Regional integration or disintegration in the world production network?

Norihiko Yamano (OECD) and

Bo Meng (IDE-JETRO/OECD)

May 2010

Outline

•How to measure Economic Integration ?•Measurement results of integration

indicators▫International specialisation?▫Trade partnership▫Production network▫<integration index by gravity model>

Data sources•Bilateral trade in goods and services•Input-output database (OECD & IDE)

Economic integrations?•Significant transformation of trade

network particularly in Asia-Pacific region in 1995-2005▫Less trade friction (transport cost, custom

union, ICT difusion)▫Substitution Complementary ▫International specialisation

•Geographically integrated?

Industry composition of traded goods• The world composition of traded goods

remained stable in mid 1990s to mid 2000s, e.g. Chemicals (10%11%), Transport eq. (12%11%), Comm equip (8%10%), Machinery (9%8%), Textile (8%6%), food (6%5%),

• On the other hands, leading export compositions have changed in many countries. The differentiation and specialisation in the manufacturing sectors are apparent in recent trade statistics

International specialisation(increased shares 1995-2006, more than 10% share of total exports)▫ Mining (ISIC 10-14) in CA, MX, BR, CL / RU / ▫ Textile (ISIC17-19) in IT▫ Chemicals (ISIC24) in US / BE,DE,ES,FR, GB / IN, KR,

SG, TW▫ Machinery (ISIC29) in CZ, FI, JP▫ Comm equip. (ISIC30) in MX / FI,HU / CN, MY, PH▫ Computing machinery (ISIC32) in CN, TW, KR, PH,

SG,TH▫ Motor vehicles (ISIC34) in US, BR / DE, FR, PL,HU,CZ /

JP, KR

•Emerging Asian: labor intensive -> assembly machinery

Inter and intra-regional trade•High intra regional trade in Europe

(major 22 EU members, 30% in 1995, 28% in 2005)

•While share of intra Asian trade flows (ASEAN+E.Asia+India+Oceania) increase (12% in 1995 15.1% in 2005), intra-NAFTA and Europe has decreased.

Counting the dominant partner links to identify the demand and supply hubs

•Demand hub (l) ▫Count the partners’ export link that

depends on country l’s economy at given threshold t

export (k,l) / Σl export (k,l) > t %

•Supply hub(k) ▫Count the partners’ import link that

depends on country l’s economy at given threshold t

import (k,l) / Σl import (k,l) > t %

Structural changes in demand hubs in Asia/Pacific (intermediate goods)

Single country based production fragmentation indicators

•Import contents of exports also well-known as vertical specialization (e.g. Hummels et al. 2001)

vs = Am(I-Ad)-1 Export

Am=import coefficient, Ad=domestic coefficient

Sliced by bilateral tradevsi

k = u Amk (I-Ad

k)-1 EXikExport of

jProduction at

jIntermediate

Import

VS related indicators (equations)• Import contents share of k’s exports (ICE)= (vs1k+vs2k+…+vsnk) / exk

<demand-side perspective, affected by country economic size>

• Induced exports by partner’s exports (EPE)=(vsk1+vsk2+…+vskn)/ (ex1+ ex2+…+ exn)

<supplier’s perspective>•Re-exported K’s intermediate exports (REI) =(vsk1+vsk2+…+vskn)/ (imd.exk1+imd.exk2+…

+imd.exkn)<supplier’s perspective>

VS related indicators (conceptual fig.)

P1

K

Exports

exk

vs1k

F

P2 Pn

vs2k

vsnk

… P1’s ICEvs f1

vs fn

Exports

S

P1 P2 Pn…

vss1

vsk2

Vssn

ex1

ex2

exn

F’s intermediate exports that are consumed in P1

Pn’s ICE

F’s intermediate exports that are consumed in Pn

…

imd.exfn=intermediate exports from f to n

ICE EPE REI

Import contents of exports (ICE)by industry group

1995 2005 1995 2005 1995 2005 1995 2005

Australia 14% 14% 28% 25% 16% 20% 10% 11%

China 16% 25% 22% 34% 15% 20% 10% 14%

Chinese Taipei 35% 48% 45% 55% 34% 53% 14% 19%

India 10% 13% 16% 21% 12% 18% 8% 6%

Indonesia 15% 18% 40% 36% 20% 21% 9% 13%

Japan 8% 15% 9% 16% 12% 22% 4% 7%

Korea 30% 39% 32% 41% 34% 42% 19% 23%

Malaysia 39% 52% 49% 65% 40% 45% 13% 31%

New Zealand 18% 18% 27% 26% 20% 19% 15% 14%

Philippines 32% 42% 56% 60% 45% 35% 17% 16%

Singapore 56% 59% 69% 71% 68% 78% 24% 30%

Thailand 33% 50% 57% 67% 29% 47% 13% 22%

Total Manufacturing Services

Higher technology manuf. Lower technology manuf.

