Intra-regional Trade in Intermediate Goods and Macroeconomic Interdependence in East Asia : Analysis with Updated and Extended Data

Over the last few decades, a distinctive trade structure has emerged in East Asia, in which countries in the region trade intermediate goods extensively with themselves, while they trade more final goods with the rest of the world. This paper documents the facts about this trade structure in detail and empirically investigates its relationship with macroeconomic interdependence in East Asia using a VAR model and data from 11 major countries in the region. The analysis yields three key findings. First, in most East Asian countries, exports, imports, and GDP increase in response to a positive output shock occurring in the USA. Moreover, output is more influenced by USA output shocks in an East Asian country where exports to East Asia are more concentrated in intermediate goods. Second, both exports and imports of an East Asian country increase in response to a positive export shock in that country, with imports being more sensitive to such shocks when intermediate goods account for a larger share of its imports. Third, output shocks from China exert a stronger influence on East Asian economies compared to those from Japan.