Factory Asia Research Articles

Global value chains before and in times of the COVID-19 pandemic

Abstract This paper aims to examine the changes in global value chains (GVCs) in the years 2020–2022 (times of the COVID-19 pandemic) compared to 2019 (last year before the pandemic). GVCs are illustrated by diagrams based on the statistics on international trade measured by value-added exports and imports. In this paper, the final demand approach is applied to measure international trade by value-added exports and imports and they were computed based on inter-country input-output tables delivered by the Asian Development Bank (ADB). The catchphrase “Made in the World” makes an impression, but in reality, value chains are rarely global. They are rather regional with three centers. “Factory Europe”, “Factory Asia”, and “Factory America” can easily be identified in the years 2019–2022 as there were three large regional supply hubs in GVCs: Germany, China, and the United States. When the years 2020–2022 were compared to 2019, “Factory Asia” with center in China elevated their position in GVCs at the expense of “Factory Europe” with center in Germany and “Factory America with center in the USA.”

Factory Asia Meets Factory North America: How Far Does Latin America Get Involved in Machinery Production Networks?

International production networks in machinery industry have formed three large clusters, each of which is in East Asia, North America, and Europe. This paper investigates the recent evolvement of the connection between Factory Asia and Factory North America with highlighting the role of Latin American countries as a mediator. For this purpose, we utilized trade matrices and gravity equations to measure each country’s level of commitment to each bilateral machinery trade after controlling the size of the economies, distance, and others. Our major findings are threefold: first, Mexico is the only Latin American country that plays a connecting role between two Factories. Second, in 2010–2019, the linkage of exports to Mexico from not only China but also other East Asian countries is strengthened particularly in machinery parts and components. Third, export linkage of China with Mexico is further intensified in 2019–2021 particularly in machinery parts and components due to the US-China confrontation, the USMCA, and other factors.

East Asian Production Networks Go Beyond the Gravity Prediction

AbstractThis paper provides empirical evidence that supports the continuing importance of machinery international production networks (IPNs) in East Asia. We first confirm their robustness and resilience, even during the coronavirus disease (COVID-19) pandemic, as well as the significance of East Asian countries as suppliers of machinery final products and parts and components for the world. Then, we demonstrate how deeply East Asian countries are committed to machinery IPNs by applying a gravity equation to pre-pandemic bilateral machinery trade and comparing actual values with fitted values of the estimated equation. The gravity estimation exercise indicates that machinery trade is basically regional—within Factory Asia, Factory North America, and Factory Europe—but Factory Asia also has strong inter-regional linkages. It also verifies that ASEAN has played an important role in Factory Asia, going far beyond the gravity prediction, for the development of machinery IPNs.

ASEAN’s Factory Economy in the Fourth Industrial Revolution Era

East Asia is the most dynamic region showing high economic growth in the last decades. This is attributed to the “Factory Asia”, which refers to regional fragmentation of production. In this case, technologically advanced countries, also called headquarter economies, hollow out the most labour-intensive production stage to the ASEAN countries and make it a “factory economy” producing parts and components. Technological developments in the fourth industrial revolution era have introduced labour-saving technologies in the manufacturing sector. As a result, low wages have become a less important determinant of competitiveness, which is predicted to end “factory Asia.” This study examines whether the adoption of Industry 4.0 in manufacturing is detrimental to the factory economy. It investigates intra-ASEAN regional relations and their relationship with headquarter economies, including the USA, Japan, China, and Korea (ASEAN + 1). Utilising the Regional Trade Introversion Index (RTII) analysis tool, the study examines the interdependency between the ASEAN countries and the headquarter economies. The vertical intra-industry trade approach was used to assess the quality of ASEAN’s exports to the headquarter economies. The results showed that ASEAN’s factory economy was not disrupted by the adoption of Industry 4.0 in the manufacturing sector. With a high intra-industry trade index and the positive intra-ASEAN RTII, the ASEAN trade block strengthens. Exports of higher quality products from ASEAN countries to the headquarter economies, especially China and Korea, have consistently increased. Furthermore, geography is important in network production fragmentation and there is a differentiation among the headquarters and the factory economy.

