This document provides an overview of a master's thesis presentation on export diversification, regional integration, and trade costs in East Asia and ASEAN-3. The presentation includes analysis of export diversification trends in ASEAN-3 countries, the significance of ASEAN-3 in regional economic development and trade, measures of export diversification and the extensive margin of trade, and the impact of trade facilitation on export diversification and regional integration based on heterogeneous firms theory. Key research questions examine the effects of trade facilitation on diversification within East Asia and its impact on ASEAN-3 countries' export diversification.

1. Today’s Presentation:
Export Diversification, Deepening Regional Integration
and Costs of Trade in East Asia and ASEAN-3
A Master Thesis Draft
Prayoga Wiradisuria
April 2009
Graduate Schol of Asia Pacific Studies

2. Preface
• Last time I was researching on changing trade patterns of ASEAN-4 which was observed
mainly through their net-export pattern (exhibit-1). A stedy increase in Intra-industrial Trade
has also been observed (exhibit-2). Except for Philiippines, all countries have gone through
export diversification
• Building on that, the next research would be to study deeper this export diversification
phenomenon in Indonesia, Malaysia, and Thailand (ASEAN-3)
• Export diversification is important because it is the sign of increased productivity and
correlated with economic growth. Export diversification is also the engine for intra-industrial
trade
• This research will learn the impact of trade facilitation to East-Asian’s performance on export
diversification
• This research then will learn how trade facilitation impacts ASEAN-3 on export diversification
Keywords: Export diversification, regional trade integration, costs of trade, heterogenous firms model

3. Significance of ASEAN-3
ASEAN-3 has been leading ASEAN region in economic
development and regional integration
Socio-demography Economic Development
ASEAN Population*
(percent)
Agriculture Manufacturing Services
Indonesia 1.6 15% 45% 41%
57% Thailand 3.2 9% 47% 44%
Malaysia 5.98% 42% 50%
ASEAN-3 Phils CMLV Total
Philippines 1.4 20% 33% 47%
ASEAN GDP* Cambodia 0.5 33% 31% 37%
(percent)
Laos 0.6 50% 25% 25%
Myanmar 0.2 43% 17% 40%
76% Vietnam 0.7 20% 39% 40%
ASEAN-3 Phils CMLV Total
Source: World Development Indicator
*Excluding Singapore and Brunei
**Excluding Singapore, Brunei and Myanmar
3

4. Significance of ASEAN-3
ASEAN-3’s trade of goods has been showing deepening
integration with East Asia
ASEAN-3 Export growth ASEAN-3 Export Composition to East Asia
(1990=100) (percentage)
600 East Asia 5% 7% Agricultural, forestry, and fishery
10%
500
Rest of World
45%
400 69% 67% Manufacture commodities
300
200 45%
25% 26% Mineral commodities
100
1990 1995 2000 2005 1990 2006 2007
ASEAN-3 Import growth ASEAN-3 Import Composition to East Asia
(1990=100) (percentage)
450 Agricultural, forestry, and fishery
East Asia
400
350
300 Rest of World
94% 94% 89% Manufacture commodities
250
200
150
Mineral commodities
100
1990 1995 2000 2005 1990 2006 2007
Source: UN WITS Comtrade, Own calculation
East Asia: ASEAN+3 minus Singapore and Brunei
4

5. Export Diversification
One of ASEAN-3 significant achievement has been its
succesful export revenue diversification
Export Revenue Concentration*
(Herfendahl Index, 4-digit SITC, ln value)
0
Herfendahl index
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
-0.5
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
-1 2
INA
n
Xi
-1.5
MAL
H=Σ
i n
-2 THA Σ Xi
i
-2.5
-3 Where:
-3.5 i : a particular product
n : total number of products
-4
-4.5
Source: UN WITS Comtrade, Own calculation
5

6. Research Question
If export diversification in East Asia and particularly
ASEAN-3 can have positive impact on development and
deepening regional integration, what would be the policy
measures to support that process?
Sub questions:
• What is the impact of trade facilitation to trade diversification
within of East-Asian region?
• What would be the effect of trade facilitation to ASEAN-3’s export
diversification`
6

7. Underlying theory
Costs of Trade (1)
Costs of trade measure
• Broadly defined, trade costs include all costs incurred in getting a good to a final user other than the marginal
cost of producing the good itself (Anderson & Wincoop, 2004).
Transportation costs e.g. shipping cost
Tariff e.g. ad valorem
Direct measure
Trade costs Policy costs e.g. from Tariff databases,
Non-tariff e.g. custom procedure
UN Doing Business database
Inference
Other costs e.g. information cost, currency cost e.g. From volume, price
• Andersen and Wincoop estimated that the tax equivalent of representative international trade costs is as high
as 74%. Costs for developing countries can be much higher.
• Trade liberalization efforts generaly aims to reduce tariff costs and trade facilitation is aimed at reducing non-
tariff costs
• In this discussion, I’m going to use th term trade facilitation for both tariff and non-tariff barrier reduction
7

