etworks as the locus of production and innovative activities.As regards the recent trends in intra-regional trade, since 1985 it has grownat a rate roughly double that of world trade. The growth rate of intra-regionaltrade was much higher than that in the EU and NAFTA. Evidence based onintra-industry trade in the region demonstrated that economic linkages orinterdependence in the region have strengthened considerably since the mid1980s (Ng and Yeats, 2003). The 2001 value of intra-regional trade in Asiawas $722 billion, or 48.2 percent of total Asian merchandises trade.17The general direction of Asian economic regionalism and intra-regionaltrade over the preceding two decades is clear from the foregoing discussion,if we ignore the 1997-98 Asian crisis. NIAEs, followed by ASEAN-4, Chinaand most recently Vietnam, have pursued outward-oriented economicdevelopment strategies, while stimulating inward flows of FDI. This includedFDI from more industrialized Asian economies to the less industrialized ones.Together, they have created complex regional economic ties among theseeconomies as well as trade dependencies. The increasing trade dependence ofAsia is clearly shown by a simple measure, namely, intra-regional trade as ashare of total trade of the region (Frankel, 1997).18 Intra-regional trade as ashare of total trade of the region, as well as various sub-groups in the regionhas a rising trend. Frankel (1997) also concluded that the entire growth ofAsian trade regionalization could be explained in terms of economic growthamong the countries in the region and the general increase in trade dependence
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of the regional economies. The rising intensity of intra-regional trade is areality that cannot be ignored. In spite of this trend, Japan and the US are stillthe overwhelmingly dominant economies for this region, consequently theirimportance as markets and as sources of investment continues to be large.3.3 Intra-Regional Production NetworksThe exposition in the preceding sections shows that the trend towardsbecoming natural trading partners took several decades of intensive intraregional trade and investment among the Asia-Pacific economies. Changes incurrency value configuration and economic complementarities buttressed thistrend. Gradually the focus of production shifted from the firms to mutuallysupporting networks of regional production. Asian economies were pioneersin this respect.19 Production networks soon became a significant force drivingthe process of economic integration in East and Southeast Asia as well as ofglobalization. They went far beyond the horizontal and vertical integration ofproduction in the past in Asia. The integration of Malaysia, Thailand and thePearl River basin of China with Northeastern Asian production has been oneof the most marked changes in the spatial organization of the Asian economysince the Plaza Accord.Although superficially this trend lent credence to Akamatsu’s (1961, pp.42–76) age-old flying geese hypothesis, emerging organizational and spatialchanges in production actually undermined many of its key assumptions.20 Theregionalization of production networks in Asia came to be organized in waysthat made the avian analogy neat, logical and orderly. Akamatsu’s hypothesis,somewhat simplistically, had failed to grasp the complexities of technologicalchanges and technology transfer. The product life-cycle theory explainsregionalization of production much more convincingly than the avian analogy.It takes individual products as ‘disembodiments’ from larger industrial structures, whereby the life cycle of any given product can be treated in isolationfrom a myriad of other products and the organizational foundations thatinitially spawned it. These new production modes or production linkages weremost conspicuous in (but not exclusive to) the electronics industry (Chen andKu, 2000). This industry provides the most revealing illustration of howproduction linkages in Asia are more complex than the trade and investmentdata describe them.One of the most striking changes in regional production since the PlazaAgreement has been the rapid shift of much of Northeast Asia’s low-endconsumer electronics production first to Malaysia and subsequently toThailand. Most prominent was the massive investment by the Japaneseelectronics industry. A similar pattern was followed by Taiwanese and, to alesser extent, Korean electronics investment in Malaysia and Thailand. This
