The determinants of vertical intra-industry trade in SITC 8: The case of ASEAN-5 and China

The bilateral trade between Asia and United States (US) was diluted since the 1997 Asian Financial Crisis. On the other hand, trade ties between Asia and China has been strengthened as China has emerged as the regional and global manufacturing powerhouse attributable to her abundance of labor and aggressiveness of open door policies. In light of the rapid development of regional production networks, vertical intra-industry trade (VIIT) has become increasingly important in Asia. The dynamic changes of Asia’s trade networking have reinforced ASEAN-5’s (Indonesia, Malaysia, Philippines, Singapore and Thailand) desire to boost the development of VIIT with China in manufactured products. This study seeks to identify the determinants for VIIT between ASEAN-5 and China in the miscellaneous manufacturing sector (SITC 8). The VIIT indices, computed using the decomposition type threshold method, were subjected to panel data analysis using spatial panel model. The explanatory variables consists of ASEAN-5’s FDI in China (FDI), differences in GDP between each ASEAN-5 country and China (DGDP), trade openness (TO) and spatial interaction effect of VIIT (SVIIT). Spatial panel model is adopted in this study as it is strongly believed that spillover effects among ASEAN-5 countries are present. The data used comprise annual statistics from 1993 to 2009. The econometric results show that trade openness is the significant determinant of VIIT as it reduces trading costs and service costs and provides greater opportunity for production fragmentation and results in greater intensity of VIIT between ASEAN-5 and China. The econometric results also confirm the presence of spatial interaction effects among ASEAN-5 as SVIIT is significant. The negative coefficient of SVIIT signifies intense competition among ASEAN-5 countries on VIIT with China in SITC 8. To transform the competition into complementation, ASEAN Economic Community can play a pivotal role as it is a good channel for each ASEAN-5 country to leverage their comparative advantage respectively, and sustain the bilateral trade with China in SITC 8.