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Intra-region trade links in Asean closer than in EU

Asean's latest intra-regional trade intensity index reading was 3.54, compared to the EU's 2.04
Monday, March 7, 2016 - 05:50

Singapore

TRADE between Asean member states as a proportion of the regional bloc's total trade value might be low when compared to other regions - but a more discriminating examination reveals that trade linkages within Asean are a lot denser than they seem at first glance.

In fact, Asean nations are 73.5 per cent more intertwined than those in the European Union, latest intra-regional trade intensity index (TII) data shows.

Asean's intra-regional TII was at 3.54 in 2014, based on Asian Development Bank (ADB) and International Monetary Fund (IMF) data. This was higher than the EU, which was at 2.04. Within the eurozone, the value drops to 1.99.

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This stands in contrast to another figure known as the intra-regional trade share, which is often cited when looking at regional integration. It measures a region's internal trade as a proportion of the total amount of trade it conducts in general.

For Asean, this was 24.22 per cent in 2014, ADB and IMF figures show. For the EU, this stood at 64.53 per cent.

Noting that many businessmen dismiss the success of Asean's economic integration because of its low intra-regional trade share, Sanchita Basu Das of the Asean Studies Centre at the Iseas-Yusof Ishak Institute said in an interview with The Business Times: "But Asean is more than that. Its TII is going up; it is more than the EU's. Trade within Asean is not bad at all."

A fresh look at how close Asean's economic integration is comes at a time when the slowing global economy is attempting to identify a new economic growth driver.

Nobel Laureate Joseph Stiglitz said previously in an interview with BT that major economies like China, the United States and Europe have been lacklustre recently, but Asean offered a glimmer of hope.

Asean's intra-regional TII figures suggest that the exchange of goods and services between its member states is more intense than what the intra-regional trade share numbers indicate.

This is because intra-regional trade share does not factor in the size of a region, especially when comparing it with another part of the world. So the larger a region is, the more likely its members are to trade among themselves.

Hence, 10-member Asean would start from a lower base than the 28-member EU when comparing them based on intra-regional trade share.

The intra-regional TII does not suffer from a size bias, academics noted.

A TII number greater than one would mean that the region's trade is oriented more towards its member countries than towards the rest of the world. The higher the index, the more important the regional trade is versus world trade.

In other words, it shows how dense production networks in Asean are, said Ms Basu Das.

"You may have a shirt that says 'Made In Vietnam' because that's where the final product came from - but the shirt must have crossed borders multiple times, starting from your fabric, to colouring. When that happens, the intensity of trade goes up," she said.

A focus on Asean's intra-regional TII would help to ascertain the progress of the Asean Economic Community (AEC), which aims to create a single market that allows a free flow of goods and services, capital and labour in the region.

This coincides with the fact that the Asean region has a high percentage of intermediate goods exports, said Standard Chartered economist Jeff Ng.

"The range of main exports of each Asean economy is actually quite diverse, so intra-regional trade can be complementary. This means that you can have good production networks here," he said.

Kishore Mahbubani, dean of the Lee Kuan Yew School of Public Policy, also previously weighed in on the fact that Asean's intra-regional TII is higher than that of the EU.

At a talk earlier this year, Prof Mahbubani said: "That's an indication of how Asean is outperforming other regions in terms of its trade intensity."

The intra-regional TII also has policy implications.

An IMF report noted that trade intensity has an effect on "business cycle synchronisation (BCS)".

The more intense trade is, the better the "propagation of shocks through the trade channel", the report said.

Tracking the rise and fall of the index also sends a signal to policymakers that trade is becoming less vibrant within the region.

For Asean, while the latest figures are encouraging, the TII has fallen from 4.26 in 2005 to 3.54 over 10 years.

Government officials must thus look at what steps are needed to help drive up the index again, said Ms Basu Das.

This can involve modernising customs procedures, or making an extra effort in attracting investments into the region.

"If the index is going down, trade is going down," she noted.

So it is in Singapore's interest to highlight to other regional governments that Asean needs to, as a group, raise the intensity of trade, Ms Basu Das added.

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