Chapter 1 rev.docx

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CHAPTER 1

INTRODUCTION

1.0 Background of Study : A Comparative study of Intra-Industry Trade (IIT)

between Japan-Malaysia (JM) and Japan-China (JC).

Over the years both classical and neoclassical theory were used to characterize Intra-

Industry Trade (IIT) or two way trade which generally happens when both export and

import takes place simultaneously in an industry1. In this study we are going to asses

IIT which happens in an industry between two countries in certain period of time.

Herbert Grubel and Peter Lloyd (1975) gave a comprehensive insight of the importance

of Intra-Industry Trade and the method to measure it.

There are two types of Intra-Industry Trade, namely the horizontal intra-industry trade

(HIIT) and the vertical intra-industry trade (VIIT). The HIIT refers to concurrent export

and imports of goods which belongs to the same sector and at the same stage of

processing. Meanwhile, the VIIT refers to simultaneous exports and imports of goods

classified in the same sector but at the different stage of processing where

fragmentation production process are organized in different stages by taking into

account the nations comparative advantage. For an example, China a nation which has

an excess of labour force usually imports computer components from Western countries

like US and Europe (technology intensive nations) and uses its labour to assemble them

into computers and then export the components in term of computers back to US and

Europe as a finished goods. The VIIT can be further narrowed down to Superior VIIT

and Inferior VIIT, which are distinguished by the quality of the goods.

1Helpman and Krugman (1985)


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In this study we are about to examine the intra-industry trade between Japan-Malaysia

(JM) and Japan-China(JC) from 1993 to 2010 by using datas under the Standard

International Trade Classification (SITC) revision 3 which was extracted from United

Nations Commodity Trade (UN COMMTRADE) database. Four main commodities

from various sectors under SITC revision 3 were chosen in order to measure Intra-

Industry Trade (IIT), Horizontal Intra-Industry Trade (HIIT), Vertical Intra-Industry

Trade (VIIT), High Value Vertical Intra-Industry Trade (HVVIIT) and Low Value

Vertical Intra-Industry Trade (LVVIIT). With the intention to measure the entire five

trade phenomenon, four types of commodities were used. Types of commodity used are

shown in table 1.1;

Table 1.1: Commodities under Standard International Trade Classification (SITC)

revision 3

SITC Description

5 Chemical and related products

6 Manufactured goods classified chiefly by material

7 Machinery and transport equipment

8 Miscellaneous manufactured article

Source : UN Commtrade

Consequently, the values of export, import for each and every secondary code under

each parent code were matched according to the year of assessment. There were

approximately 3000 of 4-digit secondary codes for each parent for both export and

import from 1993 to 2010. There datas were extracted, matched and filtered before

various analysis were conducted in order to evaluate the trade pattern.


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1.1 General Performance of Japan-Malaysia International TradeThe economic relationship between Japan and Malaysia can be defined as a vis a vis

relationship where both countries mutually benefits each others growth and economic

stability. Japan is the most resource poor nation among the industrialized country and

exposed to various natural calamities. Most of its agricultural and industrial resources

are imported from ASEAN countries. In year 2011, the average population of Japan is

about 126,475,700 dropped abruptly due to earthquake which claimed thousands of live

and leaving the nation in human capital scarcity dilemma. On the other hand, Malaysia

has been a resource-rich country and flamboyantly exports tin, petroleum, natural

rubber and latex to Japan over the years.

The presence of Japan in Malaysian economy started during the era of Tun Abdul

Razak when the Official Development Assistance (ODA) where channelled to fund

development projects and various projects under Rancangan Malaysia ke-2. The

existence of Malaysia-Japan Economic Association (MAJECA) and Japan-Malaysia

Economic Association (JAMECA) further strengthens the trade relationship between

both nations. The bilateral relationship sparked when Malaysias Prime Minister Dr.

Mahathir Mohamed implemented The Look-East Policy in order to develop the

country by cultivating the Japanese working culture.2

Over the years, Malaysia is one of the major exporting country of petroleum and

liquefied gas, electronic equipment, wood and wood products to Japan. Subsequently,

Malaysia exports electronics, vehicles, machineries, iron and steel products. According

to Japans Ministry of Finance Trade Statistics, in 2009 the total export from Malaysia

to Japan reached RM54.42 billion. In the same year, the total import from Japan to

2See Lim Hua Sing (1994)


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Malaysia is RM54.29 billion.3 Another important milestone in Japan-Malaysia bilateral

trade is the Japan-Malaysia Economic Partnership Agreement (JMEPA) which was

signed in 2005. There are two components under this agreement, namely the Economic

