Forces Underlying Trade Integration in the APEC Region: A Gravity Model Analysis of Trade, FDI, and Complementarity

Accompanying the wave of liberalization in motion since the mid 1980s, trade complementarity and its underlying structure of comparative advantage have started to dictate the directions of international trade flows. The vibrant FDIexport- led Asian growth has revealed the role of FDI as a financial gravity for trade integration in the APEC region. Analyses of forces underlying trade integration using trade gravity models with dummies for regional trading arrangements, augmented by the additions of trade complementarity and FDI flows as gravity variables of emerging significance, suggest that 1) APEC is more potent in the creation of intra-regional trade compared to other regional trading arrangements (RTAs); 2) intra-regional trade generation is much more significant in North-North and North-South RTAs as compared to that for the South-South RTAs; 3) trade complementarity is a significant determinant of the directions of trade, and its significance has grown since the mid 1980s with reductions in trade distortions; and 4) inward FDI is a significant determinant of the direction of intra-APEC trade transactions.