Prospects for Closer Economic Cooperation in Northeast Asia

In contrast to developments in other world regions, efforts to institutionalize regional economic cooperation in East Asia have been weak. Though Southeast Asian economies have taken action toward trade liberalization (ASEAN Free Trade Area), the major economies of the region such as China, Japan, and Korea have not been part of any formal trade groupings until recently. However, given the slow pace of progress within AFTA and the importance of the Northeast Asian countries in terms of weight in the Asian economy, a de facto Northeast Asian economic cooperation is a necessary condition for East Asian integration. This paper investigates the substance of recent economic cooperation in Northeast Asia. The trilateral economic cooperation is analyzed through examination of trade and direct investment links for 1990–2004, and estimation of selected determinants of direct investment, in particular the relationship between trade and FDI. Estimation results suggest that the main driving forces for direct investment outflows from the source country have been the falling‐off of exchange rate risk, the level of the nominal bilateral exchange rates, growth rate of the recipient country, and the per capita GDP gap between source and host countries. Bilateral trade has been shown to be statistically insignificant.