CHAPTER 1 INTRODUCTION 1.

0 Background of Study : A Comparative study of Intra-Industry Trade (IIT) between Japan-Malaysia (JM) and Japan-China (JC). Over the years both classical and neoclassical theory were used to characterize IntraIndustry Trade (IIT) or two way trade which generally happens when both export and import takes place simultaneously in an industry1. In this study we are going to asses IIT which happens in an industry between two countries in certain period of time. Herbert Grubel and Peter Lloyd (1975) gave a comprehensive insight of the importance of Intra-Industry Trade and the method to measure it. There are two types of Intra-Industry Trade, namely the horizontal intra-industry trade (HIIT) and the vertical intra-industry trade (VIIT). The HIIT refers to concurrent export and imports of goods which belongs to the same sector and at the same stage of processing. Meanwhile, the VIIT refers to simultaneous exports and imports of goods classified in the same sector but at the different stage of processing where fragmentation production process are organized in different stages by taking into account the nations comparative advantage. For an example, China a nation which has an excess of labour force usually imports computer components from Western countries like US and Europe (technology intensive nations) and uses its labour to assemble them into computers and then export the components in term of computers back to US and Europe as a finished goods. The VIIT can be further narrowed down to Superior VIIT and Inferior VIIT, which are distinguished by the quality of the goods.

Helpman and Krugman (1985)

In this study we are about to examine the intra-industry trade between Japan-Malaysia (JM) and Japan-China(JC) from 1993 to 2010 by using datas under the Standard International Trade Classification (SITC) revision 3 which was extracted from United Nations Commodity Trade (UN COMMTRADE) database. Four main commodities from various sectors under SITC revision 3 were chosen in order to measure IntraIndustry Trade (IIT), Horizontal Intra-Industry Trade (HIIT), Vertical Intra-Industry Trade (VIIT), High Value Vertical Intra-Industry Trade (HVVIIT) and Low Value Vertical Intra-Industry Trade (LVVIIT). With the intention to measure the entire five trade phenomenon, four types of commodities were used. Types of commodity used are shown in table 1.1; Table 1.1: Commodities under Standard International Trade Classification (SITC) revision 3 SITC 5 6 7 8 Description Chemical and related products Manufactured goods classified chiefly by material Machinery and transport equipment Miscellaneous manufactured article

Source : UN Commtrade

Consequently, the values of export, import for each and every secondary code under each parent code were matched according to the year of assessment. There were approximately 3000 of 4-digit secondary codes for each parent for both export and import from 1993 to 2010. There datas were extracted, matched and filtered before various analysis were conducted in order to evaluate the trade pattern.

1.1

General Performance of Japan-Malaysia International Trade The economic relationship between Japan and Malaysia can be defined as a vis a vis relationship where both countries mutually benefits each others growth and economic stability. Japan is the most resource poor nation among the industrialized country and exposed to various natural calamities. Most of its agricultural and industrial resources are imported from ASEAN countries. In year 2011, the average population of Japan is about 126,475,700 dropped abruptly due to earthquake which claimed thousands of live and leaving the nation in human capital scarcity dilemma. On the other hand, Malaysia has been a resource-rich country and flamboyantly exports tin, petroleum, natural rubber and latex to Japan over the years. The presence of Japan in Malaysian economy started during the era of Tun Abdul Razak when the Official Development Assistance (ODA) where channelled to fund development projects and various projects under Rancangan Malaysia ke-2. The existence of Malaysia-Japan Economic Association (MAJECA) and Japan-Malaysia Economic Association (JAMECA) further strengthens the trade relationship between both nations. The bilateral relationship sparked when Malaysias Prime Minister Dr. Mahathir Mohamed implemented The Look-East Policy in order to develop the country by cultivating the Japanese working culture.2 Over the years, Malaysia is one of the major exporting country of petroleum and liquefied gas, electronic equipment, wood and wood products to Japan. Subsequently, Malaysia exports electronics, vehicles, machineries, iron and steel products. According to Japans Ministry of Finance Trade Statistics, in 2009 the total export from Malaysia to Japan reached RM54.42 billion. In the same year, the total import from Japan to