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large infusion of investment in the electronics industry in Malaysia andThailand led to the transfer in a mere five years (1996–2000) of much of thelow-end, export-oriented consumer electronics assembly industry that hadbeen built up in Japan, Korea and Taiwan since the 1950s. Northeast Asianinvestment in the ASEAN-4 economies brought a number of changes to thestructure of production and exchange in the electronics industry in Asia.During the late 1980s, the production networks began to spread toGuangdong and Fujian provinces in south China, and a borderless economyencompassing a much larger region with different comparative advantagesbegan to emerge. This sub-region rapidly enlarged due to the complementarities that existed among its economies. It now includes Hong Kong SAR,Macao, Taiwan, and the southern provinces of China like Guangdong, Hainan,Fujian, Zhejiang and Shanghai. Geographically proximate regions possessingdifferent resource endowments tended to develop close trade and investmentties, further intensifying the production networks.21 As Taiwan moved intohigh technology industries and Hong Kong SAR moved towards becoming aservices economy, China was well placed to receive the ‘sunset’ industries thatwere being phased out from both the NIAEs. This reduced the pain of phasingout of these industries in Hong Kong SAR and Taiwan, and to a lesser extentin Korea and Singapore. In the process the sunset industries got a new lease oflife through relocation and the pace of industrialization in China quickened.This was China’s opportunity to move faster up the industrial value chain intohigh-technology products.Early in 2001, the government in Taiwan was considering removing allinvestment value ceilings on projects intended for the mainland, but closingoff certain ‘strategic industries’ like high-end electronics. Consequently,mutual industrial dependence of the two economies was on the rise (Sender,2001). Malaysia and Thailand also integrated with the southern part of Chinaby developing close trade and investment links. Together this sub-region ofAsia has shown enormous dynamism and, therefore, it is bound to expand insize, level of sophistication, and scope of cooperation. A clarification isnecessary here. When the so-called sunset industries were moving from theNIAEs to China, the latter was not the recipient of outmoded technologies.Hong Kong SAR and Taiwan had transferred their entire computer hardwaresector to mainland China by the early 1990s, an industry which can hardly becalled outmoded. The domestic ICT industry upgraded in textbook fashion,creating a division of labor between manufacturing activities in mainlandChina on the one hand and Hong Kong SAR and Taiwan on the other (EIU,2003).Notwithstanding the outbreak of SARS (Severe Acute RespiratorySyndrome), the GDP and industrial growth of China was having a great dealof impact on the regional and global economies in the early 2000s.22 With its
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membership of the World Trade Organization (WTO) since the end of 2001,and the increasing contribution to growth made by its own voraciousconsumers, the economy now depends far less on the state-owned enterprises(SOEs) for growth. As a result, it is also exerting an unprecedented degree ofinfluence over regional and world trade. Several industrial sectors, includingsteel, are considered competitive in the global market place. Its imports of ironore are likely to surpass those of Japan in 2003. According to WTO tradestatistics, China accounted for 4.7 percent of world trade in 2002 ($620billion), up from 2.7 percent in 1995. Rising levels of intra-regional and globaltrade put severe pressure on China’s fast-growing ports. In mid-2003, thesouthern Chinese city of Shenzhen overtook Kaohsiung in Taiwan to becomethe world’s fifth-largest container port (The Economist, 2003b).23Over the last quarter century, two virtuous circles of economic growthoperated in East and Southeast Asia and the Asian economies benefited fromthem immensely. Openness to trade and investment resulted in the firstvirtuous circle. This can be termed the domestic virtuous circle. The secondwas a regional virtuous circle, which explains the diffusion of economicgrowth from one group of dynamic economies to another. The productionnetworks created by Asian firms were an inherent part of the second virtuouscircle. Together these virtuous circles reinforced each other leading to briskreal GDP growth in the regional economy. It prima facie appearedcounterintuitive because increased networking among firms that werethemselves competitors, is generally not expected (Borrus et al. 2000).However, it developed as a new trend and is at present successfully operatingin Japan, the NIAEs, ASEAN-4 and China. The trade-creating effects ofinvestment are logical in the context of dynamic networking firms. These arethe newest trends in the regional economy. The end result is closer integrationand increasingly cohesive economic ties and greater regionalization of theAsian economies.24
4. NATURAL TRADING PARTNERSAsian economies have not only integrated as natural trading partners, theprospects for monetary integration between them are also improving. Tworecent studies have concluded that in terms of the economic prerequisites,ASEAN and ASEAN-Plus-Three (APT)25 are not in a significantly worseposition than the EU was a few years prior to the Maastrich Treaty coming intoforce in 1993 (Bayoumi and Eichengreen, 1997; Bayoumi et al., 2000).26However, at the heart of the European Monetary Union (EMU) project was thepolitical commitment to acquiesce to the concept of weakening, or evenlosing, sovereignty. Without it, deepening of economic integration was not
