APEC in the 21st Century

8. Trade and Foreign Direct Investment in East Asia

212 Masahiro Kawai and Shujiro Urata 8 Trade and Foreign Direct Investment in East Asia Masahiro Kawai and Shujiro Urata Introduction One notable and common characteristic of the emerging East Asian economies in recent years has been the increase in their international economic transactions such as international trade and foreign direct investment (FDI).1 In the pre-crisis, “miracle” period, the share of foreign trade in gross domestic product (GDP) was significantly higher for emerging market economies in East Asia than for emerging economies in other parts of the world. In particular, between 1980 and 1997, their share of foreign trade in GDP rose at significantly greater rates. Since the mid-1980s, East Asian economies have experienced new developments in international growth activities. Specifically, emerging East Asia experienced a rapid expansion of FDI and FDI-induced trade as part of the international business of the multinational corporations. Indeed, between 1980 and 1999, world FDI grew at an annual average rate of 16 per cent, significantly higher than the corresponding rate of 6 per cent for world trade. Since FDI has tended to be complementary Trade and Foreign Direct Investment in East Asia 213 to, rather than a substitute for, trade, large inflows of FDI to emerging East Asia further increased the region’s engagement in international economic transactions. This paper examines the changing pattern and structure of foreign trade and FDI in East Asia over the last two decades with a focus on the 1990s. It attempts to examine the interaction between foreign trade and FDI, which is a defining characteristic of developments in the region.2 The analysis shows the increase in intra-regional interdependence in foreign trade and FDI, reflecting the creation of an FDI-trade nexus in East Asia. There is no doubt that the simultaneous expansion of trade and FDI has contributed to economic development and growth in the region. Noteworthy in East Asia is the formation of regional production networks by multinational corporations, an underlying determinant of the FDI-trade nexus. These networks have promoted the specialization of production in East Asia, based on comparative advantage within the same industry, created intra-industry trade, and thus improved efficiency. Although strong intra-regional economic interdependence spread the unfavourable impacts of the financial crisis throughout the region in 1997–98, the networks also helped the region’s economic recovery from the crisis. Indeed, further expansion of trade and FDI is not only desirable but also necessary to promote sustained recovery and growth in the region. Overview of Trade and Investment in East Asia Expansion of Foreign Trade and Foreign Direct Investment in East Asia Foreign trade and foreign direct investment (FDI) of the East Asian economies expanded rapidly, beginning in the mid-1980s (Tables 1–4, Figures 1–2) until the outbreak of the East Asian financial crisis. Between 1985 and 1997, East Asian exports expanded steadily to register an almost fivefold increase, before declining in 1998 as a result of the crisis. The rate of expansion was particularly high from 1986 to 1988, when the annual rate of growth exceeded 20 per cent. In the 1990s, there were fluctuations in the annual rates of growth, with a peak at 22 per cent in 1995 followed by a decline, resulting in negative growth in 1998. The patterns of export growth for the 1985–99 period were similar for all developing economies in East Asia, with few exceptions. Compared with 214 Masahiro Kawai and Shujiro Urata (a) Millions of US dollars Regions/Countries 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 WORLD 1,832,508 1,914,798 1,774,888 1,729,561 1,836,746 1,874,505 2,043,465 2,416,116 2,763,261 2,985,652 INDUSTRIAL COUNTRIES 1,246,665 1,224,647 1,162,017 1,146,445 1,222,083 1,265,929 1,472,701 1,730,460 1,980,473 2,123,906 United States 220,781 233,739 212,274 200,527 217,889 213,146 217,292 252,884 319,413 363,812 European Union-15 751,159 693,129 668,105 651,844 669,373 708,197 869,510 1,045,819 1,163,633 1,238,972 Japan 130,435 151,500 138,443 146,971 169,748 177,189 210,718 231,332 264,961 274,597 DEVELOPING COUNTRIES 585,843 682,732 605,849 576,306 608...