International Trade in East Asia
Introduction
The practice of international trade underwent massive changes in the world trading communities over the last 20 years. Upon the formation of World Trade Organization (WTO), the sole regulatory body for the international trade and business, international trade has increased significantly. Until the 1970s, most of the countries relied more on domestic products than imported goods. Almost all the large global economies like France, the UK, Germany, the USA, and Italy were fulfilling their demands from domestic production. However, from the 1980s onwards, bilateral trades have seen a huge upturn. For instance, in the 1980s, Japanese export to the US market increased by almost 3 times from the previous decade (Drysdale, 2014). After most of the countries signed General Agreement on Trade and Tariff (GATT) in the early 1990s, international trade flourished to a great degree. Eurozone from the very beginning has the largest importer and exporter of goods in the world. In the 1990s, North America was the second largest importer and exporter of goods with Asian countries coming as a distant third, excluding oil export (Drysdale, 2014). Things started changing in the 1990s after most of the Asian countries including China, Japan, Korea, Vietnam, Philippines, Malaysia, and Chinese Taipei began to open up their manufacturing and other segments to the world. This essay will discuss how East Asian countries have slowly become one of the most influential forces in the international trade within a matter of two decades, using the gravity model.
The concept of gravity model originated from the gravitational force equation in astrophysics. However, that model, from the late 20th century onwards, was used for a variety of social science situations. Bilateral trade is also one area where the gravity model is used for making the prediction of trade flow between two countries. The gravity model equation for bilateral trade is as below:
F denotes trade flow, M denotes the economic mass (GDP) of the countries, D denotes the distance between two countries, and G is a constant (Anderson, 2014). Looking at the above equation, it can be said that if the GDPs of two countries are large and the distance between them is small, then the overall trade flow between those countries will be high. For instance, the distance between Germany and Italy, both of which are large economies in the world, is small, and therefore, the trade flow between these two countries is predicted to be high by the gravity model, and this is actually true. Similarly, if the two economies are small and the distance is wide, then the trade flow between these two countries will be negligible. For example, Panama is a small economy and so is Mongolia. The distance between these two economies is large. Therefore, as per the gravity model, the trade flow between these two economies should be minimal, which is also the actual case as there is no trade flow between these two countries (Anderson, 2014).
There is no scientific evidence in support of the gravity model for international trade. However, all the empirical data show that this model works excellently well in international trade. Owing to its empirical success, the international organizations like the International Monetary Fund (IMF), the World Bank, and WTO use this model to create rules and regulations related to international trade practices (Anderson, 2014).
The GDP Growth in East Asian Countries
Diagram 1: GDP Growth rate of Asian Countries (Hale and Kennedy, 2012)
East Asian countries have shown significant GDP growth in the last three decades. In fact, between 1950 and 2010, East Asian countries have grown at a rate higher than any other region in the world. Countries like Thailand, Indonesia, Malaysia, and the Philippines have grown at a rate of more than 5% annually in the first decade of the 21st century, whereas countries like Cambodia, Vietnam, Myanmar, and China have grown at a rate of over 9% annually during the same period (Hale and Kennedy, 2012). During this period, other big economies like the USA, Italy, the UK, France, and Spain have displayed a growth rate of less than 2% annually. As opposed to 1990 when apart from Japan, there were no other Asian economies featuring in the top 10 economies of the world, currently, China (2nd), India (3rd), Japan (4th), and Indonesia (9th) are listed in the top 10 (The World Bank, 2014). The overall GDP of the East Asian countries is now larger than that of both the USA and the European Union. Therefore, the overall gravity of the region has improved impressively well in the last two decades, which helped boost the overall international trade in the world in accordance with the prediction made by the gravity model.
International Trade from East Asia
International trade has many dimensions, such as cheap and quality product availability, manufacturing capability, easy customs, easy legal requirements, good free trade agreement (FTA), and proper import-export infrastructure. The international trade of a region can only thrive if most of these conditions are met.
Diagram 2: Export-Import from East Asian countries (WTO, 2011)
Before the 1990s, East Asian countries were producing goods at a cheap rate, but they lacked other international trade agreement facilitators like the lack of infrastructure, the lack of proper international customs and legal framework, and unjust taxation regime. After these countries came under the WTO and the market opened up, they perceived the importance of these parameters while conducting international trade. Quickly, countries like China, Chinese Taipei, Singapore, and South Korea signed FTAs within the region and with the large economies as well (WTO, 2011). As per the gravity model, in order to create a sustainable international trade flow, more trade transactions should be carried out between the neighbouring countries, which will provide more sustainable growth of trade. Without proper trade relationship in place, the East Asian countries will not thrive. That is exactly what the East Asian bloc did in the last two decades. For example, until the 1990s, Japan was the largest exporter of merchandise from the East Asian region to the other parts of the world. The overall export from the region was close to $20 billion, the majority of which belonged to Japan. In 2009, the region exported goods worth more than $500 billion only to the USA, with China exporting the bulk of it (WTO, 2011). During this time, the intra export and import of goods among the East Asian countries also grew significantly. Upon the formation of ASEAN and ASTA in the late 1990s, most of the East Asian countries started importing and exporting goods between themselves without facing any problem related to high taxation or custom duties. 50.5% of the overall export from the East Asian countries was imported within the region, and this percentage increased by 2009 to 53% (WTO, 2011). It is commonly believed that most of the goods produced in the East Asian countries are exported to the developed countries like the USA and the EU. However, the statistics clearly show that more than half of the goods exported are consumed within the region only, and this conforms to the prediction of the gravity model.
Diagram 3: Asia’s Merchandise Trade Percentage (WTO, 2011)
Another important factor in international trade is transportation infrastructure. In the present day international trade, shipping is the main form of exporting goods from one country to another. At present, among all the exported goods in the world, approximately 90% is transported via water medium, mostly ships. There are almost 50,000 cargo ships running regularly across the globe carrying millions of containers every year (ESACAP, 2011). Port infrastructure and the quick turnaround of goods loading and unloading are extremely important in supporting a vibrant export-import economy. The East Asian countries have one of the largest cargo handling capacities in the world. In fact, seven of the top ten cargo handling ports are situated in Asia only; four in China, and one each in Singapore, South Korea, and Japan (Drysdale, 2014).
Conclusion
International trade in the East Asian region has thrived in the last two decades. In fact, in terms of export and import, this is the largest region by both volume and value. The region not only exports a considerable amount of goods to many developed nations across the world, but also is very highly integrated doing significant trades with each other. As per the suggestion made by the gravity model of international trade, the international trade between two countries and regions increases with the growth of their GDPs. The East Asian economies have grown significantly in the last two decades, with the total size of the East Asian economies being larger than the EU and the USA put together. After the formation of the WTO, the East Asian countries have signed several FTAs to facilitate the goods movement in and out of the region. It has also vastly improved the transportation infrastructure to support the flow of goods in and out of the region. The region is also capable of producing low cost, high quality goods. These three factors collectively have transformed the East Asian countries from a small force into the most powerful force in international trade.
Work Cited
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