Intra-industry Trade Between Japan and East Asian Countries in the Agri-Food Sector: Patterns and Determinants

Transcription

1 Intra-industry Trade Between Japan and East Asian Countries in the Agri-Food Sector: Patterns and Determinants by Kuo-I Chang a Graduate School of Agricultural and Life Science, The University of Tokyo, Abstract This paper attempts to investigate the patterns and determinants of the share of vertical intra-industry trade (VIIT) in the agri-food sector between Japan and East Asian countries from 1997 to Our empirical results show that the large portion of agri-food trade between Japan and East Asian countries is still one-way trade while intra-industry trade, particularly VIIT has not grown rapidly from 1997 to However, we find a positive relationship between factor endowment and VIIT. Particularly, the fact that Japan imports high-quality agri-food products more than exports reflects in the opposite direction of quality ladder story based on Flam and Helpman type vertically differentiated trade models. Corresponding author. (K. Chang), Graduate School of Agricultural and Life Science, The University of Tokyo,7B538R, Yayoi, Bunkyo-Ku, Tokyo, , Japan. Phone: ; fax: address: aa57090@mail.ecc.u-tokyo.ac.jp 1

2 1. Introduction Recent studies on intra-industry trade (IIT) have brought to light rapid increases in vertical IIT and horizontal IIT. Despite the potential importance of this issue and the fact that theory suggests that the determinants of vertical and horizontal IIT differ, most of previous empirical studies on IIT have focused on total IIT without distinguishing between vertical and horizontal IIT. This paper examines the vertical and horizontal IIT and determinant of vertical IIT (VIIT) in the agri-food sector 1 between Japan and 8 East Asian countries (Indonesia, Malaysia, Philippines, Thailand, China, Singapore, Korea, and Taiwan). The motivation for this paper stem from the recent development in foreign direct investment (FDI) and the rapid expansion of processed food exports in many East Asian economies. We focus on the agriculture and food sector not only because this is an important sector within the region, but also because it is one of the most critical sectors for the success of future trade reform and economic integration. In recent literature the growing importance of the ASEAN Free Trade Agreement (AFTA) and its implications on the major trading partners have attracted a lot of attentions. It is particularly relevant when discussing future bilateral trade agreements where trade partners expect trade adjustments to take place within industries, rather than across industries. 1 This paper defines agricultural goods basically according to Agreement on Agriculture (AOA) of WTO. AOA covers HS01 to 24 less fish and fish products, plus HS (mannitol), (sorbitol), 3301 (essential oils), (albuminoidal substances, modified starches, glues), (finishing agents), (sorbitol n.e.p.), (hides and skins), 4301 (raw furskins), (raw silk & silk waste), (wool & animal hair), (raw cotton, waste & cotton carded or combed), 5301 (raw flax), 5302 (raw hemp). In this paper, we include fish and fish products while excluding additional products for avoid digit-different mixing up. 2

3 This paper employs the bilateral VIIT indices between Japan and 8 East Asian countries over the period and analyzes the relationship between factor endowment and VIIT in agri-food products. The rest of this paper is organized as follows. Section 2 presents the conceptual framework for the intra-industry trade and connects illustrative theoretical models with the empirical method. Section 3 provides detailed analysis of intra-industry trade for horizontally and vertically differentiated products and examines the nature and characteristics of agri-food trade patterns with 8 East Asian countries. Section 4 presents the results of the regression analysis. The last section concludes. 2. Conceptual framework for the intra-industry industry trade 2.1 Empirical decomposition of intra-industry industry trade Although the Grubel-Lloyd intra-industry trade index is popular for its ease of computation, it has a flaw in being unable to distinguish between horizontal IIT and vertical IIT; when in fact theory suggests that their determinants do differ. This has been reconfirmed in a number of empirical studies in recent years. Horizontal IIT refers to trade in similar products but different characteristics or attributes, while vertical IIT involves trade in similar products of different qualities and intra-firm, inter-processed trade (fragmentation). Krugman (1979) has demonstrated that horizontal IIT is influenced by scale economies and preference diversity, while Falvey (1981) has shown that factor endowment determines vertical 3