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feasible. If the Asian economies intend to emulate the EMU in any shape orsize, a firm political commitment is indispensable. The new system must notbe viewed merely as a pegged exchange rate arrangement for Asia. Bayoumiet al. (2000) believe that without a pre-determined terminal point to anchormarket expectations, the stability of an ‘Asian EMU’ is open to doubt.However, common basket pegs for the members of APT are well within therealms of possibility.Debate over whether ASEAN economies have natural tendencies to form anRIA or none at all raged during the 1990s, with noted scholars takingpolemical stands. As the debate progressed, the ‘natural trading partners’hypothesis became popular in regional trade and integration literature.27 Usingdata series until 1989, Meltzer (1991) and Frankel (1991) examined blocformation, and voted against the natural trading partner hypothesis. Theyconcluded that Asia had a low capacity for bloc formation because thecountries are not natural trading partners. Frankel (1991) posited that intraregional trade in Asia was rising only because economies in the region weregrowing faster than the rest of the world and not because of any growing biastowards intra-regional trade.The debate has not been resolved as other analysts disagreed. They believedthat the issue of natural trading partners is crucial because to the extent thattrade blocs are created between countries that already trade disproportionatelywith each other, the risk of large amounts of trade diversion is reduced. If theprospective members of an RIA are already major trading partners, integrationor RIA formation would reinforce natural trading patterns, not artificiallydivert them. Their disagreement in inferences was not surprising because theseanalysts were following different methodologies to arrive at contradictoryconclusions. Both Winters (1999) and Schiff and Winters (2003) questionedthe fundamental concept of natural trading partners. A la Winters, the term‘natural trading partner’ can only be used for the assessment of an RIA if weequate ‘natural’ with ‘desirable’, and for an RIA it is difficult to make a directassessment of its ‘desirability’. It is, therefore, better not to use the term‘natural trading partners’ except to mean without any policy inducement orinstitutional stimulus. It is difficult to disagree with this stand.Regional trade data compiled and tabulated by Lee and Roland-Holst(1998) revealed that if the scope of Asian trade is expanded from intraregional to APEC, one notices that for all large Asian trading economies,APEC countries accounted for two-thirds to three-quarters of their total tradeby the mid-1990s. Of particular interest is Japan, which has significantlydiversified its trade towards the APEC group since 1980, moving from 51.6percent to 70.4 percent of its total trade to this country group. They pointedout that as regards the individual countries, the US was the largest non-Asiantrade partner for the large exporting Asian economies. Given the size of the
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US economy, that is to be expected. As a rule of thumb, the US represents onequarter to one-half of the APEC trade for the Asian economies. So was Asiaemerging as the third trading bloc on the global economic scenario? This kindof RIA formation is poorly explained by mainstream economics.It bears repeating that according to standard trade theory, the best RIA is thewhole globe. That is, global welfare is maximized when either the number oftrading blocs is one, or each bloc is very large (see Chapter 2). In the formercase, there is free trade by definition, while in the latter the optimal tariff isnearly zero so that once again the result is free trade. However, theory does notalways provide a good guide to the formation of sub-global RIAs. A standardapproach to analysing RIA formation has been to estimate the importance ofintra-regional trade flows. This approach is based on the argument, madeearlier, that the welfare gains for countries joining an RIA are likely to begreater the higher the percentage of intra-regional trade. Thus, it can be arguedthat if intra-regional trade flows are high or increasing, rational or welfaremaximizing countries would try to form a trading bloc. In case of Asia, intratrade has remained around 50 percent for almost a decade now (refer to section3.2 for the statistical data). Also, this occurred in a market-driven manner,without institutional initiatives. Asian economies – particularly the Eastand Southeast Asian economies, along with China – could justifiably beconsidered natural trading partners.
