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Trade Liberalization and Production Fragmentation in ASEAN 

 

Production fragmentation is a prominent feature of cross-border economic activity in East 

Asia.  It is likely that multilateral and regional reductions in official trade barriers (tariffs, 

quotas, etc.) encouraged the integration of ASEAN countries into the East Asian 

production network. Other possible factors include innovation in technologies that 

allowed the fragmentation of production; falling transportation and distribution costs; and 

improvements in communications.  

 

The logic of production sharing entails a rise in both trade of final goods and, 

particularly, of parts and components between countries in a production network. Ng and 

Yeats (1999) found that, just prior to the Asian Financial Crisis, trade in parts and 

components accounted for about a fifth of East Asian manufacturing trade, having grown 

much faster in the preceding decade than other product groups. In addition, East Asian 

trade in parts and components was concentrated in just a few items, namely, 

telecommunications equipment, office and adding machinery, switchgear parts, motor-

vehicle parts and accessories, and electronic components.  

 

Ando (2006) computes that intra-ASEAN exports among four ASEAN countries 

(Indonesia, Malaysia, Philippines, and Thailand) as a share of world trade were 3.6%, 

4.1%, and 7.5% in 1981, 1991, and 2001 respectively. In other words, controlling for 

global export trends, ASEAN trade was increasingly intra-regional in the last two 

decades of the 20

th

. century. Ando also computes the same shares of exports from China, 

the NIEs (i.e., Taiwan, Korea, Hong Kong, and Singapore) and Japan to the ASEAN-4. 

She finds that these shares increased for China and the NIEs but fell for Japan. Therefore, 

China and the NIEs became increasingly important as sources of ASEAN imports while 

Japan became less important in the same period. The type of trade, in which ASEAN 

countries engage, has also changed. Ando also shows that one-way trade has given way 

mainly to vertical intra-industry trade.

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 This is particularly true in the machinery, 

transport equipment, and electronics sectors.  

 

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In theory, how do PTAs affect trade when production fragmentation exists? In a 3-

country general-equilibrium model, Arndt (2004) shows that, unless the non-member 

country has the lowest cost for every activity in the production chain, production sharing 

between member countries reduces the trade-diverting elements of preferential trade 

liberalization. This is because, with a finer division of the value chain, it is more likely 

that member countries of the preferential trading arrangement have a comparative 

advantage in some production activities. So, reduced tariffs, albeit just within the region, 

creates trade in these activities rather than diverts it as member countries engage in a 

finer specialization of activities along the value chain. Indeed, Athukorala and Yamashita 

(2006) provide evidence that vertical trade was very responsive to the formation of 

AFTA but not in other PTAs around the world. Although trade diversion may be less 

likely in the context of fragmented production, PTAs may induce other negative effects. 

Chen et al. (2004) show that tariff reductions in intermediate-goods markets may lead to 

strategic outsourcing, and rival firms in final goods may be more inclined to collude and 

increase import prices of both final and intermediate goods.