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EAST ASIAN REGIONALISM: THE NEED FOR ASEAN+3 FTA - OPENNESS WITH CUSTOMIZED RPL INDEXExport lead growth approach that has been done with the cointegration and ECM has actually provided the basis to measure openness of a country, but in some ways this alone is not enough. It only works for confirming the paradigm of trade as an engine of growth but it is not sufficient to measure a more robust pattern of openness. Therefore, we then may have to address Dollar’s Relative Price Level (RPL index).
As already explained in the previous section, ECM provides the description of short run shock. In this particular case, we examine the openness vis a vis trade liberalization trend in north East Asia region. This test employs time series quarterly data of Exchange rate, CPI, Export for CJK ranging from 2001 to 2005, the data is taken from CEIC data base.
This equation mimics equation 7, but the previous dependent variable is substituted from export to RPL in order to suit the goal which is to measure the openness. AGDPCountryX is the difference in GDP from Japan, Korea and China, ARPLCountryY is the difference in RPL from a country X to Country Y. ARPLCountryY measures the openness of trade from of country X towards Y.
This paper argues that spillover effect, product complementarities, intra industry trade, comparative advantage along with the trend of convergence form the so called economic modalities. The first three factors have a direct relationship to ASEAN welfare through income perspective.
In this equation, GDPCAP(ASEAN4) is the level of income in ASEAN4 countries, while IIT, TCI and SOE are respectively the intra industry trade, product complementarities and the spillover effect. CountryY is the country under study (CJK) in terms of relation with ASEAN4 income level. TAX is the tax level in East Asia which functions as control variable.
The next factor of economic modalities is comparative advantage, in this paper, the comparative advantage functions to determine the type of industry trade whether it is vertical or horizontal.
Faustino argued that Vertical Intra Industry Trade (VIIT) has an underlying hypothesis that goods are produced under different factor proportions and are exported according to comparative advantages, it is expected that we will find a positive correlation between VIIT and revealed comparative advantage (RCA) and a negative correlation between Horizontal Intra Industry Trade (HIIT) and RCA.
The last factor of economic modalities is Regional convergence. It is actually a forecast toward the formation of EAR. A positive trend of convergence between ASEAN and CJK will act well to create EAR.