4 IIT. Moreover, Jones and Kierzkowski (1990) and Deardorff (2001a,2001b) showed that location advantage with cost of service links determines either inter-industry trade or vertical IIT. Thus, IIT must be decomposed into horizontally and vertically differentiated products and analyzed separately. Confounding both may produce contradictory results. In order to identify vertical and horizontal IIT, we adopt a threshold-based methodology used by major preceding studies, such as Greenway, Hine, and Milner (1995), Fontagné, Freudenberg, and Péridy (1997), Fontagné and Freudenberg (2002), Fukao, Ishido and Ito (2003), Kimura and Ando (2003), and Ferto (2005). The basic idea is to give a definition of intra-industry trade which is closer both to reality and economic theory. On a conceptual framework, we start from the apprehension of intra-industry trade at the product level, and at the same time to distinguish between horizontal and vertical product differentiation. To operate on the concept of intra-industry trade in similar products, it is necessary to define what a product is empirically, what a similar product is, and what intra-industry trade is. The detailed composition of classification is the best guarantee for avoiding the empirical problems of sectoral aggregation. The data we use are published by World Trade Atlas based on HS 9-digit level and are sufficiently detailed for products to be distinguished by their principle, technical characteristics. Products would differ clearly by their quality inside the item of aggregation level. Here, it is assumed that differences in prices (unit values) reflect quality differences. Therefore, products whose unit values are close are considered as similar. Trade in 4

5 an item is considered to be intra-industry trade when the value of the minority trade flow represents at least 10% of the majority flow. If trade flows of a particular product with a partner country fulfill these criteria of similarity and overlap, we qualify imports as well as exports as intra-industry trade in similar products. We will decompose trade pattern into one-way trade, horizontal and vertical IIT by detailed commodity and discuss the changing trade patterns between Japan and 8 East Asian countries in the third section. 2.2 Connection with theoretical framework In the past twenty years, a number of theoretical studies have discussed for country and industry specific influences on intra-industry trade. Table 1 presents the connection between empirical threshold decomposition method and theoretical framework of intra-industry trade based on nature of trade, theoretical foundation, market structure and determinants of trade. == Table 1 == Two of the most common assumptions made in theoretical models of horizontal IIT are that trade is associated with imperfectly competitive product markets and that the output of relevant industries consists of sufficiently differentiated products. Both assumptions have important implications for the analysis of the gains from trade and trade policy. Spence (1976), Dixit and Stiglitz (1977), Krugman (1979), 5

6 Lancaster (1980) present a number of model of horizontal IIT based on monopolistic competition markets. Empirical studies argued that horizontal IIT plays a particularly large role in the trade in manufactured goods among advanced industrial nations. Over time, industrial countries have become increasingly similar in their levels of technology and in the availability of capital and skilled labor. Since major trading nations have become similar in technology and resources, there is often no clear comparative advantage within an industry, and much of international trade therefore takes the form of intra-industry specialization that is probably driven in large part by economies of scale and other reasons rather than inter-industry specialization driven by comparative advantage. Shaked and Sutton (1984) show the mechanism of vertical differentiation based on quality under imperfect competition (natural oligopoly). They pointed out that international trade takes the form of intra-industry specialization that driven by economies of scale which is likely to be of practical relevance to high technology industries where the main burden of quality improvement falls on fixed (R&D) costs, so that unit variable costs rise only slowly with quality. As Falvey (1981) points out in his neo Heckscher-Ohlin model, commodities of the same statistical group but of different quality may be produced by using different mixes of factor inputs. Moreover, developed economies may export physical and human capital-intensive products of high-quality and import unskilled labor-intensive products of low-quality from developing economies. Through this mechanism, an increase in vertical IIT may have a large impact on factor demands 6