8. Underlying theory
Measuring Export Diversification / Extensive Margin of Trade
• The issue of measuring product variety has received relatively little attention due to its inherent
difficulty (Feenstra and Kee, 2007)
• Some of the methods are:
Method Description Advantage Disadvantage
Count data Accumulating the number of Straightforward interpretation, Detailed data (8 digit CN) only
(Dennis & products exported in a given less bias, can be used for available for EU market
Shepherd, 2007) period of time cross section and time series (Eurostat’s Comext database)
Relative variety Total value of world exports in Widely available data, May have more bias
(Feenstra, 1994) product lines exported by country frequently used in policy
H devided by total value of world circles (UNCTAD, 2006)
exports across all product
Herfindhal-Hirschman Total value of world exports in Widely available data, less strong theoritical basis
Index product lines exported by country frequently used in policy
H devided by total value of world circles (UNCTAD, 2006)
exports across all product
• This research will use extensive margin of trade measurment by Feenstra (1994)
8

9. Underlying theory
Extensive Margin of Trade and Trade Liberalization/Facilitation
• The existing trade facilitation literature has focused almost exclusively on the potential consequences for
aggregate trade flows1)
• Extensive margin of trade is not an inconsequential property of trade flows that can safely be ignored. Rather,
it plays a crucial role in explaining several important international economic phenomena2)
• Export costs at the border have an effect on the number of goods being exported (extensive margin of trade)3)
• Large responses of trade flows to small but long-lasting reductions in trade costs (driven by trade
liberalization) are driven by a substantial response in the extensive margin of trade4)
Extensive
Heterogeneous +
products
margin of
trade Homogeneous
Trade products Preference
Trade (development
liberalization / Trade flow
flow Heterogeneous perspective)
facilitation
Intensive products
margin of
trade Homogeneous
products -
1) GPErsson (2008) in “Trade Facilitation and the Extensive and Intensive Margins of Trade”
2) Ghironiand Melitz (2004) Trade Flow Dynamics with Heterogeneous Firms
3) Dennis and Shepperd (2007) in “Trade Costs, Barrier to Entry, and Export Diversification in
Developing Countries”
4) Kehoe and Ruhl (2002) in “How Important is the New Goods Margin in International Trade”
9

10. Underlying theory
Theory of Heterogeneous Firms
• Recently theory of heterogenous firm is getting important, pioneered by Melitz (2003)
• It is a new approach to the modeling of international trade and is now starts to
become popular in recent scholarly works
• This theory explains that firms are heterogeneous in productivity
• Firms ability to trade both in domestic and international market are influenced by
variable and fixed costs applied. Simply explained, the model acknowledges that not
all firms in a particular sector will produce and/or serve foreign market (export)
• Reductions in barriers to trade → increase profits of exporters and reduce the export
productivity cutoff → labor demand within the industry rises → increase in wages →
profits of nonexporter decrease → less productive firms bankrupt
10

11. Research Question
A Modified empirical model taken from Persson (2008) which separate
homogenous and differentiated products will be used in this context
Empirical model:
Xijs β = β1 + β2ln(TFj) + β3ln(dij) + β4borderij + β5langij
+ β6colonyij + β7landlj + β8ln(Yj) + β9ln(Pj) + β10FTAj
+ β11ln(1+tariffij) + µi + regionj + diffs
Legend
Xijs : Extensive margin share of export Y : GDP
from country j to country i in sector s P : Population
TF : Costs of transaction FTA : FTA Dummy
dij : distance between the tariffij : average tariff faced by country j’s exporter
two countries’ capitals when exporting to country I
borderij : common border µi : importer fixed effects
langij : common language regionj : similarity of behavior of same region countries
colonyij : common colonial hitory diffs : dummy for differentiated or homogenous products
landl : landlock country
11

12. The Research in Summary
If export diversification in East Asia and particularly ASEAN-3 can have
positive impact on development and deepening regional integration,
what would be the policy measures to support that process?
Sub questions Model Countries to be involved
• What is the impact of trade Cross-section analysis Indonesia, Malaysia, Thailand,
facilitation to trade diversification using modified Parsson Philippines, China, South
within of East-Asian region? equation Korea, Japan, Vietnam,
Cambodia, Lao PDR
• What would be the effect of trade Time series analysis using Indonesia, Malaysia, Thailand
facilitation to ASEAN-3’s export simple regression
diversification` technique
Originality of this thesis
• Heterogenous firms • Assymetric billateral trade
• Accounts for fixed and variable • Commodity category break-
trade costs down
• Homogenous product / • East Asian economies
heterogeneous product
12

