Vertical Intra-Industry Trade and the Division of Labor in East Asia

This paper investigates the deepening of the international division of labor and its effect on factor intensities in Japan, mainly focusing on the manufacturing sector. In the first half of the paper, we analyze factor contents of trade and find that Japan's factor content net-exports of capital and non-production labor grew rapidly while net-exports of production workers fell by a large amount. Interestingly, the decline in the factor content of net-exports of production workers was almost entirely caused by Japan's trade with China and Hong Kong. According to our decomposition analyses, however, most of the macro-economic change in the capital-labor ratio and the change in the skilled-labor ratio are attributable to a "within-industry" shift rather than a "between-industry" shift. Although we clearly see a drastic increase in VIIT and outsourcing to foreign countries, particularly to Asian countries, our empirical analysis provides only weak evidence that the deepening international division of labor contributes to the change in factor intensities in each industry. Our results suggest that specialization in the export of skilled-labor-intensive products may have contributed to the increase in the relative demand for skilled (professional, technical, managerial, and administrative) labor within industry. However at the same time, our results also imply that changes in trade patterns (specialization in capital-intensive production) did not offset the excess supply of capital in Japan. That is, Japan is not adequately specializing in the export of capital-intensive goods despite the fact that the price of capital is low and capital is abundant.