The Hindu Business Line : East Asia as propeller of world trade

East Asia has emerged as the propeller for world export growth.
One of the key factors behind East Asia’s rising strength in contributing to the world’s exports has been the expansion of intra-regional trade.

S. Majumder

The late Prime Minister, Narasimha Rao, was not only a reformist but a great visionary too. His dream of India playing a dominant role in trade with East Asia has become a reality.

India’s exports, which was contributing less than 0.5 per cent to world export growth in the early 1990s, rose to 1.4 per cent in 2006. Much of the export boom was driven by the expansion of trade with East Asia. During 1999-2000 to 2006-07, Ind ia’s exports increased by 18 per cent a year, compared to a meagre growth of 8 per cent per annum during 1991-92 to 1998-99.

Contrasting trends

East Asia, which includes ASEAN +4 (China, Hong Kong, S. Korea and Taiwan), has been playing a pivotal role in driving India’s exports and imports. East Asia’s share in India’s exports jumped from 16.5 per cent in 1999-2000 to 22.9 per cent in 2006-07. In contrast, the shares of India’s traditional major partners, comprising the EU and the US, fell from 26 per cent and 23 per cent respectively in 1999-2000 to 21 per cent and 15 per cent respectively in 2006-07. Similar contrasting trends were noted in imports between East Asia and the EU and the US during the same period.

East Asia has emerged as the propeller of world export growth. In 2006, it contributed the highest to world export growth — 19.1 per cent — which surpassed the developed countries’ contribution — EU (12.5 per cent) and the US (13.1 per cent). One of the key factors for East Asia’s rising strength in contributing to world’s exports has been the expansion of intra-regional trade.

Buoyancy in intra-regional trade

The intra-regional trade in East Asia, comprising ASEAN 5 (Singapore, Indonesia, Thailand Malaysia and the Philippines) and Japan, China, Hong Kong, Taiwan and S. Korea, increased from 43.7 per cent in 1999 to 49.5 per cent in 2005 in exports and from 52.5 per cent to 56.5 per cent in imports during the same period. Therefore, East Asia is a potential market for India.

Basically, there are three main reasons for the expansion of intra-regional trade in East Asia. First, the rise of China was one of causes for the expansion of intra-regional trade in East Asia. China alone accounted for 30 per cent of intra-regional imports in 2005 from a mere 15 per cent in 1999.

Two, East Asia has emerged as the global supply centre for IT-related equipment and components. These products accounted for nearly 40 per cent of the intra-regional trade in East Asia compared to the EU and the US, where intra-regional trade was mainly in automobiles.

Trade in IT-related products

East Asia is the world’s biggest supplier of IT-related products. It accounts for 55.7 per cent of world exports and 39.8 per cent of world imports of IT equipment and components. There has been a dramatic shift in the growing market potential for PCs, cellular phones and LCD TVs from the developed to the developing countries. East Asia accounts for about 53 per cent of the world’s trade in computer and peripherals. India and China are the world’s biggest markets for cellular phones. Semi-conductor is the biggest trade item in East Asia’s IT trade. About 60 per cent of semiconductor trade in the world is accounted for by East Asia.

Taiwan is the global centre for the supply of laptops. Two leading Taiwanese companies — Quanta Computer Inc and Compal Electronics Inc — account for 50 per cent of global production of laptops. Their major clients are Hewlett Packard of the US and Lenovo Group of China. The world’s largest electronic manufacturing services company, Hon Hai Precision industry, is in Taiwan. Third, the vigorous growth in consumption in East Asia has become a factor to boost intra-regional trade in that region.

Role of FDI

Global economists forecast that East Asia trade will increase and intra-regional trade will be the driving force for the buoyancy. They visualised two factors that would support the expansion of East Asia trade. First, the intra-regional trade will increase with the growing investment from East Asia enterprises. Foreign direct investment from East Asia to the ASEAN countries has increased substantially in the current decade. In contrast, FDI from the developed countries — the traditional investors in ASEAN — slumped.

During 2004-2006, the shares of ASEAN + 4 FDI in the ASEAN block rose from 14.9 per cent to 19.7 per cent. In contrast, the shares of FDI flow from the EU and the US declined from 43.5 per cent to 32.9 per cent during the same period. Economists forecast that East Asian entrepreneurs will outsmart the Western investors in investment.

Manufacturing facilities

The second contributing factor for growth in intra-regional trade is the surge in FTAs (Free Trade Agreements) in East Asia. There are 22 FTAs in effect in the Asia-Pacific region. Of these, 14 are concentrated in ASEAN + 6 (Japan, China, S. Korea, India, Australia and New Zealand). ASEAN Free Trade Agreements (AFTA) have reinvigorated the trade opportunities in automobile components in the ASEAN by setting up a integrated network of component manufacturing facilities by the auto honchos.

For instance, Toyota Motor Corporation has set up an auto component complementary network manufacturing facility in Thailand as hub for diesel engines, press parts and axle; in Malaysia for engine computer; in Indonesia for gasoline engine and door locks and in the Philippines for manual transmission and switches.

Therefore, the buoyancy in intra-regional trade in East Asia should translate into trade expansion for India. In 2005, India accounted for only about 2.4 per cent of intra-regional trade in East Asia. The upcoming growth of IT-related component industry (with the new policy on the development of semiconductor industry last year) and India’s overseas acquisitions should act as a springboard for larger share in East Asia trade.

(The author is Adviser — Research, JETRO, New Delhi. His views are personal.)