Abstract: This paper analyzes how the ASEAN Economics Integration in 2015 will affect the trade flows between Cambodia and Thailand based on revealed comparative advantage and intra-industry trade concepts. The major findings of this study are Cambodia and Thailand are likely to further increase their inter-industry trades after the ASEAN Economics Integration, and each country (Cambodia and Thailand) may move to specialize in producing products that it has a comparative advantage. Furthermore, there may not be much adjustment costs associated with the trade liberalization among these two nations since they share a very low IIT.
Author: Mizuno Thay
Senior Banking and Finance Student
Senior Banking and Finance Student
Content:
1. Introduction
2. Comparative advantage analysis
2.
1. Theoretical background
2.
2. Results
2.
3. Discussions
3. Intra-Industry trade analysis
3.
1. Theoretical background
3.
2. Results
3. 3. Discussions
1) Introduction
Cambodia
and Thailand are neighboring countries and they have a robust economic relation
with each other. These two nations trade many goods and services with each
other and the volume of their bilateral trades has increased significantly
during this last decade. Last year, the trade between the two countries
accounted for 3.16 billion US dollars which is an increase of 26 percent
year-on-year (Figure 1).
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Figure
1. Trades between Cambodia and Thailand
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Association
of Southeast Asian Nations (ASEAN) is the main catalyst for the development of economic
ties between Cambodia and Thailand. There has been a huge reduction in trade
barriers between Cambodia and Thailand since Cambodia joined ASEAN in 1999. In
2015, ASEAN members are planning to integrate their economies together by
allowing free movement of goods and services, investment, skilled labor, and
capital within its region (ASEAN ECONOMIC COMMUNITY BLUEPRINT, 2008) . Cambodia,
Laos, Myanmar, and Vietnam (CLMV) has been granted some protections for
sensitive products until 2018 as these countries are not yet ready for full integration
of their economies in the near future. Particularly Cambodia, it has to reduce tariffs
on its sensitive products to 0-5% by 1st January 2017 under the
Common Effective Preferential Tariffs Agreement. The ASEAN Economics
Integration (AEI) will further liberalize trade and increase competition between
Cambodia and Thailand. This essay analyzes how the ASEAN Economic Community
(AEC) plan will affect trade flows between Cambodia and Thailand based on
revealed comparative advantage (RCA) and intra-industry trade (IIT) concepts.
2) Comparative
advantage analysis
2.1. Theoretical background
Revealed
Comparative Advantage is an index used to identify sectors in which an economy
has a comparative advantage by analyzing its trade pattern with other
economy(s) (Mia Mikic and John Gilbert, 2007,
pp. 64-65). This concept was introduced by Bela Balassa in 1965 and it
has been widely used among international economists since then as a measure to
analyze inter-industry trade between two regions. We can calculate RCA for country X in sector Y
by finding share of Sector Y in country X’s total exports divided by share of
sector Y in world’s total exports.
If RCA
is greater than 1, then country X has a comparative advantage in sector Y. On
the other hand, Country X has a comparative disadvantage in sector Y if its RCA
is less than 1.
2.2. Results
We
have calculated RCA of Cambodia’s and Thailand’s top 20 export products, as shown
in Table 1 and 2 respectively. Table 1 and 2 illustrate which export products
that Cambodia and Thailand has a comparative advantage and a comparative
disadvantage.
Table
1. Cambodia’s Top 20 Export Products
RCA
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|
Articles of apparel & clothing
accessories
|
27.78
|
Crude rubber (including synthetic and
reclaimed)
|
13.16
|
Footwear
|
12.74
|
Cork and wood
|
2.63
|
Crude fertilizers other than division 56,
and crude minerals
|
2.54
|
Gold, non-monetary (excluding gold ores
and concentrates)
|
2.32
|
Cereals and cereal preparations
|
1.76
|
Tobacco and tobacco manufactures
|
1.62
|
Vegetables and fruits
|
1.58
|
Miscellaneous manufactured articles,
n.e.s.
|
1.26
|
Road vehicles
|
0.49
|
Textile yarn and related products
|
0.47
|
Fixed vegetable oils and fats, crude,
refined or fractionated
|
0.43
|
Metalliferous ores and metal scrap
|
0.35
|
Fish, crustaceans, molluscs and
preparations thereof
|
0.23
|
Rubber manufactures, n.e.s.
|
0.21
|
Manufactures of metal, n.e.s.
|
0.13
|
Other transport equipment
|
0.12
|
Electrical machinery, apparatus and
appliances, n.e.s.
|
0.047
|
Telecommunication and sound recording
apparatus
|
0.042
|
Table 2. Thailand’s top 20 export products
RCA
|
|
Crude rubber (including synthetic and
reclaimed)
|
13.22
|
Sugar, sugar preparations and honey
|
6.48
|
Fish, crustaceans, molluscs and
preparations thereof
|
5.12
|
Rubber manufactures, n.e.s.