See Lim Hua Sing (1994)

Malaysia is RM54.29 billion.3 Another important milestone in Japan-Malaysia bilateral trade is the Japan-Malaysia Economic Partnership Agreement (JMEPA) which was signed in 2005. There are two components under this agreement, namely the Economic Cooperation Component and the Free Trade Agreement Component (FTA).4 The Agreement is basically about trade component covers trade in agricultural and industrial goods, trade in services, investment in all categories, rules of origin (ROO), movement of people, customs procedure, safeguards, standard and conformance, intellectual property rights, competition policy, promotion of business environment and measures to safeguard mutual interest and settlement of disputes.5

3 4

The Japans Ministry of Finance Trade Statistics report in 2009 Japan-Malaysia Economic Partnership Agreement (JMEPA), 2005 5 Japan-Malaysia Economic Partnership Agreement (JMEPA), 2005

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Trade Patterns between Japan and Malaysia for Chemical and Chemical Related Products (Commodity Code -5)
700 600 500 MILLION 400 EXPORT (MIL) 300 200 100 0 -100 1993 1995 1997 1999 2001 2003 2005 2007 2009 YEAR IMPORT (MIL) TRADE BALANCE (MIL)

Figure 1: Japan -Malaysia Trade Pattern Commodities under SITC 5

The Chemical and related products category comprises of organic chemicals, inorganic chemicals, dyeing, tanning and colouring materials, medicinal and pharmaceutical products, essential oils and resinoids and perfume materials, toilet, polishing and cleansing preparations, fertilizers, plastics and chemical materials6. The total value of Japans import from Malaysia reaches about US$415.69 million whereas the total value of export of Japan to Malaysia is about US$407.84 million from 1993 till 2010. The trade for chemical and related products which falls under code 5 shows an active performance from 1993 to 2010. The export of these items from Japan to Malaysia remains highly volatile throughout the period. Nevertheless, a significant growth can be seen in import of chemical and related products from Malaysia by Japan. This is mainly due to expansion of Malaysian Chemical industry through the governments move to implement necessary steps to reduce the cost production in Malaysia. The Malaysian government

www.uncomtrade.com

focuses in developing manufacturing sector by injecting fiscal incentives and offering special rebates for foreign base Multinational Corporation (MNC) to set up their plant in Malaysia. The participation of Japanese market players such as Dainippon Ink & Chemicals (M) Sdn Bhd, Polyplastics Asia Pacific Sdn Bhd, Kaneka Corporation and many more in the Malaysian Chemical industry is one of reason for transformation of Japan Chemical Industry from export led economy to import driven economy. This transformation is basically due to shortage of labour and limited natural resources available in Japan. According to recent report from Malaysian External Trade Development Corporation (MATRADE), the Malaysian chemical industry received inflows FDI from US and Europe.7 Another report by Malaysian Industrial Development Authority (MIDA) in 2006 states that, sub-sectors under the chemical and related products such as pharmaceutical sub-sector caught the attention of the investors where in 2005, the Malaysian government approves new projects worth RM204.3 million8. Being the worlds leading producer and exporter of oleo chemical, Malaysia continues to produce fatty alcohols, fatty acids, emulsifier, fatty acids and other oleo chemical products to support the demand from Asia, US and Europe. The alteration of the global community to Biodiesel in conjunction to reduce the dependency on crude oil boost up the Malaysian biodiesel industry where six projects with investments of RM 423.5 million were approve in year 20059.

7 8

www.matrade.gov.my www.mida.gov.my 9 www.mida.gov.my

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Trade Patterns between Japan and Malaysia Manufactured Goods Classified Chiefly By Material (Commodity Code -6)

400 300 200 MILLION 100 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 -100 -200 -300 YEAR EXPORT (MIL) IMPORT (MIL) TRADE BALANCE (MIL)