Cooperation Component and the Free Trade Agreement Component (FTA).4 The

Agreement is basically about trade component covers trade in agricultural and

industrial goods, trade in services, investment in all categories, rules of origin (ROO),

movement of people, customs procedure, safeguards, standard and conformance,

intellectual property rights, competition policy, promotion of business environment

and measures to safeguard mutual interest and settlement of disputes.5

3

The Japans Ministry of Finance Trade Statistics report in 20094 Japan-Malaysia Economic Partnership Agreement (JMEPA), 20055

Japan-Malaysia Economic Partnership Agreement (JMEPA), 2005


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i. Trade Patterns between Japan and Malaysia for Chemical and Chemical RelatedProducts (Commodity Code -5)

Figure 1: Japan -Malaysia Trade Pattern Commodities under SITC 5

The Chemical and related products category comprises of organic chemicals,

inorganic chemicals, dyeing, tanning and colouring materials, medicinal and pharmaceutical

products, essential oils and resinoids and perfume materials, toilet, polishing and cleansing

preparations, fertilizers, plastics and chemical materials6. The total value of Japans import

from Malaysia reaches about US$415.69 million whereas the total value of export of Japan to

Malaysia is about US$407.84 million from 1993 till 2010.

The trade for chemical and related products which falls under code 5 shows an active

performance from 1993 to 2010. The export of these items from Japan to Malaysia remains

highly volatile throughout the period. Nevertheless, a significant growth can be seen in

import of chemical and related products from Malaysia by Japan. This is mainly due to

expansion of Malaysian Chemical industry through the governments move to implement

necessary steps to reduce the cost production in Malaysia. The Malaysian government

6www.uncomtrade.com

-100

0

100

200

300

400

500

600

700

1993 1995 1997 1999 2001 2003 2005 2007 2009

MILLION

YEAR

EXPORT (MIL)

IMPORT (MIL)

TRADE BALANCE (MIL)


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focuses in developing manufacturing sector by injecting fiscal incentives and offering special

rebates for foreign base Multinational Corporation (MNC) to set up their plant in Malaysia.

The participation of Japanese market players such as Dainippon Ink & Chemicals (M)

Sdn Bhd, Polyplastics Asia Pacific Sdn Bhd, Kaneka Corporation and many more in the

Malaysian Chemical industry is one of reason for transformation of Japan Chemical Industry

from export led economy to import driven economy. This transformation is basically due to

shortage of labour and limited natural resources available in Japan.

According to recent report from Malaysian External Trade Development Corporation

(MATRADE), the Malaysian chemical industry received inflows FDI from US and Europe. 7

Another report by Malaysian Industrial Development Authority (MIDA) in 2006 states that,

sub-sectors under the chemical and related products such as pharmaceutical sub-sector caught

the attention of the investors where in 2005, the Malaysian government approves new

projects worth RM204.3 million8.

Being the worlds leading producer and exporter of oleo chemical, Malaysia continues

to produce fatty alcohols, fatty acids, emulsifier, fatty acids and other oleo chemical products

to support the demand from Asia, US and Europe. The alteration of the global community to

Biodiesel in conjunction to reduce the dependency on crude oil boost up the Malaysian

biodiesel industry where six projects with investments of RM 423.5 million were approve in

year 20059.

7

www.matrade.gov.my8 www.mida.gov.my9

www.mida.gov.my


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later will be exported to Western countries. According to the recent report from

MIDA, Japan, Republic of Korea, the USA, Singapore and Saudi Arabia were the

principal five FDI for the manufacturing sector.11.

Among the major investors in manufacturing sectors are Matsushita, Sharp, Nippon

Electric Glass, Toray, Kao, Toyobo, Kobe Steel, Kawasaki Heavy Industries, Kaneka,

Murata and Rohm.

The emergence of China as the worlds giant economic power started to

dominate the world steel product where the Japanese shifted to import steel products

from China as they manage to develop their steelmaking capacity and implemented

export facilitating measures. China caught the world attention as a steel hub where

during the period of 2005 to 2008, export tax was abolished12. Malaysia is one of world

very own major producer and exporter of latex products, consisting mainly of catheters,

medical gloves, and latex thread. Over the years Malaysia maintains its position as the

world's leading producer and exporter of supplying more than 80 % of the world market

for catheters, 70 % for latex threads, and 60 % for rubber gloves. The total of export of

rubber products of Malaysia to Japan is RM 508.4 million in 2008 and total import for

the same year is RM850.7 million.13 Japan remained the main sources of import for

these items. Despite being the worlds largest latex producer, Malaysia still imports

rubber in form of synthetic rubber, tyre and tyre related products from Japan mainly to

support the domestic manufacturing industries.14

11www.mida.gov.my

12

The 17th Japan-China steel dialogue held in Beijing13 www.matrade.gov.my14

Ww.matrade.gov.my


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poor performance of the industry which caused 4,754 workers lost their job.15 In

2009, 520 new projects started their production in Malaysia; resulting 64,157 job

opportunities were created and offered a remedy for those who lost their job during

the crisis.16

During the years of crisis, Japan opted to trade with China which offered

where in 2002China was the leading supplier of imports entering Japan (US$16.90

billion), further ahead of the USA.17 In 2009, the Malaysian government implemented

few measures to build back the machinery and transport sector and to attract foreign

investment.