The Regional Comprehensive Economic Partnership Agreement and Its Expected Effects on World Trade

The Regional Comprehensive Economic Partnership agreement creates the world’s largest free trade zone. The agreement has the potential to increase trade relations among its members and further promote the development of regional value chains in “Factory Asia”. This article presents the topics included in the recently concluded agreement, details the existing economic linkages between its members and discusses the expected consequences for its member states and third countries.

Cross‐Border Vertical Integration and Technology in Factory Asia: Evidence from Korea

Factory Asia, supply chains in Asian countries, is a center of global manufacturing. Over the last decade, Asian multinational enterprises have become a significant part of Factory Asia. In this paper, we examine the boundaries of Korean firms in Asia. More specifically, we test the predictions of property rights theory for cross‐border vertical integration, using firm‐level data from Korean multinational enterprises. In line with the theory's predictions, we find that cross‐border backward vertical integration is positively related to the R&D intensity of domestic producing industries and negatively related to those of foreign supplying industries, but only when transactions between the producing and supplying industries are large enough. These results can help us to understand how Asian multinational enterprises develop their supply chains in Asia.

The gravity model and trade in intermediate inputs

AbstractIs the gravity model as applicable to trade in intermediate inputs as it is to trade in final goods? One of the contributions of this paper is that we explicitly account for the dual nature of products that can be used as either intermediate inputs or final goods. We find that the structural gravity model performs extremely well for describing bilateral trade in final goods and in intermediate inputs. Moreover, this continues to hold even when we focus on a subset of countries in which intermediate inputs trade accounts for a growing share of trade, namely "Factory Asia." However, the gravity model may perform poorly due to model misspecification (i.e., exclusion of intranational trade) and/or sample selection, even after the model considers the dual nature of products. We demonstrate that the poor performance of the gravity model is not attributable to the large trade flow of intermediate inputs, which supports the continued use of the model as these trade flows continue to grow in importance worldwide.

Factories Europe, Asia, and North America as the main production centres in the 21st century

Objective: The paper aims to present how the relations between countries in global value chains (GVC) changed at the beginning of the 21st century. Research Design & Methods: For this purpose, we propose two approaches. The first focuses on presenting data in the form of a matrix of trade flows in domestic value added in intermediate products. The second is related to analyzing the GVC indicator (GVC participation).The analysis uses data from the OECD and WTO Trade in Value Added databases. Findings: The global economy still is not unified. I indicate the existence of 3 major supply chain blocks, which can be called Factories: Factory Europe, Factory Asia, and Factory North America. In the trade of intermediate products, the primary relationships are inter-regional rather than intra-regional. Some countries act as hubs. Germany and the US play the role of regional supply hubs, while China assumes the role of the world supply hub, becoming the largest exporter and importer in GVC activities. Contribution & Value Added: The use of export data in value-added terms instead of gross export data indicates significant differences in the description of world economy trade relations.

Brexit and the Future of UK Capitalism

Brexit and the Future of <scp>UK</scp> Capitalism

Productivity and Trade Growth in Services: How Services Helped Power Factory Asia

This paper uses a theory-based measure of productivity-based comparative advantage to examine the trade performance of developing Asian economies in manufacturing and services over the 1995–2011 period. We find that the growth in service exports was nearly as rapid as that in manufacturing over this period—a little-appreciated fact. Services are therefore an integral part of “Factory Asia.” Moreover, the results from a quantitative model of trade show that revealed productivity measures are often comparable between manufacturing and services at a disaggregated level, although the results differ markedly across sectors and economies. We also find evidence of rapid growth in revealed productivity in some service subsectors, comparable to that in manufacturing. Our findings suggest that oversimplifying the relationship between patterns of specialization and subsequent economic transformation and growth patterns misses important elements of reality.