|
3.9
|
Office machines and automatic data
processing machines
|
2.55
|
Cereals and cereal preparations
|
2.47
|
Plastics in primary forms
|
2.31
|
Gold, non-monetary (excluding gold ores
and concentrates)
|
1.94
|
Vegetables and fruits
|
1.63
|
Road vehicles
|
1.51
|
Organic chemicals
|
1.27
|
Manufactures of metal, n.e.s.
|
1.27
|
Other industrial machinery and parts
|
1.23
|
Electrical machinery, apparatus and
appliances, n.e.s.
|
1.18
|
Nonmetallic mineral manufactures,
n.e.s.
|
1.14
|
Telecommunication and sound recording
apparatus
|
1.13
|
Miscellaneous manufactured articles,
n.e.s.
|
1.06
|
Power generating machinery and
equipment
|
0.99
|
Articles of apparel & clothing
accessories
|
0.78
|
Petroleum, petroleum products and
related materials
|
0.41
|
Table 3 shows RCA of
Cambodia for Thailand’s top 25 import products. When there is a trade
liberalization within ASEAN, Cambodia may increase its export to Thailand for Thailand’s
import products that it has RCA >1.
Table 3. Thailand’s top
25 import products
RCA Cambodia
|
|
Petroleum, petroleum products and
related materials
|
0.00
|
Electrical machinery, apparatus and
appliances, n.e.s.
|
0.04
|
Iron and steel
|
0.00
|
Road vehicles
|
0.49
|
Other industrial machinery and parts
|
0.00
|
Gold, non-monetary (excluding gold ores
and concentrates)
|
2.32
|
Office machines and automatic data
processing machines
|
0.00
|
Telecommunication and sound recording
apparatus
|
0.04
|
Power generating machinery and
equipment
|
0.07
|
Manufactures of metal, n.e.s.
|
0.13
|
Non-ferrous metals
|
0.01
|
Miscellaneous manufactured articles,
n.e.s.
|
1.26
|
Specialized machinery
|
0.04
|
Gas, natural and manufactured
|
0.00
|
Other transport equipment
|
0.12
|
Organic chemicals
|
0.07
|
Professional and scientific
instruments, n.e.s.
|
0.00
|
Plastics in primary forms
|
0.02
|
Metal working machinery
|
0.03
|
Chemical materials and products, n.e.s.
|
0.07
|
Textile yarn and related products
|
0.47
|
Nonmetallic mineral manufactures,
n.e.s.
|
0.00
|
Fish, crustaceans, molluscs and
preparations thereof
|
0.23
|
Fertilizers other than group 272
|
0.00
|
Medicinal and pharmaceutical products
|
0.02
|
2.3. Discussions
Cambodia
has a strong comparative advantage in manufactured goods and unprocessed items like articles of apparel and clothing accessories, crude fertilizer, and
crude rubber, while it has a comparative disadvantage in machinery equipment,
food products and high technology goods (Table 1). Articles of apparel and
clothing accessories (SITC 84) makes up most of Cambodia’s total export (Figure
2) and also has the highest RCA. This indicates that Cambodia export is not
diversified.
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Figure
2. Shares of Cambodia’s Export Products
Cambodia
economy is very vulnerable since its export relies heavily on one sector. If
there is a price fluctuation in apparel and clothing accessories, it may
strongly affect Cambodia economy as well as the Cambodian Riel currency.
Table
2 shows Thailand has a strong comparative advantage in sectors such as
machinery equipment, food products, and high technology stuffs, whereas, it has
a comparative disadvantage mostly in low-end technology goods. As we can see,
Cambodia and Thailand have almost different comparative advantage
products/sectors. This demonstrates that Cambodia and Thailand are not
competitors in the international market. Two or more countries, which have
different comparative advantage products, are likely to gain from each other as
the result of the integration of their economy. In this way, the producers and
consumers in a competitive advantage products/sectors are likely to gain from
trade liberalization while only a minority of producers in a competitive
disadvantage sectors may losses. Cambodian producers and Thailand consumers in
low-end technology goods and unprocessed items will enjoy gains as a
consequence of removing tariffs and non-tariffs measures between Thailand and
Cambodia. Only a minority of Thailand producers in low-end technology goods and
unprocessed items may suffer as they cannot compete with Cambodian producers.
Cambodia will possibly increase its export of apparel and clothing accessories,
footwear, and crude rubber and fertilizer to Thailand after the AEI takes
place. Due to the increase of export in these products from Cambodia, Thailand
consumers may also enjoy these products at lower prices. Thailand producers and
Cambodian consumers in food, machinery, and high-end technology products
perhaps will also enjoy gains as Thailand may increase its export of these
products to Cambodia. The minority of Cambodian producers in these products may
suffer as a result of increasing competition from Thailand.