7 and factor prices. Vertical IIT is likely to be driven by differences in factor endowments. Consequently, we expect vertical IIT to be more pronounced between developing and developed economies. As being shown by Falvey and Kierzkowski (1987), the share of vertical IIT will be correlated with the average market size of the two countries in spite of a distinctly different pattern of specialization. Flam and Helpman (1987) developed a model of North-South trade based on vertical product differentiation in which the North exports high-quality and the South exports low-quality industrial products. Faster technical progress in the Southern industrial sector leads the North to introduce new high-quality products and the South to abandon low-quality products. Production of Northern low-quality products is shifted to the South. This is a sort of quality ladder story. Durkin and Krygier (2000) find evidence of a positive and significant relationship between differences in GDP per capita and the share of vertical IIT and support the view that IIT may be positively related to differences in relative wages. Intra-industry trade that trade economists have recently referred to as intra-firm, inter-processed trade in relation to the fragmentation has been reconfirmed in a number of studies recently. While this type of intra-industry trade is often seen within the framework of multinational corporations, Northern firms can also make subcontracting arrangements with Southern counterparts, thereby enabling them to exploit economies of scale at various stages of production. Deardorff (2001b) discusses fragmentation across different cones that is maybe useful in understanding the pictures of vertical production chains. Fragmentation becomes 7

8 economical when the cost of service links (SL) connecting production blocks (PB) is low enough. The emergence of intra-industry trade tends to be a concomitant of enhanced fragmentation. Thus the increase of intra-industry trade among trilateral economies may be regarded as the emergence of a new form of interdependence among trilateral economies. It goes beyond the conventional view of the international trade theory based on international differences in technological level and factor prices or preference diversity. As Helpman and Krugman (1985) pointed out, there still exist higher barriers against intra-regional trade in East Asia than in the EU and NAFTA. These barriers are likely to reduce IIT within East Asia. On the other hand, there is a huge income gap among countries in East Asia. Probably this gap enhances vertical IIT because of the differences in labor costs and other factor prices. At the same time, this gap is likely to reduce horizontal IIT because of the differences in industrial structure and preferences. 2.3 Relevance to agri-food intra-industry industry trade between Japan and East Asia The developments of international trade in the whole East Asia reveal that the large portion of trade pattern is still inter-industry trade, which presents a sharp contrast with European trade where intra-industry trade has a substantial share. 2 Fukao, Ishido, and Ito (2003) find that a major pattern is still inter-industry trade while vertical intra-industry trade (IIT) with vertical foreign direct investment 2 See, for example, Fontagné and Freudenberg (2002) 8

9 (FDI) increases its importance in East Asia. Their analysis reveals that, although still much lower than in the EU, intra-industry trade, and particularly vertical IIT, in East Asia has grown rapidly in importance in overall intra-regional trade. This is especially the case in the electrical machinery industry and the general and precision machinery industry. However, while for most EU countries, the share of IIT remained almost constant during the period from 1996 to 2000, it expanded quickly for East Asian countries. Their empirical results imply that in the East Asian region FDI played a significant role in the rapid increase of vertical IIT in recent years. Moreover, they found the largest part of total IIT growth in the region is attributable to the growth of vertical and not of horizontal IIT that have relatively large share in the EU region. However, there are relatively few papers that focus on the intra-industry trade nature of agri-food trade, despite its growing importance especially toward s closer economic integration between East Asian countries Feto (2005) reviews some of the empirical studies on agri-food trade particularly in the latter half of the 1990s (Chang et al., 2001; Christodolou, 1992; Ferto, 2005; Hirschberg et al., 1994; Pieri et al., 1997; Qasmi and Fausti, 2001; Sun and Koo, 2002) relating to the sign and significance of GDP per capita and finds empirical studies on agri-food trade are promising, but they do not support unambiguously the prediction of the C-H-O model. 3. Measurement of Vertical and Horizontal Intra-industry Trade 9

