Intra-Industry Trade Between Japan and Korea: Vertical Intra-Industry Trade, Fragmentation and Export Margins

This paper contributes to the existing empirical investigation of Japan-Korea international trade by providing new evidence of intra-industry trade between Korea and Japanese sub-regions. Taking advantage of a Japanese international trade dataset disaggregated by sub-regions, we calculate the Grubel-Lloyd intra-industry trade index for 41 regions of Japan with respect to Korea for the period between 1988 and 2006. By restricting the flows of intra-industry trade to sub-regions, the Grubel-Lloyd index is more likely to capture the effect of the fragmentation of production than the traditional index, which is based on the national level. By using Japanese prefecture international trade data, it is revealed that intra-industry trade is still pervasive even when it is restricted to trade flows between prefectures and Korea. In intra-industry trade regression models, we introduce extensive and intensive margins of prefecture exports as new explanatory variables. We find that a rise in intra-industry trade is driven by the introduction of a new variety of exports, while intra-industry trade is discouraged by an increase in the trade value of products already exported.