Trade Integration and Business Cycle Synchronization

• Author: Kevin Cheng - Romain Duval - Dulani Seneviratne
• Pages: 5-8

5

September 2014

Trade Integration and Business

Cycle Synchronization:

A Reappraisal with Focus on Asia

Kevin Cheng, Romain Duval, and Dulani Seneviratne

Over the past two decad es, trade integration has increased

rapidly within the world economy and tight supply chain

networks have been formed , particularly within Asia. Have

these developments st rengthened the propagation of shock s,

and more broadly the synchronization of bu siness cycles

between economies? Base d on a unique dataset, we provi de a

new answer to this old que stion: increased trade integration

in value-added ter ms does increase the synchronization of

growth cycles between e conomies, while gross trade linkages

do not seem to matter. This ef fect appears to be stronger in

crisis times . A related finding is that g rowing dependence of

economies, espec ially within Asia, on Chines e final demand

in value-added ter ms is amplifying the international spill-

overs of growth shocks in Chin a.

e relationship between trade i ntegration and busi-

ness cycle synchroniz ation is theoretically ambiguous and

is therefore mainly an empir ical question. Earlier research

(notablyFrankelandRose,1997,1998)foundapositive

impact, but more recent studies have questioned the va lidity

of earlier results, which h ad not accounted for xed country-

pair factors and common globa l shocks, and thereby may

not necessarily have identie d a causal relationship. Con-

trolling for these omit ted factors, recent papers (such as

Kalemli-Ozc an and others 2013 and Abiad and others 2013)

nd the relationship between g ross trade integration and

business cycle synchroni zation to be insignicant.

In our work (Duval and others 2014), we reassess this

relationship by computing trade intensity i n value-added

rather than gros s terms, building on the recent joint OECD-

WTOinitiativeontrad einvalueadded.Ourlog icisthat

gross trade data mi srepresent trade linkages across countries

amid increasingly i mportant supply-chain networks across

the globe. Value-added trade nets out bilatera l trade in

intermediate goods—un like gross trade data, which count

products multiple times when they c ross borders repeatedly

for processing purposes—a nd thus captures more accurately

the value added embodied i n bilateral trade. Furthermore,

value-added trade includes i ndirect trade linkages v ia third

countries—such as va lue added exported indirectly by

country A to countr y B via intermediate inputs exported by

A to C that are then used to produce a good ex ported by C

to B. Using value-added trade data i nstead proves crucial

to identifying a robus t impact of trade on business cycle

synchron ization.

Stylized Facts About Business Cycle

Synchronization and Trade Integration

Consistent with fi ndings from other simi lar studies, we

find that business c ycle synchronization sharply increases

in crisis times . The largest spikes occurred around the

global fina ncial crisis outside Asia, and around the Asian

crisisofthe late1990swit hinAsia. However,evenduring

normal times, busi ness cycle synchronization—while much

smaller—also shows a n upward trend around the globe

since the 1990s, especi ally in Asia (Figure 1, left).

Turning to trade integration, the most f requently featured

trade variable in t he literature is bilateral trade intensity, for

which we follow the standard de nition (the ratio of the sum

of exports between a cou ntry-pair to the sum of their GDPs),

except that we dene it in a value-adde d sense. Measured

this way, trade openness appears to have inc reased until the

mid-2000s, and more so with in Asia than elsewhere (Figure

1, ri ght).

Vertical trade has als o increased more in Asia than

elsewhere, with Chi na playing a pivotal role. e share of

foreign value-added embedded in tota l exports has gener-

ally increased i n Asian economies, particula rly in East Asia

reecting the “Chi na supply-chain” network. By contras t,

value-addedto/fromJapanhasgeneral lydeclined.Fur-

thermore, the nature of integr ation with partners diers

between China and Japa n, with China specializ ing compara-

tively more in downstream act ivities (such as assembling,

even though China is now increa singly moving up the value

chain) and Japan special izing in upstream activit ies (provid-

ing various intermed iate goods as inputs). Finally, although

the United States and the Europea n Union remain by far

the largest na l consumers of Asia’s supply chain products,

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