Notes: Higher technology-intensive manufacturing group is defined as ISIC Rev.3 24, 29-35; lower technology-intensive manufacturing group is defined as ISIC Rev.3 15-23, 25-28, 36-37; services sector is ISIC Rev.3 50-95.Sources: OECD Input-Output Database, March 2010; IDE-JETRO Asian International Input-Output Database, 2005; OECD Bilateral Trade Database, March 2010; OECD Trade in Services, January 2010.

Induced Intermediate Exports by Partner’s Exports (EPE) (Percentage of World Exports in Goods and Services)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1995 2000 2005

CHN / JPN has high export elasticities to world trade

Re-exported Intermediate Exports (REI)(Percentage of a Country’s Total Intermediate Exports in Goods and Services)

0%

10%

20%

30%

40%

50%

60%1995 2000 2005

Country size is irrelevant. High values for earlier

stage of production network

MRIO-based indicator•Domestic effects and intercountry spillover

effects (unit increase in final demand)of MRIO Leontief inverse are

D ¤ (I-R)-1 , and

(I-R)-1 - D ¤ (I-R)-1 , respectively where R=intercountry input

coefficient matrix , D is diagonal block, ¤represents cell-by-cell product operation.

A B C DABCD

OECD I-O and BTD based Inter-country I-O table•48 countries (30 OECD countries), 37

sectors•1995-2000-2005•The missing year data is interpolated

using the available tables•Trade coefficients are based on bilateral

trade in goods and services•The missing services trade (of early years)

is filled by trade model estimates

Asia/Oceania Europeamericas row

Asia/Oceania Europeamericas row

Inter-country spillover effects(1995-2005)

Austria

Germany

Asia/Oceania Europeamericas row

1995 2005

Asia/Oceania Europeamericas row

1995 2005

Increased inter-country spillover effects for neighbor European countries and Asian countries

Inter-country spillover effects(1995-2005)

United States Japan China

Increased inter-country spillover effects particularly in Asia

1995 1995 1995

2005 2005 2005

Summary for findings• Benefitted by WIOD data products • European structure is stable, Asia-pacific

experienced great changes• Observed increase in intra-regional trade

and export product specialisation • The position of a country in the global

production supply chain is explained by the combinations of indicators of ICE, EPE, and REI.

• Inter-country spillover effects increased particularly for neighbor countries

“regional” economic integration

Measurement of international interdependence based on gravity model and trade data

Traditional gravity model:

𝑻𝒓𝒔 = 𝑨∙(𝑮𝑫𝑷𝒓)𝜶∙(𝑮𝑫𝑷𝒔)𝜷 ∙(𝒅𝒓𝒔)𝜸

𝑻𝒓𝒔: country r’s import from counry s

𝒅𝒓𝒔: physical distance (time distance) between r and s

𝐥𝐧𝑻𝒓𝒔 = 𝐥𝐧𝑨+ 𝛂𝐥𝐧𝑮𝑫𝑷𝒓 + 𝛃𝐥𝐧𝑮𝑫𝑷𝒓 + 𝜸𝐥𝐧𝒅𝒓𝒔+ 𝝁𝒓𝒔

𝑻𝒓𝒔 = 𝑨∙(𝑮𝑫𝑷𝒓)𝜶∙(𝑮𝑫𝑷𝒔)𝜷 ∙(𝒅𝒓𝒔∙(𝒆𝝁𝒓𝒔)𝟏𝜸)𝜸

Total Resistance (TR):

𝐓𝐑𝐫𝐬 = 𝒅𝒓𝒔∙൫𝒆𝝁𝒓𝒔൯

𝟏𝜸 Non Geographical Resistance (NGR):

𝑵𝑮𝑹= (𝒆𝝁𝒓𝒔)𝟏𝜸

Regression resultsYear (Intercept) log(GDPr[, year]) log(GDPs[, year]) log(disance[, 1])

2000 10.296 0.872 0.971 - 0.8962001 10.357 0.856 0.953 - 0.8782002 9.953 0.871 0.942 - 0.8382003 9.706 0.867 0.947 - 0.8242004 9.448 0.880 0.957 - 0.8192005 9.472 0.880 0.964 - 0.8332006 9.507 0.880 0.964 - 0.842

t value (2006) 39.52 47.77 52.33 - 35.49Pr(>|t|) (2006) <2e- 16 <2e- 16 <2e- 16 <2e- 16

*** *** *** ***signf. Codes ***: 0.001