10 The previous section reviews various kinds of trade models. This section provides detailed analysis of intra-industry trade for horizontally and vertically differentiated products and examines the nature and characteristics of agri-food trade patterns between Japan and 8 East Asian countries. 3.1 The threshold decomposition method In the following analysis, we decompose bilateral trade flows between Japan and 8 East Asian countries by classifying each detailed commodity category into one of the following patterns: (a) inter-industry trade (one-way trade), (b) horizontal IIT (HIIT), and (c) vertical IIT (VIIT). Three steps are required to obtain the share of each type of trade for the sector concerned, by using the threshold-based index. First, we have to identify whether bilateral trade of commodity j is one-way trade or intra-industry trade. Min(Mkk'j, Mk'kj ) /Max(Mkk'j, Mk'kj ) 0.1 (3.1) where Mkk'j : value of economy k s imports of commodity j from economy k', Mk'kj : value of economy k' s imports of commodity j from economy k. Bilateral trade of commodity j is regarded as one-way trade when equation (3.1) holds and as IIT otherwise. 10

11 Second, we then have to distinguish whether intra-industry trade of commodity j is horizontal IIT or vertical IIT. Intra-industry trade of commodity j is regarded as horizontal IIT when the following equation (3.2) holds and as vertical IIT otherwise: P ' kk j P ' k kj 1.25 (3.2) where Pkk'j: average unit value of economy k s imports of commodity j from economy k', Pk'kj: average unit value of economy k' s imports of commodity j from economy k. Finally, the share of each trade type in a broader commodity category is calculated as: n n + M ' ) / ( M ' + kk j k kj kk j j ( M ' k kj j M ' ) (3.3) where n denotes one of the three intra-industry trade types, i.e., one-way trade (OWT) horizontal intra-industry trade (HIIT) and vertical intra-industry trade (VIIT). For our analysis, we chose to identify horizontal IIT mainly by using the range of relative export/import unit values of 1/1.25 (i.e., 0.8) to Although most previous studies in Europe mainly use a 15% threshold to distinguish between horizontally and vertically differentiated products, we employ a 25% threshold as a rather strict definition of vertical intra-industry trade. 11

12 For the analysis on trade patterns, we use the World Trade Atlas published by the Global Trade Information Services, Inc. This dataset provides us with bilateral trade data of almost all the countries including Taiwan at the HS 9-digit level. For the calculation of the IIT, we use importing countries data. Unit values of imports are obtained at the HS 9-digit level by dividing import values by the corresponding quantities, which are also available from the World Trade Atlas. Following Kimura and Ando (2003), bilateral export data are used for commodities that have discordance in units of quantities of imports between two countries when we distinguishes intra-industry trade between horizontal IIT and vertical IIT. Some commodities with discordant units still remain even after adjustment, but such commodities become much smaller than the case without adjustment Comparison of changing trade patterns between Japan and East Asia Next, Table 2 and Table 3 are summarized tables of shares and values for threshold decomposition of trade between Japan and 8 East Asian countries. Commodities are classified into three types of trade at the HS 9-digit level and are aggregated in each type. These tables tell us various stories of agri-food trade, but here we would like to emphasize three points. 3 Among intra-industry trade, trade of commodities with discordant units even after the adjustment with export data is categorized into not classified. 12

13 == Table 2, Table 3 == First, one-way trade is still dominant in agri-food trade between Japan and each East Asian country. It seems natural for Japan-China trade (99.53% for 9-years average) to be relatively large one-way trade in our samples because of large differences in development stages and income levels between them. However, large shares of one-way trade for Japan-Taiwan (99.48% for 9-years average) and Japan-Korea (99.15% for 9-years average) may be unexpected. On the other hand, Japan imports from partner s countries more than exports to them besides the case of Japan and Singapore. This result means that most of traded agri-food even between developed countries are homogenous. Second, the shares of horizontal IIT are lower than those of vertical IIT despite the fact that we find the share of horizontal IIT is larger than the share of VIIT in the case of 9-years average for Japan-Philippine and Japan-Thailand. That is, most of trade in differentiated agri-food is according to the difference in quality of goods. Third, as for the unit value of exported vertically differentiated goods, it seems to follow quality-ladder story only in case of Japan-Singapore and Japan-Taiwan. That is, it is considered that developed countries export high quality products and imports low quality ones. However, it does not seem to follow in case of agri-food trade between Japan and the other East Asian countries. The share of the agri-good exported by the other partners with more expensive unit value is larger 13

