# **Notes**

1 In this paper, East Asia refers to the member countries of the Association of Southeast Asian Nations (Brunei Darussalam, Cambodia, Indonesia, the Lao People’s Democratic Republic, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam), plus China, Hong Kong (China), Japan, the Republic of Korea, Mongolia, and Taiwan (China). Emerging East Asia refers to East Asia, minus Japan. Developing East Asia refers to emerging East Asia, minus Hong Kong (China), Korea, and Singapore. 2 In this paper, the NIEs include Hong Kong (China), Korea, and Taiwan (China).

3 Various terms have been used to describe production networks, including slicing up the value chain (Krugman 1995), outsourcing (Feenstra and Hanson 1996, 1997), the disintegration of production (Feenstra 1998), the fragmentation of production (Deardorff 1998; Jones and Kierzkowski 2001), and intraproduct specialization (Arndt 1997).

4 For a broader discussion of the theory on geography and trade, see Fujita, Krugman, and Venables (1999).

5 See Redding and Venables (2004).

6 The triangular trade index is defined as: [(exports of intermediate goods from Japan and the NIEs to China and ASEAN) ÷ (exports of intermediate goods from Japan and the NIEs to the world)] x [(exports of finished goods from ASEAN and China to Canada, the European Union, and the United States) ÷ (exports of finished goods from emerging East Asia to the world)].

7 The intraindustry trade index (IIT) is computed as: where _Xijk_ represents exports from industry _i_ by country _j_ to country _k_ , and _Mijk_ represents the corresponding import values. The greater the degree of intraindustry trade, the greater the value of IIT. IIT tends to increase with the level of aggregation in terms of the number of countries under one group, such as East Asia, rather than individual countries. It also tends to increase with the level of product aggregation, say, from the standard international trade classification (SITC) 3-digit to the SITC 2-digit. See Fukao, Ishido, and Ito (2003) for the classification of three types of trade; the 6-digit Harmonized Commodity Description and Coding System classification is used.

8 Two types of intraindustry trade may be identified. One type is called horizontal intraindustry trade, which refers to trade in products that are similar in quality and price, but differentiated by design or other characteristics. Such trade may occur between countries at similar income levels (and similar endowments), wherein consumers have similar tastes, but also demand variety. The other type is called vertical intraindustry trade, which refers to trade in products differentiated in quality and price. An example of such trade involves standard color televisions and high-definition televisions, which are different in quality and price. Vertical intraindustry trade tends to take place between developing and developed countries, where the factor prices are very different.

9 A more appropriate approach to capturing such back-and-forth links, following Hummels, Ishii, and Yi (2001), is called vertical specialization, which is defined as production arrangements whereby firms produce final goods in multiple stages across multiple countries. Vertical specialization may comprise some types of intraindustry trade, but is a broader concept. Vertical specialization only occurs when the following conditions are met: (1) goods are produced in multiple, sequential stages; (2) two or more economies add value during the production sequence; and (3) at least one economy uses imported inputs during its stage of the production process and exports some of the resulting output. The vertical specialization chain involves a minimum of three economies: (1) economy 1 produces intermediate goods (including raw materials) and exports them to economy 2; (2) economy 2 combines the imported intermediate goods with capital and labor (adding value) and domestically produced intermediate inputs to produce a good, which may be a final good or another intermediate good (gross output); and (3) economy 2 exports some of the good to economy 3 (though, in practice, economy 1 and economy 3 may 31