however, which will induce some firms to locate in less agglomerated regions where the wages are lower. The result is a core-periphery structure of production.<sup>5</sup>

# **TRENDS AND EVOLUTION OF TRADE PATTERNS IN EAST ASIA**

The rapid expansion of foreign trade and FDI has had a major part in successful economic development in East Asia (see figure 3). Through foreign trade and FDI, East Asian economies have obtained technology and management know-how from foreign countries, and this has contributed to economic growth by improving production and technological capability. There have been dramatic changes in trade patterns over the years. Intraregional trade has expanded more rapidly than extraregional trade and now accounts for over half of East Asia’s trade, resulting in an increase in intraregional dependency. The composition of trade is shifting from low-skill products, such as textiles and garments, to higher-skill, highertechnology products, especially machinery, which now accounts for over 40 percent of East Asia’s exports and over 50 percent of intraregional exports. Among machinery exports, electronics (office and telecommunications equipment) and electrical products are the most substantial. Within East Asia, intraindustry trade has expanded more rapidly than interindustry trade; a dominant portion of the intraindustry trade takes the form of vertical intraindustry trade or production sharing networks. Indeed, the trade in parts within East Asia accounts for a large share of the total trade (that is, the trade in parts and finished products), and the share is increasing: over 50 percent of textiles and garments and over 80 percent of electrical machinery. This pattern reflects the expanding division of labor inside East Asia as it has become a factory of the world. These changes in trade patterns have occurred with the active involvement of multinational corporations in FDI and foreign trade; the corporations have taken advantage of the business opportunities arising from the freer trade and FDI environment in the region.

<!-- Start of picture text --> Figure 3 FDI Has Played a Key Role in East Asia<br>a. Exports, FDI inflows, and gross domestic product b. Exports and FDI as a share of gross domestic product<br>1985=100 percent<br>1600 45<br>1400 40 exports<br>35<br>1200<br>FDI inflow stock<br>30<br>1000<br>25<br>800 exports<br>20<br>600<br>15 FDI inflow stock<br>400<br>10<br>GDP<br>200 5<br>0 0<br>1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003<br><!-- End of picture text --> _Source:_ World Bank 2005.

**_The expansion in intraregional trade did not come at the expense of extraregional trade._** The dynamics of intraregional trade reveals the new role of East Asia as a factory for the world market. Half of East Asia’s trade is now conducted inside the region (49 percent of exports and 55 percent of imports). The importance of intraregional trade has grown for most East Asian economies (see table 1). China has become an important trading partner for other East Asian countries; all have increased their share of exports to China. At the same time, the share of China’s exports to East Asia has dropped, while the share of China’s exports has increased to the European Union and the United States. The trade intensity of Japan and the NIEs with China is high, reflecting the strength of their production sharing networks (see figures 4 and 5).

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