The Pattern of International Trade Between Japan and the Pacific Basin Countries: A Comparison Between 1975 and 1985


WP/95/9-EA
The Pattern of International Trade Between Japan and the Pacific
Basin Countries: A Comparison Between 1975 and 1985 by Sayuri Shirai

In recent years, so-called new theories of international trade have
been rapidly developed to provide better explanations of actual trading
patterns. These new trade theories, which are based on the concepts of
product differentiation, imperfect competition, and economies of scale, seek
to explain why trade takes place even when countries do not differ much in
relative factor endowments or labor productivity. The theories seem to
explain the pattern of trade between Japan and the five Pacific Basin
countries (Indonesia, Korea, Malaysia, Singapore, and Thailand) that
initiated industrialization in the postwar period--patterns that led to
strong economic growth in the 1980s.

The purpose of this paper is to analyze the patterns of trade between
Japan and these five Asian countries in the light of insights provided by
the new trade theories. In particular, the paper attempts to examine the
pattern of trade in 1975 and to determine how it had shifted by 1985. In
doing so, we examine the deepening economic linkages in the Pacific Basin
region, using data on intermediate inputs, final products, and sellers and
buyers by country and industry from the international input-output tables
for the available years, 1975 and 1985.

This paper shows first that Japan has remained a substantial net
exporter of manufactured or capital-intensive products and a large net
importer of primary, or natural-resource, labor-intensive products. It also
shows, however, that Japan's intra-industry trade in manufactured products
with the five Asian countries has increased, although inter-industry trade
remained dominant with those countries, such as Indonesia and Malaysia, that
are rich in natural resources. The increase in intra-industry trade was
more actively observed in manufactured intermediate inputs (such as
chemicals, machinery, and metals) than in final products. The rapid growth
reflected Japan's increasing dependence on these manufactured products and
the expanding intra-industry import/export markets in its Asian partners.
In particular, Japanese industries imported more manufactured intermediate
inputs from parallel industries in its Asian partners than they obtained
from counterpart industries in Japan. As manufacturing firms subdivided the
production process of intermediate inputs and shifted their production
locations to different countries, the division of labor between Japan and
the five Asian countries changed substantially. The largest increase in
imports was observed for machinery products and can be attributed to an
expansion of intra-firm trade as a result of Japan's foreign direct
investment (FDI) in these countries.

Although the paper does not cover the large-scale structural change in
trade that took place after the yen began to appreciate in 1985, the
deepening of economic linkages between Japan and the five Asian countries
was observed before 1985. Thus, we believe a detailed analysis of the
structural changes before 1985 is important in understanding the growing
international division of labor taking place in the Pacific Basin countries.