The accelerated pace of globalisation in the past fifteen years has led to a high degree of economic integration of Asian economies with the rest of the world, particularly through trade of goods and services. At the centre of the globalisation process in East Asia is a rapid development of vertical trade integration in the region, with China becoming a trading hub of manufactured goods after its accession to the WTO in 2001. The East Asian supply chain is particularly dominant in electronic products, as illustrated by Koopman, Wang, and Wei (2008).
While increased trade in substitutes can generate resource shifting effect, leading to more asymmetric business cycles across countries, trade in complements such as vertical trade will have opposite effect and strengthen the output co-movement (Burstein, 2008). Giovanni and Levchenko (2009) and Ng (2010) find that the vertical production linkage is the main channel through which trade syncrhonises business cycles between economies. Thus, business cycles in East Asia may have become more synchronised as a result of increasing vertical trade integration in the region.
Theoretically, vertical trade integration in a region can affect business cycle synchronisation among the economies in the region through a number of channels. On the demand side, since the regional production network is organised to serve a common market or source of final demand, common demand shocks that originate outside the region may lead to common movement of business cycles in the region. On the supply side, the regional production network implies that producers along the production chain are pushed or pulled together toward the frontier of technology.
For instance, a positive supply shock to computer technologies may lead to producers in different countries along the supply chain to move to higher efficiency simultaneously. Such supply side shocks may thus lead to higher synchronisation of business cycles among the economies that form the production network. He and Zhang (2010) argue, for example, that the role of export in promoting economic growth in China should best be appreciated from its effect on the supply side, rather than on the demand side.
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Asian Business Cycle Synchronisation