13. Thank you for listening and the feedbacks
13

14. Appendix-1a
Indonesia’s and Malaysia’s export structure have evolved…
Indonesia (Net export, %)
100% Tropical A griculture
80% Raw Materials
60% Petroleum
Machinery
40%
Labor Intensive
20%
Forest Products
0% ` Chemical
-20% Cereals, etc.
-40% Capital Intensive
A nimal Products
-60%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Malaysia (Net export, %)
100%
Tropical A griculture
80% Raw Materials
60% Petroleum
40% Machinery
Labor Intensive
20%
Forest Products
0% Chemical
-20% Cereals, etc.
-40% Capital Intensive
A nimal Products
-60%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006

15. Appendix-1b
…as also observed with those of Thailand and Philippines
Thailand (Net export, %)
80%
Tropical A griculture
60% Raw Materials
40% Petroleum
20% Machinery
Labor Intensive
0%
Forest Products
-20% Chemical
-40% Cereals, etc.
-60% Capital Intensive
A nimal Products
-80%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Philippines (Net export, %)
60%
Tropical A griculture
40% Raw Materials
20% Petroleum
0% Machinery
Labor Intensive
-20%
Forest Products
-40% Chemical
-60% Cereals, etc.
-80% Capital Intensive
A nimal Products
-100%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006

16. Appendix-2
Evidence suggests IIT in all ASEAN-4 countries have been
forming substantially in the last 3 decades
Intra-Industrial Trade
(Grubel-Llyod Index, 4-digit SITC ver.1) Economic picture:
0.70 • The economies in general
0.65 enjoy gains in productivity
0.60 which leads to economies
0.55 Indonesia of scale
0.50 Malaysia
0.45 Thailand
• Trade reform and
liberalization took place
0.40 Philippines
0.35
• Market competition is
0.30 presence
0.25
0.20 • Consumers likely to benefit
0.15 from wider product
0.10 differentiation
0.05
• Growing income per capita
0.00
1970 1975 1980 1985 1990 1995 2000 2005
Source: UN Comtrade, Author’s calculation, no data for Thailand’s 1998 export figure

17. Appendix-3
DATA SOURCES
Variables Data Sources
Export/import UN Comtrade
Distance Centre D'Etudes Prospectives et D'Informations Internationales (CEPII)
Border Centre D'Etudes Prospectives et D'Informations Internationales (CEPII)
Common language Centre D'Etudes Prospectives et D'Informations Internationales (CEPII)
Colony Centre D'Etudes Prospectives et D'Informations Internationales (CEPII)
Landlocked World Bank’s World Development Indicators
GDP World Bank’s World Development Indicators
Population ADB Regional Integration Center
FTA Average applied Tariff from MAcMap Database or TRAIN
Tariff John Haveman’s International Trade Data on Rauch Classification
Rauch Classification Proxy for export transaction cost: The number of all documents needed to
Export documents export a good across the border from UN’s Doing Business Database
Proxy for export transaction cost: The costs ascociated with all the procedures
Export costs required to export a good across border from UN’s Doing Business Database
Countries to be involved
Indonesia, Malaysia, Thailand, Philippines, Vietnam, Lao PDR, Cambodia, China, South Korea, Japan
17

18. APPENDIX
Edward Leamer’s 10 industrial clusters
Aggregates SITC Aggregates SITC Aggregates SITC
Raw Materials Tropical Agriculture Cereals, etc.
Crude fertilizer and minerals 27 Vegetables 05 Cereals 04
Metalliferrous ores 28 Sugar 06 Feeds 08
Coal and coke 32 Coffee 07 Miscellaneous 09
Gas, natural, and manufactured 34 Beverages 11 Tobacco 12
Electrical current 35 Crude rubber 23 Oil seeds 22
Nonferrous metal 68 Textile fibers 26
Capital intensive Animal oil and fat 41
Animal Products Leather 61 Fixed vegetable oils 42
Live animals 00 Rubber 62
Meat 01 Textile yarn and fabric 65 Labor Intensive
Dairy products 02 Iron and steel 67 Nonmetal minerals 66
Fish 03 Other manufacture metals 69 Furniture 82
Hides and skins 21 Sanitary fixtures and fittings 81 Travel goods and hanbags 83
Crude animals and vegetables 29 Art apparel 84
Processed animal and vegetable oils 43 Machinery Footwear 85
Other animal products 94 Power generating 71 Miscellaneous manufactured articles 89
Specialized 72 Postal packaging, not classified 91
Chemical Metalworking 73 Special transaction, not classified 93
Organic 51 General industrial 74 Coins (non-gold) 96
Inorganic 52 Office and data processing 75
Dyeing and tanning 53 Telecommunications and sound 76 Petroleum
Medical and pharmaceutical products 54 Electrical 77 Petroleum and derivatives 33
Essences and perfumes 55 Road vehicles 78
Fertilizers 56 Other transportation vehicles 79 Forest Products
Explosives and pyrotechnics 57 Professional and scientific instruments 87 Lumber, wood, and cork 24
Artificial resins and plastics 58 Photographic apparatus 88 Pulp and waste paper 25
Pther chemical materials 59 Firearms and ammunition 95 Cork and wood manufacturers 63
Paper 64
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