5. IMPACT OF OTHER RIAs ON THE ASIA-PACIFICECONOMIESAs noted in Chapter 3, section 3, the total number of RIAs notified to WTOstood at 250 in March 2002 (WTO, 2002a). According to the 2002 AnnualReport of the WTO, 159 agreements were still in force in 2001. Trade andinvestment diversion would cause the Asia-Pacific economies to lose out onsome of their export markets and FDI due to the presence of such a largenumber of RIAs in the global economy. Several scholars have devotedthemselves to the issue of impact. In an extensive study, Frankel and Wei(1997) provided a comprehensive survey of various empirical studies done tocalculate the effect of major RIAs on the Asian economies.28 Studies of theCanada–US Free Trade Area (CUSFTA) show a decline in trade with thirdcountries in general (Cox and Harris, 1992; Braga, et al., 1994). If anything,the developing Asian economies have more to lose from NAFTA becausetheir labor-intensive manufactured products will lose some of the Canadianand US markets to Mexico. Noland (1994) estimated that NAFTA could diverttrade from Korea, which could amount to 1 percent to 3 percent of totalKorean exports. Similar trade diversions would be experienced by the other
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NIAEs. A large part (almost two-thirds) of this estimated impact would be inthe textiles, spinning and weaving sectors where Multifiber Arrangement(MFA) quotas were applicable. Hufbauer and Schott (1994) estimated thatNAFTA could divert from Korea and Taiwan, manufactured exports worth$300 million annually that previously went to the US. According to them,machinery and transport equipment sectors would suffer the largest loss ofexport markets. These authors also found that the range of estimates for effectson Southeast and South Asia were similar. They estimated that Southeast andSouth Asian developing economies, excluding Korea and Taiwan, would lose$350 million in manufactured exports. Again, machinery and transportequipment sectors would be the hardest hit sectors. The other two sectors thatwould be most adversely affected were clothing and consumer goods. Exportsof primary products from these countries would also be adversely affected, tothe extent of $100 million.Safadi and Yeats (1993) examined the effects of NAFTA on South Asianeconomies alone and inferred that trade diversion effects would beconcentrated in their textiles and apparel sectors. Although industrializedcountries pledged under the Uruguay Round to phase out their textile quotas,the schedule has such a backlog that NAFTA could make a big difference totextiles trade of South Asian economies (Das, 2000b). These estimates ofimpact are not trivial, but are not particularly large either. Part of the reasonwas that US tariffs were low to begin with. They were slightly lower againstsome Mexican goods than against imports from other industrial economiesunder the Generalized System of Preferences. Safadi and Yeats posited thatthis was the reason that the scope for both trade creation and trade diversionin the US market was small.The US and other industrial economies have had low tariff barriers. Not thesame can be said about NTBs and administrative protection measures likeanti-dumping duties.29 Exports from Canada and Mexico to US do not facemany non-tariff barriers, although they are not out of reach for anti-dumpingactions. This has turned out to be an important benefit of an RIA. However,NTBs do adversely affect Asian exports to the US. This mode of tradediversion does seem to be a valid concern of the Asian economies. Anothersimilar snag is created by the rules of origin (ROO). They can be interpretedin such a manner as to divert Asian vehicle exports intended for the US. Itwould benefit Mexican exporters at the expense of those from Asia. There aredistinct possibilities of trade diversion. Rapid growth in Mexico–US tradesince 1993 seemed consistent with these concerns.FDI is another concern of the Asian economies because both CUSFTA andNAFTA include provisions to promote investment within the RIA. It is logicalto assume that this could cause diversion of investment from Asian economiesto Mexico. Although this was a general concern of the Asian economies,
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portfolio investment was considered especially vulnerable because it isfungible and mobile. McCleery (1993) argued that investment diversion is amore serious effect of NAFTA than trade diversion. According to him it wouldhave a more serious adverse impact over the Asian economies. He calculatedthat Indonesia would lose 4 to 5 percent of FDI to NAFTA, which would causea 2.2 percent decline in GDP. The corresponding figures for other countries:Malaysia would lose 5 to 7 percent causing a 1.4 percent decline in GDP;Singapore 2 to 3 percent of FDI, which would lead to a 1.3 percent GDPdecline; for Thailand the loss would be 4 to 5 percent, leading to a 1.0 percentdecline in GDP. These numbers seem to be biased upwards. Other Asianeconomies, according to McCleery (1993), would be affected less than theseASEAN countries. Kreinen (1998) predicted that a significant amount of FDImight be diverted from ASEAN economies to Mexico in the followingsectors: food, chemicals, textiles, metals, transport equipment, and electronics.US FDI in Mexico started growing rapidly in 1993. In the future, as itseconomy liberalizes further and becomes more productive, Mexico might startattracting Japanese investment as well.30As a hemisphere-wide Free Trade Area of the Americas (FTAA) wasproposed in 1994 during the Miami Summit of Latin American countries,Hufbauer and Schott (1994) estimated its impact. For each major commoditygroup they calculated how much of the increased US imports from LatinAmerica would divert trade from other trading partners. Their estimatesindicated $7.3 billion worth of diverted exports from the NIAEs annually by2002. They concluded that this was equal to 2.6 percent of the NIAEs’ exportsto the US market in that year. They also subdivided trade diversion in varioussectors and found that textiles and apparel would be affected most with almost40 percent of the diversion. The leather and leather products category was thenext affected sector, followed by primary metals and sporting goods. As forthe South Asian economies, they similarly found that this country group wouldsuffer large trade diversions in the textiles and apparel sectors as well as foodproducts sectors. Their estimates of total diversion were substantial. Theyestimated it at $3.2 billion, or 2.8 percent of the projected exports to the USmarket.Studies of trade creation and trade diversion effects of EU formation foundthat trade creation is five to seven times larger than trade diversion (Kreinen,1982). With regard to the impact of SEM on the Asian economies, studiesshow that Australia, New Zealand and NIAEs would gain from it, while Japanwould experience diversion of its skill-intensive exports to the EU. Even in the1980s, and especially after 1992, the Japanese vehicle industry wasparticularly hit by the spread of import quotas from France and Italy to theother EU members. Both Anderson (1993) and Gundlach et al. (1993)concluded that Japanese exports of photocopiers, electric scales, electric
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typewriters, and semiconductors have also been affected due to ROOinterpretation of the EU. As opposed to this they found that primarycommodity exports of the Asian economies would not be diverted. This wasessentially because the EU economies neither produce them nor have anyclose substitutes. In 1995, the EU was enlarged to include some of the formermembers of the European Free Trade Area (EFTA), namely Austria, Finlandand Sweden. This should have affected the skill-intensive exports of Japan,although no empirical estimates are presently available. This is not likely to bethe situation with the 2004 enlargement of the EU. Labor-intensive exportersof Asia would naturally suffer as a result and their labor-intensive exportswould be diverted to the 10 new members joining the EU.
