Vertical Intra-Industry Trade and Economic Integration in East Asia

Abstract

It is notable that the trade in East Asian countries has increased more than proportionately to the growth of economy. This paper tests the hypothesis that the recent trade expansion is induced by development of international fragmentation of production. This paper constructs an index of vertical intra-industry trade (VIIT) to measure the fragmentation of production, and finds that the share of VIIT has been rising in East Asia as well as in NAFTA and the EU using the gravity equation. It also establishes that a rising share of VIIT is an important factor in explaining the recent expansion of trade with East Asia. The results suggest that an agreement to remove and harmonize institutional impediments among East Asian countries is important for further expansion of trade within the region.