14 than that by Japan. This contrast implies that quality on agri-food can be less approximated by stages of economic development as found in Ferto (2005). Although these aggregated numbers are useful for examining how many traded agricultural goods in a mass are differentiated or not, the numbers mask detailed pictures on each agricultural product. Therefore, we present the disaggregated figures in Table 4. == Table 4 == From this table, we can find statistically that many differentiated products in some agri-food are traded between Japan and East Asian countries. In the case of Japanese significant share of high-quality exports which are larger than partner share are as follows. Japan-Indonesia: Lac;Vegetable Sap, Extrac (HS ), Fats and Oils (HS ) and Beverages (HS ). Japan-Malaysia: Beverages (HS ) and Baking Related (HS ). Japan-Philippine: Misc Grain, Seed, Fruit (HS ). Japan-Thailand: Misc Grain, Seed, Fruit (HS ) and Fats and Oils (HS ). Japan-China: Cocoa (HS ) and Fats and Oils (Hs ). Japan-Singapore: Fats and Oils (Hs ) and Beverages (HS ). Japan-Korea: Fats and Oils (Hs ) and Milling; Malt; Starch (HS ). Japan-Taiwan: Other Vegetable (HS ) and Baking Related (HS ). 14

15 In the opposite case of Japanese significant share of high-quality imports which are larger than partner share are as follows. Japan-Indonesia: Other Of Animal Origin (HS ) and Fish and Seafood (HS ). Japan-Malaysia: Tabacco (HS ). Japan-Philippine: Spices, Coffee and Tea (HS ). Japan-Thailand: Cocoa (HS ). Japan-China: Fish and Seafood (HS ) and Beverages (HS ). Japan-Singapore: Misc Grain, Seed, Fruit (HS ). Japan-Korea: Tobacco (HS ), Prepared Meat, Fish, Etc (HS ), and Fish and Seafood (HS ). Japan-Taiwan: Fats and Oils (HS ), Trees and Plants (HS ),and Misc Grain, Seed, Fruit (HS ). 4. Determinants The relationships between factor endowments and vertical IIT arising from theory would be examined for Japanese trade with 8 East Asian countries in agri-food products. The data set includes 8 East Asian countries and 9 years ( ). However, there are no trade data of Japan-Malaysia of 2005 for total VIIT and Japan-Malaysia of 1997/2005, and Japan-Philippine of 1998/2000 for higher quality of VIIT. Therefore, observations are 71 and 68 for total VIIT and higher quality VIIT, respectively. The difference in factor endowments is usually measured in empirical studies by bilateral in per capita GDP. Therefore, we test the factor endowments hypothesis controlling for distance between Japan and its trading partners. In addition, we include direct measure of factor endowment 15

16 corresponding to land. Following Ferto (2005), we test the equation based on Flam and Helpman (1987) by following specification employing OLS regression: IIT ijt = α 0 + α 1 ln DGDPC ijt + 2 α ln GDP it + α 3 lngdp jt + α 4 DISTANCE ijt + α 5 DLAND ijt + ε ijt (4.1) where IIT ijt denotes total or high quality vertical IIT; i is Japan, j is trading partner, and t is time. DGDPC ijt denotes the difference in per capita GDP between i nad j calculated from database of Asian Development Bank. GDP it and GDP jt are the GDP in i nad j, both from database of Asian Development Bank. DISTANCE ijt is the distance between Tokyo and the capital city of j, calculated from CEPII database. DLAND ijt denotes the difference in arable land in one thousand hectares between Japan and trading partners calculated from FAO database. The expected signs for total VIIT: α 1, α 3, α 5 >0 and α 2, α 4<0 The estimated results using the dependent variable for total VIIT and higher quality VIIT are listed in Table 5, respectively. == Table 5 == In the total VIIT, the positive relationship between differences in the factor endowments and the VIIT are obtained. The estimatedcoefficients of GDPi and GDPj have the expected signs and are significant, while the DISTANCE and 16