Figure 2 : Japan -Malaysia Trade Pattern Commodities under SITC 6 The Manufactured Goods contains eight sub-sectors which are leather, rubber manufactures, paper, paperboard and articles of paper pulp, textile yarn, fabrics, made-up articles, non-metallic mineral manufactures, iron and steel, non-ferrous metals and manufactures of metals10. The value of Japans export to Malaysia reaches US$281.19 million and the total value of Japans import to Malaysia is about US$126.09 million. Japan is one of most important economic force in the world. Over the years it has used the ASEAN countries as a source of low cost labour by expanding their manufacturing corporation there. The reason which lies behind the expansion is basically due to the insufficient raw material and high labour cost. Over the years, Japan has changed its export trend from agriculture to manufactured commodities like car, textiles and steels. In textile industry, Japans export to

Malaysia remains increasing as it uses the Malaysian labours with high assembling skills to assemble the Japanese highly value added material into final products which

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www.uncomtrade.com

later will be exported to Western countries. According to the recent report from MIDA, Japan, Republic of Korea, the USA, Singapore and Saudi Arabia were the principal five FDI for the manufacturing sector.11.

Among the major investors in manufacturing sectors are Matsushita, Sharp, Nippon Electric Glass, Toray, Kao, Toyobo, Kobe Steel, Kawasaki Heavy Industries, Kaneka, Murata and Rohm. The emergence of China as the worlds giant economic power started to dominate the world steel product where the Japanese shifted to import steel products from China as they manage to develop their steelmaking capacity and implemented export facilitating measures. China caught the world attention as a steel hub where during the period of 2005 to 2008, export tax was abolished12. Malaysia is one of world very own major producer and exporter of latex products, consisting mainly of catheters, medical gloves, and latex thread. Over the years Malaysia maintains its position as the world's leading producer and exporter of supplying more than 80 % of the world market for catheters, 70 % for latex threads, and 60 % for rubber gloves. The total of export of rubber products of Malaysia to Japan is RM 508.4 million in 2008 and total import for the same year is RM850.7 million.13 Japan remained the main sources of import for these items. Despite being the worlds largest latex producer, Malaysia still imports rubber in form of synthetic rubber, tyre and tyre related products from Japan mainly to support the domestic manufacturing industries.14

11 12

www.mida.gov.my The 17th Japan-China steel dialogue held in Beijing 13 www.matrade.gov.my 14 Ww.matrade.gov.my

iii.

Trade Patterns between Japan and Malaysia Commodity Code -7

12000 10000 8000 MILLION 6000 4000 2000 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 YEAR EXPORT (MIL) IMPORT (MIL) TRADE BALANCE (MIL)

Figure 3 : Japan -Malaysia Trade Pattern Commodities under SITC 7 The machinery and transport equipment consist of power-generating machinery and equipment, machinery specialized for particular industries, metalworking machinery, general industrial machinery and equipment, and machine parts, office machines and automatic data-processing machines, telecommunications and sound-recording and reproducing apparatus and equipment, electrical machinery, apparatus of electrical household-type equipment), road vehicles (including aircushion vehicles) and other transport equipment. The total value of Japans export to Malaysia US$123.956 million and the value of Japans import from Malaysia reaches US$32.39 million. The import and export for machinery had a drastic drop in year 1997 due to Asian Financial crisis and IT bubble which devastated the Malaysian economic. The trade trend did not recover and remain to be sluggish till 2010. According to the Malaysian Human Resource Ministry, approximately 363 manufacturers were forced to downsize their operation causing 13,096 Malaysians to be unemployed. Meanwhile, almost 64 manufacturers were forced to end their operation due to the
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poor performance of the industry which caused 4,754 workers lost their job.15 In 2009, 520 new projects started their production in Malaysia; resulting 64,157 job opportunities were created and offered a remedy for those who lost their job during the crisis.16 During the years of crisis, Japan opted to trade with China which offered where in 2002 China was the leading supplier of imports entering Japan (US$16.90 billion), further ahead of the USA.17 In 2009, the Malaysian government implemented few measures to build back the machinery and transport sector and to attract foreign investment.

15 16

Malaysian Human Resource Ministry Press Statement in 1997 Malaysian Human Resource Ministry Press Statement in 2009 17 www.jetro.com.jp

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iv.

