Zhang Xiaoji

Research Report No 177, 2002

Bilateral and multilateral trade in goods is an important content in evaluating economic contact of countries within a region. With economic globalisation, however, regional economic integration already exceeds the area of commodity trade, and movements of capital, services and personnel have become increasingly important. Product trade between countries is not only based on comparative advantages. With ownership advantages, transnational corporations develop their intra-industry and intra-firm trade through cross-the-border investment to optimise production distribution and fully exert their technology advantages and vertical integration advantages through internalisation. As the link between trade and investment has become increasingly intertwined in regional economic integration, differences in economic development level of various countries have become less important. The scale and the development potential of regional market may have become the decisive factor in the integration process.

I. The Status of Northeast Asia in Economic Globalization

Geographically speaking, apart from China, Japan and Korea, Northeast Asia should also cover Mongolia, North Korea and the far-eastern regions of Russia. However, with regard to economic vitality and market contact, China, Japan and Korea constitute the economic core of Northeast Asia and are a key area of study in regional economic integration.

The rapid growth of external trade and cross-the-border investment is a major feature of economic globalization. In the last 10 years of the previous century, global import trade grew by 0.9 times and global exporting trade grew by 0.8 times, the inflow of FDI grew by 5.3 times and the outflow of FDI grew by 3.9 times, while the global GDP only rose by 0.4 times. Both trade and investment grew much faster than GDP. With globalization, economic vitality of a country or a region is not only demonstrated by its own rate of growth but also by its ability to effectively utilize global resources.

Japan and Korea suffer from relatively poor resources. Their long-standing economic development strategies focus on the development of export-oriented manufacturing industries. As a result, Northeast Asia has become the global center of manufacturing industries, leading the world in the production and export of steel, automobile, chemical and shipbuilding industries. In recent years, the IT products manufacturing industry has become the fastest growing industry in Northeast Asia. It makes increasingly greater contributions to the economy of Northeast Asia and demonstrates strong competitiveness in the world market as well. As to China, the per capita resource remains below the average level in the world, but it has attached great importance to the utilization of external markets in the past 20 years. It has changed from mainly exporting resource-intensive products to exporting labour-intensive, manufactured products. Its export-oriented processing industries established in the coastal areas imported large volume of raw materials and parts and exported the processed and assembled products. China’s industrialization and its development of export-oriented manufacturing industries strengthened the status of Northeast Asia as the manufacturing center of the world.

The economies of China, Japan and Korea are characterized by high levels of dependency on the US and the European markets. Exports to the US and the EU accounts for more then 50% of China & Japan’s total exports, and Korea sells more than 35 percent, which is higher if taking into account of exports of its overseas enterprises. By comparison, the potentials of the regional market of Northeast Asia have not been fully tapped. Currently, the foreign exchange reserves of China, Japan and Korea total over US$ 700 billion and are still increasing. However, the Japanese economy plummeted into stagnation since the 1990s. After the mid-1990s, especially after the Asian financial crisis, the economic growth of Korea and China have also slowed down significantly. Under this situation, the increases in foreign exchange reserve are as good as outflow of resources. Moreover, with the turbulent state financial market, the risks of assets have also increased. At present, all the three countries are striving to speed up domestic restructuring and reforms. If they can expand the intra-regional market and optimize the industrial division of labour and resource allocation, they may effectively reduce the costs and risks of restructuring.

The expansion of the regional market of Northeast Asia requires sound interactions between trade and investment. In the late 1980s and early 1990s of the 20th Century, outflow of direct investment of Japan took up 20 percent of the world total, when Japan, the USA and the EU ranked equally as the three major cores of global direct investment. Direct investment of Japan to Northeast Asian countries used to be an important force that promoted regional economic integration. However, the status of Japan in the global direct investment gradually fell ever since. Its outflow of direct investment in 2000 only amounted to 2.9 percent of the world total, when over 50 percent of it flowed into the EU and the US, and only 4.5 percent and 1.7 percent went respectively to China and Korea. Affected by the Asian financial crisis, the ability of overseas investment of Korea also weakened. In 2000, the proportion of intra-regional FDI in Northeast Asia was 11 percent of the inflow and 6 percent of the outflow. By contrast, the proportion of intra-regional FDI in the EU was much larger. In 1998, it was 52 percent of the total FDI inflow in the region and 40 percent of the outflow. With intra-regional investment, the EU has become the largest region in the world in terms of FDI inflow and outflow, which took up 49 percent and 67 percent, respectively. In the free trade zone of North America, the USA is the exporter of FDI while Canada and Mexico are the importers. The industrial transfer pulled by investments has remarkably increased trade within the region.

II. The Impact of Investment on Trade among China, Japan and Korea

1. Foreign invested enterprises (FIEs) in China play an important role in the development of foreign trade.

At the end of the 1970s of the 20th Century, China only shared less than 1 percent of global trade and ranked the 32nd among all countries in the world. At that time, China had a very backward manufacturing industry and mainly depended on exports of primary products to exchange for needed foreign currencies. By the mid-1980s, its exports of primary products still took up over 50 percent of the total, of which crude oil shared a half. Through years of development, China’s status in the world market has significantly changed. In 2001, its share in the global trade rose to 4 percent and it ranked the 6th in the world for exports.

China’s development of foreign trade is closely linked to its policies on absorbing FDI. During 1986-2001, total imports and exports in China rose by 13.7 percent annually, while imports and exports by FIEs grew by 34.7 percent per annun. The proportions of imports and exports of FIEs in China’s total imports and exports rose from 4 percent to 50 percent. The growth of exports of FIEs was faster than that of imports. In the past 15 years, their total exports increased by 43.6 percent per annun while imports grew by 30.2 percent per annun. In 2001, the surplus of China’s imports and exports reached US$ 22.5 billion, of which about 1/3 are owed to the FIEs (Table 1). The main export goods of FIEs were manufactured industrial products, which always remained over 80 percent of their total exports.

Processing trade – importing raw materials and original parts with protective tariffs and exporting them after processing and assembling in China – is the main method of trade of the FIEs. In 2000, total imports of the FIEs of processing trade reached US$ 68.5 billion, which were 58 percent of their total imports, while total exports of processing trade amounted to US$ 97.2 billion, which were 81 percent of their total exports (Table 2). These data demonstrate that efficiency remains one of the major goals of foreign companies that invest in China.

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