crisis. Others argue that trade integration could increase economic vulnerability of member countries to the external factors, especially regional shocks such as the 1997 Asian financial crisis. For example, Olaberria and Rigolini (2009) show that high trade openness has made countries more vulnerable to external volatilities. In addition, Obiora (2009) finds that financial and trade linkages are the most important transmission channels of growth spillovers from the EU to the Baltics, thus causing the Baltics to face significant downside risk during the global economic downturn. The objective of this paper is to investigate whether ASEAN+3 economic cooperation has enhanced regional trade. If regional trade has already been promoted substantially, an official regional FTA may not add a significant impact to regional trade. Using data of ten Asian economies, namely China (CN), Hong Kong SAR (HK), Japan (JP), South Korea (KR), Taiwan (TW), the Philippines (PH), Thailand (TH), Indonesia (ID), Malaysia (MY) and Singapore (SG), the paper explores their export destinations and sectors to find whether the Asian exports are diversified or integrated. As one of its contributions, how the Asian export growth co-moves before and after the foundation of ASEAN+3 regional cooperation is analysed using correlation coefficients and multivariate vector autoregressive (VAR) models respectively. With an existence of regional trade integration, export growths of member countries are expected to be highly synchronized. Two VAR models are developed not only to investigate how the causality among the Asian export growth changes after the foundation of ASEAN+3, but also to evaluate whether the export growth of the economy is less affected by external shocks if its exports are more diversified and less related to regional exports. …