Trade Patterns between Japan and Malaysia Commodity Code -8

250 200 150 100 MILLION 50 0 -50 -100 -150 -200 YEAR 1993 1995 1997 1999 2001 2003 2005 2007 2009 EXPORT (MIL) IMPORT (MIL) TRADE BALANCE (MIL)

Figure 4 : Japan -Malaysia Trade Pattern Commodities under SITC 8 The miscellaneous manufactured articles consist of prefabricated buildings; sanitary, plumbing, heating and lighting fixtures and fittings, furniture, and parts thereof; bedding, mattresses, mattress supports, cushions and similar stuffed furnishings, travel goods, handbags and similar containers, articles of apparel and clothing accessories, footwear, professional, scientific and controlling instruments and apparatus, photographic apparatus, equipment and supplies and optical goods, watches and clocks and miscellaneous manufactured articles. Malaysia remains to be one of top trading partner for SITC 7 commodities. The total value of Japans export to Malaysia reaches US$17.59 million from 1993 to 2010 whereas the total import from Malaysia reaches US$97.59 million.

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1.2

General Performance of Japan-China International Trade The current bilateral relationship between Japan and China is defined as cold politics

and hot economics where both countries are complement each other in trade despite their dispute over politics issues such as the sovereignty of Diaoyu/Senkaku, Chinas oil exploration in East China Seas and many more18. China is the second largest economy after the United States, the rapid expansion of its economy is supported by the growth of its exports. Based on a report released by Japan External Trade Organization (JETRO), in 2010 Japans total trade with China (for both imports and exports) exceeded US$300 billion19. This boost is basically due to the increase in Japans export to China in order to nation is at its high economic growth. Meanwhile, there is also an increase in Japans import from China which is to recover the nations economy after the recession. In 2010, China became Japans major partner with large volume of exports, imports and total trade20. Regardless of an extensive political dilemma, from 1979 Japan consistently provided Overseas Development Aid (ODA) to China and it was continued as the economic relationship between both nations becomes more aggressive. In terms of Japans foreign direct Investment (FDI) in China, the investment of Japan in China rose subsequently over the years. Japans cumulative investment growth in China accounted for about 23.08% from 2000 till 2007. China has replaced ASEAN countries in which the Japans FDI growth rate in Malaysia (10.51%), Singapore (10.06%), Thailand (22.27%) and Indonesia (8.04%) from 200 till 200721. Japan Japans Chinas accession to World Trade Organization (WTO) in 2001, have diversified the countries perspective towards international trade. Under the terms of membership, Chinas existing domestic laws was revised and enacting new legislation fully

18 19 20 21

Report Japan External Trade Organization (JETRO), 2010

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in compliance with the WTO Agreement22. Prior to the accession, Japan affiliates in China utilised the nation as their export platform. Fundamentally, trade between Sino-Japanese takes place in which

Japan trades with China in products where it has comparative advantage the most. The Japan economy can be considered as high technology, high capital, high labour cost and with low domestically available resources. On the other hand, Chinese economy has abundant, cheap and highly skilled labours, medium technology and low capital strength23. The occurrence of intra-industry trade was seen in the Japan-China bilateral trade relationship where Japanese affiliated manufacturers imports high technology equipments and machinery from Japan to support the Chinese industry and the value added end product will be exported back to sustain Japanese domestic market. At the same time, Japan transfers its technology through FDI and outsourcing to China which indirectly has influenced their production capabilities, industry capacities, and product reengineering. The collaboration of both countries in enhancing the production capacity is visible through the adaptation of Japanese technology by the Chinese highly skilled labours. The end results is high value added manufactured products. As a poor resource country, Japan depends critically on its export in order to support its domestic industry. The SinoJapanese economy both has a massive manufacturing industry to rely on. The manufacturing industry produces job opportunity for Chinese labours. According to a recent survey which was conducted by the Japanese Ministry of Economy, Trade and Industry in 2001, the motives of Japans Investment in China is driven by the opportunity to expand local sales, low cost production, high chances of reduction in cost of production and the high chances of

22 23

Chinas accession to World Trade Organization (WTO) in 2001

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regional sales expansion24. Subsequently METI conducted another study on determining factors on Japans FDI in China in 1998 and among the factors which influence Japaneses investment in China is availability of low-wage labours and prospects of increase in local demands25. Energy efficiency and pollution have the tendency to effect the growth of SinoJapanese bilateral trade relationship. The inflow of Japanese energy consumption technology and being a pioneer in pollution control, have created a win-win economy situation for both countries. Rising labour cost might reduce the opportunity of China as a labour abundant nation.