Dynamics of Trade in Value-Added in “Factory Asia”

ABSTRACTTrade patterns in East Asia are termed the “Factory Asia” model, whereby Asia functions as a “global factory” that imports intermediate goods from its regional networks and then assembles and exports them as finished goods to higher-income developed countries. In 2001, China’s accession into the World Trade Organisation consolidated this pattern by becoming the core economy in this model. However, is this pattern still valid after more than a decade of rapid development in East Asian countries? The main objective of this article is to examine the evolution of this pattern of trade in East Asian countries. Although the key findings of this study show that the Factory Asia model continues, it is changing as different East Asian countries capture more value in global value chains. The gaps in the rate of upgrading are identified and mainly attributed to differences in government policies and competition. However, the dependence on foreign inputs still remains an important part of high-technology production in East Asian countries. Hence, the idea that East Asia is evolving from a “factory” into a “Research & Development hub” remains far-fetched.

Indian IT Industry in Factory Asia

The Indian IT sector has recorded impressive growth in the post-reforms period of the Indian economy and has come to attain global prominence in terms of exports. The conventional trade and services data shows that North America and Europe are the primary destinations for Indian IT exports whereas the burgeoning economies of East Asia (the “Factory Asia”) feature less prominently in the Indian IT story. We shed new light on this seemingly puzzling phenomenon by looking at the Trade in Value Added (TiVA) statistics related to the Indian IT sector.

Factory Asia and Asia-Pacific Economic Regionalism: The Connectivity Factor Revisited

With its strong economic, technological and innovative potential, Asia-Pacific has the potential to drive the global economy. The “engine” of this drive is the system of supply-value chains within the vertically-organized Asia-Pacific conglomerates specializing in producing value-added intermediate goods and services. In the academic literature, this phenomenon is conceptualized as “Factory Asia”. To unlock Asia-Pacific’s true potential, the implementation of measures embracing regional infrastructural, institutional and people-to-people connectivity becomes the key prerequisite for success. The initiatives of Asia-Pacific economic regionalism covering the trans-Pacific and the East Asian/South Asian geographical domain—the Free Trade Area of Asia-Pacific (FTAAP), the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP)—have different possibilities to develop the connectivity agenda. While FTAAP and potentially RCEP can stimulate these processes, for TPP it is highly problematic. This broadens the possibilities for Russia to get more involved in Asia-Pacific economic cooperation with an emphasis upon technologically-advanced exchanges within Factory Asia. Strengthening regional connectivity is the key component in Russia’s agenda in multilateral cooperation with Asia-Pacific countries, which was exemplified by Russia’s APEC agenda. While at present the resource-intensive production in Russia’s Far East is prioritized, the multiplier effect produced by the Territories of Advanced Development on the industrial and innovative sectors of Russian economy can help Russia to enter Factory Asia.

Production fragmentation, upstreamness, and value added: Evidence from Factory Asia 1990–2005

We exploit the recent release of the 2005 Asian Input-Output Matrix to dress a picture of the geographic fragmentation of value added in Factory Asia from 1990 to 2005. We document 3 stylized facts. The first is that the average share of foreign value added embedded in production rose by about 7 percentage points between 1990 and 2005, from 9% to 16%. The second is that, contrary to popular belief, China has emerged as a major source of value added to other Factory Asia countries’ production. Third, we find empirical support for the smile-curve hypothesis. Country-industries at the upstream and downstream extremities of the supply chain embed a larger share of value added than those with intermediate levels of upstreamness.

Book Review: Emerging Trends in Factory Asia: International Capital Mobility, Global Value Chains and the Emerging Labour Movement in Asia by Surendra Pratap

Book Review: <i>Emerging Trends in Factory Asia: International Capital Mobility, Global Value Chains and the Emerging Labour Movement in Asia</i> by Surendra Pratap

Understanding Foreign Direct Investment in East Asia

The authors recount East Asia’s experience with foreign direct investment (FDI). They document that, contrary to the Rybczynski theorem, capital flows in the region cause the host country’s labor-intensive industry to expand and its capital-intensive industry to decline. They also present narrative evidence that sheds light on how FDI is affected by the host country’s locational advantages, whether Asian FDI is footloose, and how the PRC has become the center of Factory Asia. Finally, they show that the evolution of production networks in the region can be explained partly by changes in the service cost of linking geographically separated production blocks relative to the cost saving arising from slicing up the value chain.