6. THE GRAVITY MODELFor studies related to regional trade or regional integration, the gravity modelcan be a successful empirical tool. In a direct and simple application it relatesvolume of trade between two countries positively to their incomes andnegatively to transaction costs. Thus, economic size (GDP, population, landarea) and transaction costs (geographic distance between the two countries,and cultural dissimilarities) are treated as the two most important factorsexplaining bilateral trade flows in this model. It is called the gravity modelbecause it is analogous to gravitational attraction between two masses inphysics (Bergstrand, 1985). Lee and Roland-Holst (1998) specify the basicresulting equation as follows.Tij = o Yi Yj dij Aij e D uij1
2
3
4
5
ij
where Tij is the bilateral trade flow from country i to country j, Yi and Yj are theexporting and importing countries’ gross domestic products, and dij is thegeographical or economic distance between the two countries. Dij is an arrayof dummy variables such as those for preferential trading arrangements, Aij isan array of other factors that could either facilitate or impede trade between iand j, and Uij is a log-normally distributed error term with E(log Uij) = 0. Theper capita income variable is generally included in Aij.31The popularity of the gravity model is relatively recent. Bayoumi andEichengreen (1995) call the gravity model ‘the workhorse for empiricalstudies of the pattern of trade’. Its empirical robustness made it much used forinvestigations of the geographical pattern of trade. During the 1960s and1970s trade flows were estimated with it but it was criticized because it has aweak theoretical foundation. Tinbergen (1962), Poyhonen (1963) andLinneman (1996) provided initial specifications and estimates of the
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determinants of trade flows and Aitken (1973) applied it to RIAs. AfterAnderson (1979) provided a rigorous economic justification, its use expandedagain.32 With a revival of interest among the economists in economics andgeography, the gravity model has again become popular. Bergstrand (1985)and Deardroff (1997) have provided partial theoretical foundations for thegravity equation, although none of the models generate exactly the equationgenerally used in empirical work.Trade statistics confirm that the magnitude of intra-trade within thefollowing three regional groupings, namely, the EU, Asia-Pacific and NorthAmerica, has been disproportionately high. One plausible explanation behindthis apparent bias towards intra-regional trade in these three country groups isgeographical proximity among the countries. The immediate consequence ofgeographical proximity is reduction in transport costs, short delivery time, lessinterest payable on export credits and low spoilage. Both Krugman (1991a)were of the opinion that the disproportionate intra-trade in the above-namedthree country groups is largely due to proximity, and the other traits associatedwith it. They are wedded to the concept that proximity promotes trade.Krugman (1991b) goes further and argues that the three trading blocs arewelfare enhancing natural groupings. This logically means that there are some‘unnatural’ trade groupings where partners are not close but far apart. Heprovided the example of the United Kingdom and members of the Commonwealth as an ‘unnatural’ trading arrangement. The argument supporting thishypothesis is that because of little or no distance between trading partners,intra-continental RIAs are likely to be more trade creating than trade diverting.Using the gravity model, Solonga and Winters (1999) examined the impactof nine RIAs, namely, the Andean Community, AFTA, CACM, EU, EFTA,the Gulf Co-operation Council (GCC), LAIA,33 MERCOSUR and NAFTA.Using non-fuel imports and exports data for 58 countries, they compared thebefore-and-after scenario of the trade patterns of these nine RIAs. The centralvariables of the gravity model – the volume of GDP of countries i and j, thearea of these countries, and the absolute distance between i and j – were foundto have the expected sign and were all significant at 1 percent. Trade wasfound to increase with the level of GDP of the importer and exporter anddecrease with the size and distance. The variables reflecting population ofimporter and exporter countries were positive and almost always significant.The degree of remoteness of the importer country from its suppliers had theexpected positive sign and was always significant. The estimated parametersfor ‘common land borders’ were not significant in any year of the sample,reflecting probably some colinearity with the parameter for remoteness. Theirresults are interesting and show that for all the RIAs involving Latin Americancountries (CACM, LAIA, and Andean Community) the intra-tradecoefficients were positive and statistically significant for the whole sample.
