Regional integration or disintegration in the world production network?

1. Regional integration or disintegration in the world production network? Norihiko Yamano (OECD) and Bo Meng (IDE-JETRO/OECD) May 2010

2. 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)

3. 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?

4. 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

5. 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

6. 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.

7. 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 %

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

11. 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 trade vsik = uAmk (I-Adk)-1EXik Intermediate Import Production at j Export of j

12. 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>

13. VS related indicators (conceptual fig.) ICE EPE REI

14. Import contents of exports (ICE)by industry group 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.

15. Induced Intermediate Exports by Partner’s Exports (EPE) (Percentage of World Exports in Goods and Services) CHN / JPN has high export elasticities to world trade

16. Re-exported Intermediate Exports (REI)(Percentage of a Country’s Total Intermediate Exports in Goods and Services) Country size is irrelevant. High values for earlier stage of production network

17. 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.

18. 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

19. Inter-country spillover effects(1995-2005) Austria Germany Increased inter-country spillover effects for neighbor European countries and Asian countries 1995 2005 1995 2005

20. Inter-country spillover effects(1995-2005) United States Japan China 1995 1995 1995 2005 2005 2005 Increased inter-country spillover effects particularly in Asia

21. 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

22. Measurement of international interdependence based on gravity model and trade data

23. Regression results