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EAST ASIAN REGIONALISM: THE NEED FOR ASEAN+3 FTA - COMPLEMENTARITYA high degree of complementarity is assumed to indicate more favorable prospects for a successful trade arrangement in East Asia vis a vis Regionalism. The best way to measure product complementarities it is through Trade Complementary Index (TCI). TCI is a type of overlap index. It measures the degree to which the export pattern of one country matches the import pattern of another. Changes over time may tell us whether the trade profiles are becoming more or less compatible.
Where d is the importing country of interest, s is the exporting country of interest, w is the set of countries under study, i is the set of industries, x is the commodity export flow, X is the total export flow, m the commodity import flow, and M the total import flow. In words, we take the sum of the absolute value of the difference between the sectoral import shares of one country and the sectoral export shares of the other. Dividing by 2 coverts this to a number between 0 and 1, with zero indicating all shares matched and 1 indicating none did. Subtracting from one reverses the sign, and multiplying by 100 puts the measure in percentage terms. It takes a value between 0 and 100, with zero indicating no overlap and 100 indicating a perfect match in the import/export pattern. The data is collected from The United Nations Commodity Trade database (COMTRADE), the World Trade Database (WTD) maintained by Statistics Canada, and the GTAP database from Purdue University.
Comparative advantage underlies economists’ explanations for the observed pattern of inter-industry trade. In theoretical models, comparative advantage is expressed in terms of relative prices evaluated in the absence of trade. Since these are not observed, in practice we measure comparative advantage indirectly. Revealed comparative advantage indices (RCA) use the trade pattern to identify the sectors in which an economy has a comparative advantage, by comparing the country of interests’ trade profile.
Where s is the country of interest, d and w are the set of all countries in the world, i is the sector of interest, x is the commodity export flow and X is the total export flow. The numerator is the share of good i in the exports of country s, while the denominator is the share of good i in the exports of the world. It takes a value between 0 and +°°. A country is said to have a revealed comparative advantage if the value exceeds unity. The data is collected from The United Nations Commodity Trade database (COMTRADE), the World Trade Database (WTD) maintained by Statistics Canada, and the GTAP database from Purdue University
The intra industry trade (IIT) is a measure of the degree to which trade in a particular sector represents intra-industry trade (based on scale economies and/or market structure). By engaging in IIT, a country can reduce the number of similar goods it produces, and benefit from scale economies. Higher IIT ratios suggest that these sources of gains are being exploited. IIT may also indicate that adjustment costs would be lower with trade expansion.
In this paper, we measure the trend toward openness vis a vis regionalism by using ECM for the RPL index in North East Asia (CJK). Since we include two sub regions, the best way to measure it is by using test of convergence of the term of trade for CJK and ASEAN4. The notion of convergence implies that differences between the series must follow a stationary process. Thus, stochastic convergence implies that the sub regions will form the so called EAR. Following Bernard and Durlauf, stochastic convergence occurs if the differential log trade system, yt, follows a stationary process, where yt = ASEAN4tott -CJKtott where ASEAN4tott is the logarithm term of trade of ASEAN4, and CJKtott is logarithm term of trade of CJK. Both series are in the first difference (I).