15

Malaysian Human Resource Ministry Press Statement in 199716 Malaysian Human Resource Ministry Press Statement in 200917

www.jetro.com.jp


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iv. Trade Patterns between Japan and Malaysia Commodity Code -8

Figure 4 : Japan -Malaysia Trade Pattern Commodities under SITC 8

The miscellaneous manufactured articles consist of prefabricated buildings;

sanitary, plumbing, heating and lighting fixtures and fittings, furniture, and parts

thereof; bedding, mattresses, mattress supports, cushions and similar stuffed

furnishings, travel goods, handbags and similar containers, articles of apparel and

clothing accessories, footwear, professional, scientific and controlling instruments and

apparatus, photographic apparatus, equipment and supplies and optical goods,

watches and clocks and miscellaneous manufactured articles. Malaysia remains to be

one of top trading partner for SITC 7 commodities.

The total value ofJapans export to Malaysia reaches US$17.59 million from

1993 to 2010 whereas the total import from Malaysia reaches US$97.59 million.

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-100

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50

100

150

200

250

1993 1995 1997 1999 2001 2003 2005 2007 2009MILLION

YEAR

EXPORT (MIL)

IMPORT (MIL)

TRADE BALANCE (MIL)


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1.2 General Performance of Japan-China International TradeThe current bilateral relationship between Japan and China is defined as cold politics

and hot economics where both countries are complement each other in trade despite their

dispute over politics issues such as the sovereignty of Diaoyu/Senkaku, Chinas oil

exploration in East China Seas and many more18. China is the second largest economy after

the United States, the rapid expansion of its economy is supported by the growth of its

exports.Based on a report released by Japan External Trade Organization (JETRO), in 2010

Japans total trade with China (for both imports and exports) exceeded US$300 billion19.This

boost is basically due to the increase in Japans export to China in order to nation is at its

high economic growth. Meanwhile, there is also an increase in Japans import from China

which is to recover the nations economy after the recession. In 2010, China became Japans

major partner with large volume of exports, imports and total trade20.

Regardless of an extensive political dilemma, from 1979 Japan consistently provided

Overseas Development Aid (ODA) to China and it was continued as the economic

relationship between both nations becomes more aggressive. In terms of Japans foreign

direct Investment (FDI) in China, the investment of Japan in China rose subsequently over

the years. Japans cumulative investment growth in China accounted for about 23.08% from

2000 till 2007. China has replaced ASEAN countries in which the Japans FDI growth rate in

Malaysia (10.51%), Singapore (10.06%), Thailand (22.27%) and Indonesia (8.04%) from 200

till 200721. Japan Japans Chinas accession to World Trade Organization (WTO) in 2001,

have diversified the countries perspective towards international trade. Under the terms of

membership, Chinas existing domestic laws was revised and enacting new legislation fully

18Report Japan External Trade Organization (JETRO), 2010

19

20

21


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in compliance with the WTO Agreement22. Prior to the accession, Japan affiliates in China

utilised the nation as their export platform.

Fundamentally, trade between Sino-Japanese takes place in which

Japan trades with China in products where it has comparative advantage the most. The Japan

economy can be considered as high technology, high capital, high labour cost and with low

domestically available resources. On the other hand, Chinese economy has abundant, cheap

and highly skilled labours, medium technology and low capital strength23. The occurrence of

intra-industry trade was seen in the Japan-China bilateral trade relationship where Japanese

affiliated manufacturers imports high technology equipments and machinery from Japan to

support the Chinese industry and the value added end product will be exported back to

sustain Japanese domestic market.

At the same time, Japan transfers its technology through FDI and outsourcing to China

which indirectly has influenced their production capabilities, industry capacities, and product

reengineering. The collaboration of both countries in enhancing the production capacity is

visible through the adaptation of Japanese technology by the Chinese highly skilled labours.

