Trade Structure in Japan, China, South Korea and Taiwan

Trade Structure in Japan, China, South Korea and Taiwan

Introduction

Though Japan has not suffered greatly from a housing collapse or toxic assets, its economy has been hit harder by the crisis than the US or EU. Japan's contraction is almost entirely due to a steep fall in external demand. This column uses input-output analysis to show that the fall in US demand has had an amplified effect on Japan because it not only reduces Japanese net exports to the US but also net exports of intermediate goods to Asian countries, where they would have been assembled for final export to the US.

Though Japan has not suffered greatly from a housing collapse or toxic assets, its economy has been - in some respects - hit harder by the global crisis than the US or EU, as several analysts have noted (e.g. Buiter 2009). Japan's GDP contraction in the fourth quarter of 2008 was nearly double that of the US (12.1% vs. 6.3%).(Baldwin 2010)

Japan's contraction is almost entirely due to a steep fall in external demand - its drop in net exports accounts for 11.8 percentage points of the decline. In contrast, the US experienced only a decrease in net exports responsible for only 0.15 percentage points of the contraction, meaning that its 6.3% contraction in GDP was almost entirely due to decreased domestic demand. Why did Japan experience such an exceptionally serious decline in overseas demand?

Contraction in triangular trade

Until the economic crisis, there was vigorous “triangular trade”, in which the advanced economies of Asia, such as Japan, South Korea, and Taiwan, exported key components to developing countries, such as China, Thailand, or Vietnam, which assembled and exported the final products to the US (and Europe) in return for US Treasuries. The Asian developing countries specialised in relatively low value-added assembly and manufacturing processes, while the advanced countries concentrated on high-value added processes, such as the production of key components. (George 2009) However, the sudden decrease in US imports has very rapidly contracted this triangular trade. US goods imports fell during the last quarter of 2008 at an annual rate of 19.6%. And as developing countries' exports to the US decreased, so did their imports from Asia's advanced economies. Japan, South Korea, and Taiwan thus suffered a significant decline in exports. (Baltagi 2009)

A shift in the global demand structure

A large share of Japan's exports consists of capital and durable consumer goods, such as cars, electric machinery, machine tools, and their components. It is very likely that investment in plant and equipment, as a consequence of what is known as the “acceleration principle,” suffered a particularly steep decline due to the global downturn. Simultaneously, households have been holding back purchases of durable consumer goods due to liquidity constraints and diminished expectations. Consumer demand has shifted from high-end items to inexpensive goods, as illustrated by the boost in sales experienced by firms such as Wal-Mart and Uniqlo. But Japan specialises in the production of high-end items, ...