The Dynamics of Intra-industry Trade in ASEAN*

The decision to establish the ASEAN Free Trade Area (AFTA) by the year 2008 has resulted in producers in all ASEAN countries except Singapore raising concerns relating to potential loss of market share and adjustment pressures. Underlying these concerns is the view that the expected growth in intra-ASEAN trade will be dominated by inter-industry or net trade (NT) rather than intra-industry trade (IIT). If most of the expected growth in trade is intra-industry, however, then the short-run resource re-allocation costs are likely to be lower. In this study, we employ a new methodology to analyse the dynamics of IIT in ASEAN. We overcome problems associated with using movements in the value of the Grubel-Lloyd (GL) index by deriving a formula that decomposes the growth in trade into the contributions of growth in IIT and NT. Our results suggest that the role of IIT in trade growth has been increasing in importance, and thus much of the recent concern that threatens the viability of AFTA may be misplaced.