The end results is high value added manufactured products. As a poor resource country,

Japan depends critically on its export in order to support its domestic industry. The Sino-

Japanese economy both has a massive manufacturing industry to rely on. The manufacturing

industry produces job opportunity for Chinese labours. According to a recent survey which

was conducted by the Japanese Ministry of Economy, Trade and Industry in 2001, the

motives of Japans Investment in China is driven by the opportunity to expand local sales,

low cost production, high chances of reduction in cost of production and the high chances of

22Chinas accession to World Trade Organization (WTO) in 2001

23


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regional sales expansion24. Subsequently METI conducted another study on determining

factors on Japans FDI in China in 1998 and among the factors which influence Japaneses

investment in China is availability of low-wage labours and prospects of increase in local

demands25.

Energy efficiency and pollution have the tendency to effect the growth of Sino-

Japanese bilateral trade relationship. The inflow of Japanese energy consumption technology

and being a pioneer in pollution control, have created a win-win economy situation for both

countries. Rising labour cost might reduce the opportunity of China as a labour abundant

nation.

24Ministry of Economy, Trade and Industry(METI) survey in 2001

25


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i. Trade Patterns between Japan and China Commodity Code -5

Figure 5 : Japan China Trade Pattern Commodities under SITC 5

China remains as Japans main export partner for goods which falls under

code 5. The total value of Japans export to China from 1993 to 2010 reaches

US$80,406.64 million as compared to Chinas export to Japan which is about

US$32523.58 million. Figure 5 shows a rapid increase on Japans import from China

from 1993 except for year 2009 where there is a slight reduction in import. Japans

export to China is fuelled by and expanding domestic demand in China and the

increase of Chinas export of finished product back to Japan. Based on a survey

conducted by JETRO in 2003, Japanese affiliated producers in Chinese chemical

industry exports back 55% of their products back to Japan26.

The increasing popularity for aromatherapy among Japanese have resulted the

increase import of essential oil related products from China where 29.3% out to total

import of this item originates from China27. Meanwhile the Japanese government is

actively implementing policies to boost the nations pharmaceutical industry. The

26JETRO Annual Report, 2003.

27Guideline for export to Japan 2011, see page 9

0

1000

2000

3000

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5000

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7000

8000

9000

1993 1995 1997 1999 2001 2003 2005 2007 2009

MILLION

YEAR

EXPORT (MIL)

IMPORT (MIL)

TRADE BALANCE (MIL)


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total sales of pharmaceutical products in 2008 reach US$80 billion which accounts

10% of the worlds healthcare market.

ii. Trade Patterns between Japan and China Commodity Code -6

Figure 6 : Japan - China Trade Pattern Commodities under SITC 6

The total value of Japans import from China for items under SITC 6 is

US$4817.52 million, whereas Japans export to China from year 1993 to 2010 values

about US$3522.71 million. China can be seen stronger in exports of labour-intensive

commodities such as leather, rubber, fabrics, textiles, yarns and steel metals.

According to a report by the Japans Ministry of Finance in 2002, the cumulative

value of The Japanese FDI from 1990-20001 in textiles industry reaches 92 billion

Yen and in metal products it is about 117 billion.

The development of textile industry in China can be seen with existence of

textile city namely Shaoxing Textile City, Wangxiang Textile City, Wuxi Textile City

and Wei Fang Textile City. Japan exports raw materials of fur, metal, yarn, rubber and

plastics to their subsidiary in China which will be later produced to become highly

value added final or intermediary goods.

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2000

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1993 1995 1997 1999 2001 2003 2005 2007 2009

MILLION

YEAR

EXPORT (MIL)

IMPORT (MIL)

TRADE BALANCE (MIL)


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on Malaysian trade and formulate appropriate policy measures to enhance and sustain

bilateral and multilateral relationship with economic partners.

1.4 Research ObjectivesThe objective of this study is as following;

1. To examine value added in IIT trade between Japan-Malaysia and Japan-China from1993 till 2010;

2.

To analyse the intra and inter industry trade for products traded under SITC 5, 6, 7

and 8 between Japan-Malaysia and Japan-China;

3. To measure the Vertical IIT (VIIT) and Horizontal IIT (HIIT) for products tradedunder SITC 5, 6, 7 and 8 between Japan-Malaysia and Japan-China; and

4. To evaluate High Value VIIT (HVVIIT) and Low Value VIIT (LVVIIT) for productstraded under SITC 5, 6, 7 and 8 between Japan-Malaysia and Japan-China.

1.5 Significance of Study

This study is meant to provide insight of the importance of value added in IIT

between Japan-Malaysia and Japan-China in terms of product fragmentation and technology

transfer. Adjacently, this study will evaluate the contribution of IIT in Japan-Malaysia and

Japan-China. Thus, it is believe the findings of the present study will be useful for Malaysia

policy makers in their policy formulation that would sustain Japan as the nations leading

trade partner.


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Chapter 1 rev.docx