17 DLAND variables have unexpected signs but significant. On the other hand, the results are quite similar in higher quality VIIT despite the coefficient of ln DGDPC variable becomes negatively insignificant. 5. Concluding remarks This paper attempts to investigate the patterns and determinants of the share of vertical intra-industry trade (VIIT) in the agri-food sector between Japan and East Asian countries from 1997 to Our empirical results show that the large portion of agri-food trade between Japan and East Asian countries is still one-way trade while intra-industry trade, particularly VIIT has not grown rapidly from 1997 to However, we find a positive relationship between factor endowment and VIIT. Particularly, the fact that Japan imports high-quality agri-food products more than exports reflects in the opposite direction of quality ladder story based on Flam and Helpman type vertically differentiated trade models. 17

18 References Chang, C. C., Yang, T. C. O., Huang, D. S., Intra-Industry Trade between Taiwan and Asean-5 in the Agro-Food Sector: Patterns and Determinants. Selected Paper for the 2001 American Agricultural Economics Association Annual Meeting Chicago, USA, August 5-8, Christodolou, M., Intra-Industry Trade in Agrofood Sectors: The Case of the EEC Market. Applied Economics 24, Deardorff, A. V. (2001a) Fragmentation in Simple Trade Models. North American Journal of Economics and Finance, 12: Deardorff, A. V. (2001b) "Fragmentation across Cones." In Sven W. Arndt and Henryk Kierzkowski, eds., Fragmentation: New Production Patterns in the World Economy, Oxford University Press, 2001, pp Dixit, A. K., Stiglitz, J. E., Monopolistic Competition and Optimum Product Diversity. American Economic Review 67, Durkin, John T. and Markus Krygier. (2000) Differences in GDP Per Capita and the Share of Intra-industry Trade: The Role of Vertically Differentiated Trade, Review of International Economics, 8(4), pp Falvey, R.E. (1981) Commercial Policy and Intra-Industry Trade Journal of International Economics,11, pp Falvey, R. E., Kierzkowski, H., Product Quality, Intra-industry Trade and (Im)Perfect Competition. In: Kierzkowski, H. (Ed.), Protection and Competition in International Trade: Essays in Honor of W. M. Corden. Oxford: Basil Blackwell, Ferto, I., Vertically Differentiated Trade and Differences in Factor Endowment: The Case of Agri-Food Products between Hungary and the EU. Journal of Agricultural Economics 56, Flam, H., Helpman, E., Vertical Product Differentiation and North-South Trade. American Economic Review 77, Fukao, Kyoji and Ishido, Hikari and Ito, Keiko. (2003) Vertical Intra-Industry Trade and Foreign Direct Investment in East Asia journal of the Japanese and International Economics 17,

