East Asia's Intra- and Inter-Regional Economic Relations; Data Analyses on Trade, Direct Investments and Currency Transactions

October 2000
Takashi ISOGAI
Shunichi SHIBANUMA

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INTRODUCTION

The currency crisis in the 1997 diversified views on Asian economies. In one view, the ever-expanding image of Asian economies faded away, resulting in a view that Asia could never regain the power to achieve sustainable strong economic growth. In another view, Asia is still believed to continue its high growth rate with strong exports after relatively short adjustment phase. When discussing the future of East Asian economies¹, it is very important to capture the whole image of economic relations with other economic regions as well as its interaction within the region. However, some key statistics, which are available in advanced countries, are not always available in Asian economies. Analyses on trade and direct investment between Asia and advanced countries occasionally depend on the statistics compiled by advanced countries. Also, due to the lack of statistical data, analysis of intra-regional economic activities is not so easy. In this paper, we tried to show the current situation and dynamic change of Asian economies quantitatively through analyses of statistical data from various kinds of sources.

In this paper, East Asia comprises nine countries and regions: NIEs (South Korea, Taiwan, Singapore and Hong Kong), four ASEAN countries (Thailand, Malaysia, Indonesia and the Philippines <herein after called "ASEAN 4">) and China.

OVERVIEW

Given the fact that economic growth in East Asia has progressed with considerable dependence on exports, we first look at the region's relationship with foreign economies with respect to trade, especially for information technology (IT)-related goods. As direct investments are considered to be closely connected with trade, we also gather data that cover changes in the intra/inter-regional flow of direct investments. In addition, we extend to some statistics to provide data on the usage of currency transactions in East Asia.

1.Intra/Inter-Regional Trade Linkage

(1) Increase in East Asia's dependence on trade and changes in inter-regional trade relationships with advanced countries

Since the 1980s, in East Asia, imports of intermediate and capital goods have increased as a result of export-driven strong economic growth, allowing East Asia's trade between the US, Europe or Japan to expand. This has led to a significant increase in East Asia's share of global trade and a further increase in dependence on trade i.e. ratio of imports/exports to nominal GDP, especially for both the ASEAN 4 and China.

Concerning trade with advanced countries, there has been little change - the US remains to be the largest importer for East Asia, and Japan remains to be the largest exporter. Changes since the 1980s are evidenced by a decrease in direct trade between the US and Japan, while a closer trading relationship between Japan and the US, via East Asia were also observed.

(2) East Asia plays a central role in the global trade of IT (Information Technology)-related goods

East Asia's share of the international trade of IT-related goods is increasing sharply. In the past few years, it has exceeded that of the US and become the world's largest supply center for IT-related goods in its trade share. Thus, expanded trade in IT-related goods has greatly contributed to deepening relationships between East Asia and markets outside the region.

The largest importer of IT-related goods is the US. The story began with the considerable increase of the US direct investments in NIEs for IT-related goods at the early 1990s. The US then proceeded to increase its production of IT-related goods in East Asia, including the ASEAN 4.

After the currency crisis, increased exports, primarily of IT-related goods, have supported the recovery of the East Asian economy, indicating that trade in IT-related goods has become even more important to East Asia. It is also true that, the increase in East Asia's dependence on exports, IT-related goods in particular, means that the region has become more susceptible to fluctuations in the world economy.

(3) Intra-regional trade expansion in East Asia; diversified IT-related goods production in East Asia

Together with the expansion of inter-regional trade with advanced economies, intra-regional trade in East Asia is also expanding rapidly. The size of intra-regional trade in East Asia, ratio to nominal GNP, has increased to exceed even that of the regions where regional trade integration has taken place, including NAFTA and the euro area.

Diversification of IT-related goods production within the region has contributed immensely to activate intra-regional trade. The proportion of IT-related goods exports to total exports has sharply risen not only vis-à-vis inter-regional markets but also among regional countries. In particular, IT trade between NIEs and the ASEAN 4, between NIEs and China/Hong Kong is increasing conspicuously.

2.Flow of Direct Investments in East Asia

(1) Direct investments contributed to capital flow stability into East Asia

The means of capital investments into East Asia before the currency crisis were mainly bank loans and securities investments from advanced countries. These investments lacked stability, evidenced by their rapid inflow and abrupt outflow. In contrast, direct investments have remained relatively stable, even during the currency crisis, thus partially contributing to the stabilization of capital flows in East Asia.

(2) Most of direct investments still come from outside the region

Concerning direct investments in the region, investment from countries outside the region generally outweighs investment from countries within the region. East Asian countries differ in their dependence on direct investments. Specifically, NIEs and the ASEAN 4 are more dependent on inter-regional investments, while China is highly dependent on intra-regional investments. NIEs have received direct investments from countries outside the region, but at the same time actively made direct investments in China. This is one of the reasons for China's dependency on direct intra-regional investments. NIEs are highly dependent on the US investments in IT-related products and finance & insurance while the ASEAN 4 depend on Japan and European countries.

With respect to inter-regional relationship, there is little difference in the direct investment shares of Japan, the US and European countries in the East Asian region. Thus, there is no sign that the region has particularly deepened relationships with any specific region.

(3) Intra-regional direct investments in East Asia are mainly from NIEs to China and the ASEAN 4

Intra-regional direct investments from NIEs to China and the ASEAN 4 are increasing significantly. As the background to the increase, NIEs have been relocating and expanding production centers, particularly for IT-related goods. The increase in intra-regional direct investments from NIEs is closely associated with the expanded share of East Asia in the global trade of IT-related goods, as well as the increase in intra-regional trade, primarily for IT-related goods.

3.Currency transactions in East Asia

If economic relationships continue to deepen in East Asia, for example if the increased intra-regional trade and direct investments continue to rise in the region, it is probable that the share of the currencies used for settlement within the region may change. Before the currency crisis, because there was no key currency in the region, US dollar was used in settlement for not only trade and capital transactions with external markets but also for intra-regional transactions under a dollar peg system.

After the currency crisis, there was a regime shift to floating exchange rates. However, due to the US dollar being practically established as the key settlement currency in East Asia and the high proportion of transactions with external markets being settled in the dollars, little change in the environment regarding the currency for settlement is observed.

4.Relationships between Japan and East Asia

From Japan's point of view, the linkage with East Asia appears to be deepening in terms of trade and direct investments. Yet, from East Asia's point of view, linkage with external regions in terms of trade and direct investments have actually deepened not only with Japan but also with other areas including the US and European countries. Thus, relationship with Japan is not regarded as having become closer compared to those with other countries, while relationship with the US has become deeper especially in IT-related goods trade. There is hardly a change in the dollar's position as the dominant currency for settlement.

In the process of pursuing its role as an international supply center for IT-related goods, East Asia has strengthened its relationship with external markets in terms of both trade and direct investments. As a consequence, the relationship between Japan and East Asia can be regarded as having grown closer as well.