24 25

Ministry of Economy, Trade and Industry(METI) survey in 2001

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i.

Trade Patterns between Japan and China Commodity Code -5

9000 8000 7000 6000 MILLION 5000 4000 3000 2000 1000 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 YEAR EXPORT (MIL) IMPORT (MIL) TRADE BALANCE (MIL)

Figure 5 : Japan China Trade Pattern Commodities under SITC 5 China remains as Japans main export partner for goods which falls under code 5. The total value of Japans export to China from 1993 to 2010 reaches US$80,406.64 million as compared to Chinas export to Japan which is about US$32523.58 million. Figure 5 shows a rapid increase on Japans import from China from 1993 except for year 2009 where there is a slight reduction in import. Japans export to China is fuelled by and expanding domestic demand in China and the increase of Chinas export of finished product back to Japan. Based on a survey conducted by JETRO in 2003, Japanese affiliated producers in Chinese chemical industry exports back 55% of their products back to Japan26. The increasing popularity for aromatherapy among Japanese have resulted the increase import of essential oil related products from China where 29.3% out to total import of this item originates from China27. Meanwhile the Japanese government is actively implementing policies to boost the nations pharmaceutical industry. The

26 27

JETRO Annual Report, 2003. Guideline for export to Japan 2011, see page 9

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total sales of pharmaceutical products in 2008 reach US$80 billion which accounts 10% of the worlds healthcare market.

ii.

Trade Patterns between Japan and China Commodity Code -6

6000 5000 4000 3000 MILLION 2000 1000 0 -1000 -2000 -3000 YEAR 1993 1995 1997 1999 2001 2003 2005 2007 2009 EXPORT (MIL) IMPORT (MIL) TRADE BALANCE (MIL)

Figure 6 : Japan - China Trade Pattern Commodities under SITC 6 The total value of Japans import from China for items under SITC 6 is US$4817.52 million, whereas Japans export to China from year 1993 to 2010 values about US$3522.71 million. China can be seen stronger in exports of labour-intensive commodities such as leather, rubber, fabrics, textiles, yarns and steel metals. According to a report by the Japans Ministry of Finance in 2002, the cumulative value of The Japanese FDI from 1990-20001 in textiles industry reaches 92 billion Yen and in metal products it is about 117 billion. The development of textile industry in China can be seen with existence of textile city namely Shaoxing Textile City, Wangxiang Textile City, Wuxi Textile City and Wei Fang Textile City. Japan exports raw materials of fur, metal, yarn, rubber and plastics to their subsidiary in China which will be later produced to become highly value added final or intermediary goods.
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iii.

Trade Patterns between Japan and China Commodity Code -7

4000.00 3000.00 2000.00 MILLION EXPORT (MIL) 1000.00 0.00 1993 1995 1997 1999 2001 2003 2005 2007 2009 -1000.00 -2000.00 IMPORT (MIL) TRADE BALANCE (MIL)

YEAR

Figure 7: Japan -China Trade Pattern Commodities under SITC 7 From 1993 until 2010, the total value of Japans export to China accounts about US$3164.16 million meanwhile the total value of import of Japan from China is about US$2949.17 million. Japan as the worlds major industrialist in machinery and transport equipment exports machinery equipment, parts and materials for production usage in China. Being a nation which focuses on specialised production, China indeed imports capital equipment in the form of high-end machinery equipments from Japan to assist its skilled and unskilled labours to produce highly value added goods to meet the rising demand on other SITCs. The fast developing automobile industry is one of the reasons behind the constant increase of import transport equipment (engine and auto parts) from Japan. Furthermore Chinas move to impose duties and levies on imported cars not only secures the domestic automobile industry but also enhances the nations vehicle productions.

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iv.