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However, their results were far from uniformly positive and statisticallysignificant. For NAFTA, the result was positive but never significant, whilefor the GCC it was positive but significant for only a certain number of years.The coefficients for the intra-bloc trade were negative for the EU, EFTA andAFTA, although they were not statistically significant.Again, Frankel and Wei (1997) provided extensive examinations ofpossible RIAs in Asia-Pacific. They also considered a sequence of ‘nestedcountry groupings’ in Asia, like ASEAN, East Asia, and South Asia and thewhole of Asia. In their gravity model exercise, they measured the log ofdistance between two major cities – usually the capital cities – of therespective countries for their empirical model. They also added a dummy‘adjacent’ variable to indicate when two countries shared a common border. Inanother similar study, Frankel et al. (1994) tried to test with a more thoroughmeasure of distance that took into account land, and sea routes. The results ofboth the studies tended to be similar. Frankel and Wei (1997) took GNP inproduct form because it is empirically well established in bilateral traderegressions and can be justified by the modern theory of trade under imperfectcompetition. Countries a priori choose larger countries to trade with becausethey offer a greater variety of goods to choose from than smaller countries.Also common language tends to facilitate trade by enhancing exporters’ andimporters’ understanding of each others’ cultures, commercial and legalsystems, which have a great deal of influence on trade. To capture these effectsFrankel and Wei (1997) included dummy variables that took the value of oneif the country pair in question had a favorable impact on trade due to theseeffects, and zero if they did not. They used ordinary least square (OLS)regression, which tests effects of each independent variable while holdingconstant the effects of the others. They used the United Nations trade matrixand the International Monetary Fund’s Direction of Trade Statistics for dataand employed the panel regression technique that allows for year-specificintercepts.The inferences of Frankel and Wei (1997) may be summarized as follows.As posited by the gravity model, geography matters. Distance has aneconomically and statistically large effect on trade. As distance increased by 1percent, trade declined by 0.5 percent. The ‘adjacency’ dummy showed thattwo countries with a common land border have a larger volume of trade thantwo otherwise identical countries. Another important conclusion was thatcommon language or past colonial connections facilitated trade; it brought in50 percent more trade than otherwise.As regards the degree of integration within Asia, two ASEAN countrieswere found to have 600 percent more trade than two otherwise identicaleconomies. As Singapore is an entrêpot trade center, its imports and exportsare usually more than 100 percent of GDP. It was possible that the apparent
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intra-ASEAN bias was partly or wholly a reflection of the extreme opennessof Singapore. A Singapore dummy was added to examine this. The coefficientof the ASEAN dummy was reduced somewhat but remained quantitativelylarge and statistically significant. This suggested that Singapore’s extremeopenness did not explain all of the apparent inward bias among the AEANcountries. It was also found that all East and Southeast Asian countries tendedto concentrate their trade with each other, and that the tendencies of theASEAN economies were not unique in this regard. As expected, two Chinesespeaking countries appeared to trade an estimated four and half times as muchas other similarly situated countries. Chinese business practices, culture andChinese language business terminology raises the possibility that the influenceof the Chinese diaspora was a dominant source of East Asian intra-regionaltrade.A noteworthy point here is that China–Taiwan trade does not appear in thestatistics because official statistics deny it takes place. However, this trade islarge and rapidly growing, and routed through Hong Kong SAR. Thus, thistrade was counted twice in HK data and may have exaggerated the estimate ofthe influence of the Chinese variable. This double counting in trade wascorrected, and the gravity estimates rerun with trade among the so-calledGreater Chinas. The independent Chinese language effect was no longer foundto be significantly stronger than other linguistic links around the globe.Frankel (1997) reported that the two South Asian economies in the sample,India and Pakistan, were negatively impacted by their historical animosity.Their trade was found