Trade Integration and Production Network in East Asia

In recent decades, the intensification of intra-regional trade within East Asia has been driven by the rapid expansion of parts and components trade notably from machinery sector and electrical machinery sub-sector. This paper examines the patterns of intra- trade in machinery sector and the linkage between parts and components trade and the regional production / distribution network led by multinational enterprises. Using international trade data and survey results on business operations of Japanese MNEs and their overseas affiliates, we found that trade patterns in East Asia has shifted towards parts and components trade. Redirection of trade flows has also been observed among East Asian countries especially for Japan and China. An investigation into micro data of Japanese MNEs reveals that parts and components trade is highly associated with fragmentation of production and back-and-forth transactions between parent companies and their affiliates located in different countries according to location advantages. Despite the highly integrated trade, East Asia has still relied on final demand outside the region. The paper suggests that it is crucial for East Asia to maintain its competitive position in the world market. The region could do so by further strengthening the regional production network and achieving deeper cooperation