Trade Patterns between Japan and China Commodity Code -8

TRADE FOR SITC-8

6000 4000 2000 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -2000 -4000 -6000 EXPORT (MIL) IMPORT (MIL) TRADE BALANCE (MIL)

Figure 8 : Japan - China Trade Pattern Commodities under SITC 8 The value of Japans export for commodities under SITC 8 is almost US$179.98 million while the value of Japans import from China reaches US$4740.16 million. Japan depends on import from China in order to meet the domestic demand for the commodities. This is basically due to major constraints such as low population which contributes to less number of labours, higher wage demand and limited resource available. All these contributing factors forces Japan to import those items from Japan instead of producing domestically. Meanwhile the business expansion of Japans affiliates in China has an impact on trade pattern between both countries. The affiliates exports back half of the production back to Japan and third world countries.

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1.3

Statement of Problem In general countries trade for the reason that they have dissimilar resource, technology

and through trade a country can achieve scale economies or increasing return in production. Intra-industry trade (IIT) plays a very crucial role in trade in manufactured goods among developed nations. The practice of IIT among worlds large economy key players such as China, Japan, ASEAN-4 countries, etc are often associated with foreign market affiliation, production fragmentation, knowledge spillovers, specialized suppliers and many more. .In this paper, we are going to examine the importance of IIT and the contribution of IIT in Japan-Malaysia (JM) and Japan-China (JC) bilateral relationship. Numerous studies have found that the degree of development of nation has an underlying impact on the nations IIT. The rise of China has an impact on Sino-Japanese bilateral trade in specific. The trade between both nations is expanding with Japans capital injection and expansion of Japanese affiliated parent companies in China indicates that the bilateral trade between both nations is going through a momentum. One question to be addressed here is What are the impacts of Japan-China economic collaboration on the bilateral trade between Japan- Malaysia? Another question that needs to be notified is The importance of value-added in product reengineering and production fragmentation as a result from the intra-industry trade. In 1990s Malaysia was one of the favourable nations in South East Asia region for Japanese FDI. The uproar of Chinese economy caught the attention of Japanese investors where it changed the distribution of Japans investment. China overtakes Malaysia where in 1995, Japans investment in China increased to 36% meanwhile Japans investment in ASEAN4 countries inclusive of Malaysia dropped to 33%28. It is important to analyse the impact of revisit the issue with the current changing global economic environment. This would to some extent help the policymakers in identifying the impact of Chinas emergence

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on Malaysian trade and formulate appropriate policy measures to enhance and sustain bilateral and multilateral relationship with economic partners.

1.4

Research Objectives

The objective of this study is as following; 1. To examine value added in IIT trade between Japan-Malaysia and Japan-China from 1993 till 2010; 2. To analyse the intra and inter industry trade for products traded under SITC 5, 6, 7 and 8 between Japan-Malaysia and Japan-China; 3. To measure the Vertical IIT (VIIT) and Horizontal IIT (HIIT) for products traded under SITC 5, 6, 7 and 8 between Japan-Malaysia and Japan-China; and 4. To evaluate High Value VIIT (HVVIIT) and Low Value VIIT (LVVIIT) for products traded under SITC 5, 6, 7 and 8 between Japan-Malaysia and Japan-China.

1.5

Significance of Study

This study is meant to provide insight of the importance of value added in IIT between Japan-Malaysia and Japan-China in terms of product fragmentation and technology transfer. Adjacently, this study will evaluate the contribution of IIT in Japan-Malaysia and Japan-China. Thus, it is believe the findings of the present study will be useful for Malaysia policy makers in their policy formulation that would sustain Japan as the nations leading trade partner.

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1.6

Organization of Study

This paper is organized as follows. Chapter one provides an overview of study which includes an introduction of research background, problem statement, research objectives, significance of the study and the organization of the study. Chapter two concentrates on the literature review on the Intra Industry Trade (IIT) between Japan Malaysia and Japan-China. Chapter three describes the data source and methodology used. Chapter four reports the empirical results and interpretation on the findings. Finally, Chapter 5 provides the summary, conclusion, policy implementation and recommendation for future research.

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