Cross-Border Price Differentials and Goods Market Integration in East Asia

As cross-border movements of goods, capital, and labor are intensifying, it is likely that goods markets in East Asia will become increasingly integrated. This study investigates the current state of goods market integration in East Asia by measuring the extent of cross-border price differentials. Specifically, this study shows that compared with the European Union (EU), East Asian markets are neither sufficiently integrated nor are they showing any price convergence over time. Examining the factors and hurdles that prevent East Asian countries from approaching the European level of market integration, this study also shows that such wide price differentials could be explained largely by greater exchange rate volatilities and wider intra-regional income gaps, together with insufficient regionalization efforts. This result highlights the importance of a three-pronged integration strategy covering trade, money, and development policies, and of East Asia-wide regional institutions which, incorporating both developed and developing Asian countries, help promote more free trade agreements (FTAs) and prevent financial crises.