19 Greenaway, D., Hine, R., Milner, C., Vertical and Horizontal Intra-Industry Trade: A Cross Country Analysis for the United Kingdom. Economic Journal 105, Helpman, E. and Krugman, P. R. (1985) Market Structure and Foreign Trade. Cambridge: The MIT Press. Hirschberg, J., Sheldon, I., Dayton, J., An Analysis of Bilateral Intra-Industry Trade in the Food Processing Sector. Applied Economics 26, Jones, R. W. and Kierzkowski, H. (1990) The Role of Services in Production and International Trade: A Theoretical Framework. in Ronald W. Jones and Anne O. Krueger, eds., The Political Economy of International Trade: Essays in Honor of Robert E. Baldwin. Oxford, Basil Blackwell. Kimura, F., Ando, M., Intra-regional Trade among China, Japan, and Korea: Intra-industry Trade of Major Industries. In: Kim, Y., Lee, C. J. (Eds.), Northeast Asian Integration: Prospects for a Northeast Asian FTA. Seoul: KIEP, Krugman, P.R. (1979) Increasing Returns, Monopolistic Competition and International Trade, Journal of International Economics, vol.9,pp Lancaster, K.(1980) Intra-industry Trade under Perfect Monopolistic Competition, Journal of International Economics,vol.10, pp Pieri, R., Rama, D., Venturini, L., Intra-Industry Trade in the European Food Industry. European Review of Agricultural Economics 24, Qasmi, B. A., Fausti, S. W., NAFTA Intra-Industry Trade in Agricultural Food Products. Agribusiness 17, Shaked, A and J. Sutton. (1984) Natural Oligopolies and International Trade in Kierzkowski, H.ed. Monopolistic Competition and International Trade, Oxford: Oxford University Press. Spence, A. M.(1976) Product Differentiation and Welfare, American Economic Review, vol.66,pp Sun, C. and Koo, W. W., Horizontal and Vertical Intra-Industry Trade in the U.S. Food Processing Industry. Agribusiness & Applied Economics Report No.502. North Dakota State University. 19

20 Main model of intra-industry trade Trade pattern Nature of trade Theoretical foundation Market structure Determinants of trade Main model Richardian Model Heckscher-Ohlin Model Technological gap Factor endowments Inter-industy trade Comparative advantage Perfect competition One-way trade Min(Mkk'j,Mk'kj)/Max(Mkk'j,Mk'kj) 0.1 Jones and Kierzkowski (1990) Deardorff (2001a, 2001b) Location advantages with cost of service links Imperfect competition with firm-specific assets Intra- firm, interprocessed trade (fragmentation) Vertical production chain Falvey (1981) Falvey and Kierzkowski (1987) Flam and Helpman (1987) Durkin and Krygier (2000) Perfect competition Factor proportion Product differentiation based on quality Vertically differentiated products VIIT (1.25 Pkk'j/Pk'kj, Pkk'j/Pk'kj 1/1.25) Fixed costs of R&D Shaked and Sutton (1984) Imperfect competition (natural oligopoly) Intra-industry trade Spence (1976) Dixit and Stiglitz(1977) Krugman (1979) Demand for brand (love of variety approach) Monopolistic competition Product differentiation based on attributes Horizontally differentiated products HIIT (1/1.25 Pkk'j/Pk'kj 1.25) Neo-Hotelling Model, Lancaster (1980) Helpman (1984) Diversity of preferences (ideal variety approach) 20

21 Table 2. Shares of Oneway, Vertical and Horizontal IIT between Japan and East Asian Countries Japan and Indonesia Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is highe Not classified Total Japan and Malaysisa Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is highe Not classified Total Japan and Philippine Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is highe Not classified Total Japan and Thailand Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is highe Not classified Total Data Source: Authors calculation based on World Trade Atlas 21

22 Table 2. Shares of Oneway, Vertical and Horizontal IIT between Japan and East Asian Countries (Continue) Japan and China Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is highe Not classified Total Japan and Singapore Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is highe Not classified Total Japan and Korea Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is highe Not classified Total Japan and Taiwan Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is highe Not classified Total Data Source: Authors calculation based on World Trade Atlas 22

23 Table 3. Values of Oneway, Vertical and Horizontal IIT between Japan and East Asian Countries (Million US dollars) Japan and Indonesia Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is higher Not classified Total Japan and Malaysisa Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is higher Not classified Total Japan and Philippine Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is higher Not classified Total Japan and Thailand Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is higher Not classified Total Data Source: Authors calculation based on World Trade Atlas 23

