Essays on international trade and regional economic integration in East Asia

Abstract

This thesis investigates the regional economic integration in East Asia, and empirically finds out the inter-relationship amongst vertical-specialisation-based trade, business cycles synchronisations and regionalisation. The thesis is consisted of six chapters. The first chapter explains the motivation to study the economic integration in East Asia and provides a brief literature survey on the topic of regional economic integration. Some background information of international trade in East Asia and of the current progress of regional integration achieved in East Asia is offered in Chapter 2. Chapter 3 looks at the correlations of external disturbances amongst coun- tries in East Asia. A Bayoumi-Eichengreen (1992) method of Structural VAR is employed to identify the long-run external shocks. We find that the level of correlations of external shocks for our sample countries is not far behind the one for EMU countries. The external demand shocks are highly correlated amongst ASEAN countries as well as other economies in the region. Moreover, we find that Japan has strong correlations with other countries in the region in terms of supply disturbances, which reflect the vertical production linkages between Japan and the other countries. Chapter 4 studies effects of vertical production linkages which include back- ward linkages from demand and forward linkages from supply, and of interna- tional spillovers on output co-movements across countries. Shea (2002) has found that production linkages positively affect industrial output co-movements within the U.S. By exploiting the international input-output table, we derive the verti- cal production linkages between countries. The result from our two-step estima- tion shows that both directions of vertical linkages together with international spillovers have positive significant effects on output co-movements across coun- tries. Chapter 5 looks into the regional bloc effect on vertical-specialisation-based trade. The regional trading agreement dummy is instrumented as suggested by Tenreyro and Barro (2003) to calculate the propensity of creating a trading agree- ment. Our gravity estimation demonstrates that either bilateral or multilateral free trade agreement significantly promotes international trade which is based on vertical production fragmentation. The thesis concludes in Chapter 6 and also outlines the possible future work.

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