# **PRODUCTION SHARING: AT THE CORE OF EAST ASIA’S TRADE PERFORMANCE**

International production fragmentation—the crossborder dispersion of component production and assembly within vertically integrated production processes whereby each economy specializes in a particular stage of the production sequence—has been an important feature of the deepening structural interdependence of the world economy in recent decades. This phenomenon has been reflected in a growth in the trade in parts and components at a rate exceeding that of the trade in final goods because a good crosses multiple borders while it is involved in processing (see figure 11). The world trade in parts and components increased in value from US$400 billion in 1992 to over US$1,000 billion in 2003. Developed countries account for the bulk of the trade in components, but the share of developing countries has increased sharply over the years. The share of East Asia in the total exports of components rose steadily, from 31 percent in 1992 to 43 percent in 2003, despite a decline in the share of Japan. Contrary to the popular perception of crowding out by China, the increase in the share of the exports of components by China and Hong Kong (China)<sup>10</sup> has occurred within an overall increase in exports from relative newcomers in trade in the region, including Vietnam (see table 3).

<!-- Start of picture text --> Figure 11 Share of Parts and Components in Total Exports<br>World<br>Eastern Europe<br>EU<br>M ERCOSUR<br>M exico<br>USA<br>NAFTA<br>South Asia<br>Thailand<br>Singapore<br>Philippines<br>M alaysia<br>Indonesia<br>AFTA<br>Taiwan<br>Korea<br>Hong Kong<br>China<br>Japan<br>0 20 40 60 percent 80<br>Source: Athukorala and Yamashita 2005.<br>a. Mercosur = the Southern Cone Common Market.<br>b. NAFTA = North American Free Trade Agreement.<br>c. AFTA = ASEAN Free Trade Area.<br><!-- End of picture text --> The engine for the expansion of trade in East Asia in recent years has been international processing activities, in which China has been a major manufacturing base relying on inputs imported from other Asian countries. Production sharing with advanced Asian economies has permitted rapid diversification in China’s manufacturing export capacities. Firms in Asia have moved production facilities to China, enhancing China’s integration in the regional economy and leading to the reorganization of industry in East Asia. Production sharing has enabled developing countries to take advantage of differences in comparative advantage at a more sophisticated level of specialization. East Asia has been at the forefront of this international fragmentation of production. Malaysia, the Philippines, and Thailand performed exceptionally well in exports of finished or assembled machinery between 1998 and 2004. Japan accounts for over half of East Asia’s exports in machinery. The production networks that initially linked Japanese industry vertically with Korea and Taiwan (China) in low-skill assembly activities have gradually been transferred to lower-wage countries such as Malaysia, the Philippines, and Thailand. (Indonesia, however, has shown little success despite even lower wage levels.) These networks are also now being transferred to China and Vietnam.

**<u>Table 3 Intra-Asian Trade in Parts and Components</u>**

|||_Japan_||_NIEs_||_Importers_<br>_ASEAN-4_<sup>a</sup>||_China_||_Asia_|
|---|---|---|---|---|---|---|---|---|---|---|
|_Exporters_|_%,_<br>_2004_|_% point change,_<br>_1993–2004_|_%,_<br>_2004_|_% point change,_<br>_1993–2004_|_%,_<br>_2004_|_% point change,_<br>_1993–2004_|_%,_<br>_2004_|_% point change,_<br>_1993–2004_|_%,_<br>_2004_|_% point change,_<br>_1993–2004_|
|Japan|n.a.|n.a.|11|−14|5|−8|7|+3|25|−22|
|NIEs|4|..|15|..|6|−2|15|+9|41|+7|
|ASEAN-4<sup>a</sup>|2|..|7|−1|2|+1|4|+4|16|+4|
|China|3|+2|10|+7|2|+1|n.a.|n.a.|16|+11|
|Asia|10|+3|44|−8|15|−7|25|+16|100|n.a.|

_Source:_ CEPII-BACI Database, Centre d’Etudes Prospectives et d’Informations Internationales, http://www.cepii.fr/francgraph/bdd/baci.htm. _Note:_ n.a. = not applicable. .. = negligible.

a. ASEAN-4 = Indonesia, Malaysia, the Philippines, and Thailand.

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