24 Table 3.Values of Oneway, Vertical and Horizontal IIT between Japan and East Asian Countries (Continue) Japan and China Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is higher Not classified Total Japan and Singapore Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is higher Not classified Total Japan and Korea Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is higher Not classified Total Japan and Taiwan Average One-way(total) export:japan is lower export:japan is higher Intra-industry(total) Horizontal Vertical export:japan is lower export:japan is higher Not classified Total Data Source: Authors calculation based on World Trade Atlas 24

25 Table4. Share of Each Trade between Japan and East Asian Countrires (thousnad US dollars, %) Japan and Indonesia Share Value One-way Intra-industry Total Export Vertical (Export) Horizontal Not Industry I>J J>I I>J J>I Class LIVE ANIMALS MEAT FISH AND SEAFOOD DAIRY,EGGS,HONEY,ETC OTHER OF ANIMAL ORIGIN LIVE TREES AND PLANTS VEGETABLES EDIBLE FRUIT AND NUTS SPICES,COFFEE AND TEA CEREALS MILLING;MALT;STARCH MISC GRAIN,SEED,FRUIT LAC;VEGETABL SAP,EXTRC OTHER VEGETABLE FATS AND OILS PREPARED MEAT,FISH,ETC SUGARS COCOA BAKING RELATED PRESERVED FOOD MISCELLANEOUS FOOD BEVERAGES FOOD WASTE; ANIMAL FEE TOBACCO Total Japan and Malaysia Share Value One-way Intra-industry Total Export Vertical (Export) Horizontal Not Industry M>J J>M M>J J>M Class LIVE ANIMALS MEAT FISH AND SEAFOOD DAIRY,EGGS,HONEY,ETC OTHER OF ANIMAL ORIGIN LIVE TREES AND PLANTS VEGETABLES EDIBLE FRUIT AND NUTS SPICES,COFFEE AND TEA CEREALS MILLING;MALT;STARCH MISC GRAIN,SEED,FRUIT LAC;VEGETABL SAP,EXTRC OTHER VEGETABLE FATS AND OILS PREPARED MEAT,FISH,ETC SUGARS COCOA BAKING RELATED PRESERVED FOOD MISCELLANEOUS FOOD BEVERAGES FOOD WASTE; ANIMAL FEE TOBACCO Total

26 Table4. Share of Each Trade between Japan and East Asian Countrires (thousnad US dollars, %) (Continue) Japan and Philippine Share Value One-way Intra-industry Total Export Vertical (Export) Horizontal Not Industry P>J J>P P>J J>P Class LIVE ANIMALS MEAT FISH AND SEAFOOD DAIRY,EGGS,HONEY,ETC OTHER OF ANIMAL ORIGIN LIVE TREES AND PLANTS VEGETABLES EDIBLE FRUIT AND NUTS SPICES,COFFEE AND TEA CEREALS MILLING;MALT;STARCH MISC GRAIN,SEED,FRUIT LAC;VEGETABL SAP,EXTRC OTHER VEGETABLE FATS AND OILS PREPARED MEAT,FISH,ETC SUGARS COCOA BAKING RELATED PRESERVED FOOD MISCELLANEOUS FOOD BEVERAGES FOOD WASTE; ANIMAL FEE TOBACCO Total Japan and Thailand Share Value One-way Intra-industry Total Export Vertical (Export) Horizontal Not Industry T>J J>T T>J J>T Class LIVE ANIMALS MEAT FISH AND SEAFOOD DAIRY,EGGS,HONEY,ETC OTHER OF ANIMAL ORIGIN LIVE TREES AND PLANTS VEGETABLES EDIBLE FRUIT AND NUTS SPICES,COFFEE AND TEA CEREALS MILLING;MALT;STARCH MISC GRAIN,SEED,FRUIT LAC;VEGETABL SAP,EXTRC OTHER VEGETABLE FATS AND OILS PREPARED MEAT,FISH,ETC SUGARS COCOA BAKING RELATED PRESERVED FOOD MISCELLANEOUS FOOD BEVERAGES FOOD WASTE; ANIMAL FEE TOBACCO Total