Multilateralizing Asian Regionalism

Motivated by the proliferation of free trade agreements (FTAs) in Asia over the last decade, this paper studies the challenges faced by the Asian “noodle bowl” — overlapping, multiple trade rules, regulations, and standards in Asia — in the process of regional and global trade integration. The paper first highlights the importance of trade and investment linkages among Asian economies that have formed Asian supply chains, called Factory Asia. It then considers ways and means of multilateralizing Asian trade regionalism by discussing the pros and cons of various approaches — such as the Association of Southeast Asian Nations (ASEAN)-centered regional trade agreements, including the Regional Comprehensive Economic Partnership agreement, and cross-regional FTAs, including the Trans-Pacific Partnership agreement and a future Asia–European Union FTA. The paper emphasizes the promising role of inclusive Asian regionalism and the need to move to global integration.

From Global Factory to Global Mall: East Asia's Changing Trade Composition

This paper studies how East Asia’s trade composition and orientation have changed over the past decade and analyzes the implications for the region and beyond. Over the last 2 decades we have witnessed the emergence of regional and global supply chains, in which production is divided into production stages or tasks across the most competitive locations. East Asia has been the most successful region in the world in building up or joining regional and global supply chains and has been described as “Factory Asia” (Baldwin 2008). Introducing a new and simple analytical tool, we show that over the past decade East Asia has successfully consolidated its role as the “Global Factory.” Furthermore, studying East Asia’s recent trade patterns in primary, intermediate, capital, and consumption goods, our results indicate that East Asia is on track to becoming one of the biggest “malls” in the world. Whereas in 1999-2000 around half of all consumption goods exported by East Asia went to the United States and the European Union-27, in 2011-2012 half stayed in the region or were traded with the rest of the world.

Trade Policy and Growth in Asia

This paper examines the changing relationship between trade policy, production networks, and economic growth in Asia. It traces East Asia’s rise to the coveted “Factory Asia” league with rapid growth over several decades through trade policy anchored on outward-oriented industrialization strategies, including a voluntary liberalization approach under the Asia-Pacific Economic Cooperation (APEC) and a multilateral approach under the General Agreement on Tariffs and Trade (GATT)/World Trade Organization (WTO) system. It explores the implications of various stresses to the performance of Factory Asia such as the consequences of the global financial crisis, the risk of protectionism, the persistence of residual behind-the-border regulatory barriers, the failure to conclude ambitious WTO multilateral trade negotiations, and the relative exclusion of small and medium-sized enterprises (SMEs). Next, it examines the evolving trade policy response in major East Asian economies centered on free trade agreements (FTAs) to support the functioning of Factory Asia and key policy challenges posed by FTAs, including the insufficient depth of FTAs, the risk of an Asian noodle bowl of multiple rules of origin, the potential for raising use of FTA preferences, and the emergence of mega-regional FTA negotiations. Finally, it considers policy implications at the national, regional, and global levels for supporting Factory Asia and growth in Asia.

Race‐to‐the‐bottom Tariff Cutting

AbstractUnilateral tariff liberalization accounts for the lion's share of trade liberalization since the 1980s and has accompanied the most successful trade‐led development model of the past 50 years, “Factory Asia”. Understanding what drove this liberalization is therefore crucial to our grasp of the process of economic development. This paper provides empirical evidence for seven Asian emerging economies from 1988 to 2006 consistent with a tariff race to the bottom driven by a competition for foreign direct investment (FDI). The identification is two‐pronged. First, it is shown that tariffs on parts and components, intermediates and capital goods, crucial locational determinants for assembly firms, are correlated in competitive space, i.e. across countries at a similar level of development, but not across all countries. Second, it is shown that the tariff correlation in competitive space is significantly higher for inputs than consumer goods.