The
trade liberalization generally pushes a country to specialize in producing
goods that it has a comparative advantage. Similarly, the AEC may push Cambodia
to specialize in producing agricultural and low tech-manufactured goods while
Thailand may move to specialize in producing high-end technology, machinery,
and food products. Presbish-Singer Hypothesis (PSH) explains that countries
with high export dependence on primary products and/or low value added goods tend
to lose out in the long run to economies that export high technology and high
value added goods (Riley, 2012). According to PSH, Cambodia may not gains as
much as Thailand from the trade liberalization as
it will move to specialize in producing only low value added goods while
Thailand might advance its production in high value added goods.
Table
3 illustrates there are only two out of the top 25 import products in Thailand
that Cambodia has a comparative advantage (Table 3). Consequently, Cambodia
seems not to increase much of its exports products to Thailand at all after the
trade liberalization. Gold and miscellaneous manufactured articles are the only
two main export products that Cambodia might gain benefits from the trade
liberalization with Thailand.
3. Intra-Industry
trade analysis
3.
1. Theoretical background
Intra-industry trade (IIT) is an index used to measure the
level of trade of a country/economy in similar goods produced in the same
industries (A Practical Guide to Trade Policy Analysis, 2012). Countries import
and export goods made in the same industries at the same time because of
product differentiation and international production sharing (Reinert, AN
INTRODUCTION TO INTERNATIONAL ECONOMICS, 2012). There are two types of IIT:
Horizontal IIT and Vertical IIT. Horizontal IIT refers to the simultaneous
exports and imports of goods at the same stage of processing; it has its source
in product differentiation. An example of horizontal IIT is the export and
import of rice in Cambodia. Cambodia both exports and imports rice from
Thailand because of the variation in taste, price and quality in rice. Vertical
IIT is the simultaneous exports and imports of goods at different stages of
processing. It has its source in fragmentation/international production
sharing. For example, Thailand imports timber from Cambodia and exports
furniture back into Cambodia. A most well-known index for measuring the level
of IIT is “The Grubel-Lloyd (GL) Index”. We can calculate the Grubel-Lloyd
index by one minus the ratio of absolute value of export in a given product
category less imports in the same category
times 100 to the sum of exports and imports in the category.
Sources: Belassa (1965) and Van
Marrewijk (2002)
Source: Reinert, AN INTRODUCTION TO
INTERNATIONAL ECONOMICS, 2012
This index ranges from 0 to 100, with zero indicates pure inter-industry
trade in product i and one hundred specifies totally intra-industry trade in
product i. If trade liberalization happens between countries with high IIT,
adjustment costs will be low. In contrast, adjustment costs will be substantial
if trade liberalization occurs between countries with low IIT.
3. 2. Results
We have calculated
Glubel-Lloyd index of Cambodia-Thailand, Cambodia-World, and Thailand world.
From table 4, we can observe that Cambodia has a low level of IIT with Thailand
and also low level of IIT with the world in comparison to Thailand.
Table 4. The Grubel-Lloyd index of
Cambodia and Thailand
3.3. Discussions
The intra-industry trade between Cambodia and Thailand is
very low, which is only about 7.3% (Figure 4). This infers that the trade
between Cambodia and Thailand are mostly inter-industry trade. When there is
trade liberalization, adjustment costs usually arise due to each country moves
to specialize in producing products in which it has a comparative advantage.
The adjustment costs associated with the trade liberalization are generally the
cost of labor movements across sectors, the loss of productivity and the time
needs for training new employees. There may be not much adjustment
costs between Cambodia and Thailand since their bilateral IIT is low. After the
AEI, many Cambodian workers might move to work in apparel and low-end
technology companies as it has a comparative advantage in these two businesses. As the majority of Cambodian employees move
to work in these businesses, they may incur some expenses such as unemployment,
travelling, and accommodation. Apparel and low-end technology firms in Cambodia
may also incur some costs as they have to spend some time in order to train new
employees. The time which spends on training new employees may lead to the
decrease of productivity in Cambodia as well. At the same time, Thailand may
also incur some adjustment costs once it liberalizes its trades with Cambodia
because it may move to specialize in producing food, high-end technology and
machinery products. As a consequent, there is usually adjustment
costs associated with the trade liberalization between countries and the
higher the IIT, the higher adjustment costs associated with free trades.
4. Conclusion and policy recommendations
References
(2012). A Practical Guide to Trade Polcy
Analysis. New York: World Trade Organization.
ASEAN ECONOMIC COMMUNITY BLUEPRINT.
(2008). Jakarta, Indonesia.
Mia Mikic and John Gilbert. (2007). Trade
Statistics in Policymaking. Bangkok, Thailand.
Reinert, K. A. (2012). AN INTRODUCTION
TO INTERNATIONAL ECONOMICS. New York: Cambridge University Press.
Riley, G. (2012, 09 23). Economic
Growth - Prebisch-Singer Hypothesis. Retrieved 12 18, 2013, from tutor2u:
http://www.tutor2u.net/economics/revision-notes/a2-macro-economic-growth-prebisch-singer-hypothesis.html
International Trade and the World Economy, Oxford University Press.
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