The World Economy (2008) doi: 10.1111/j.1467-9701.2008.01105.x © 2008 The Authors Journal compilation © 2008 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA 841 Blackwell Publishing Ltd Oxford, UK TWEC World Economy 0378-5920 1467-9701 © 2008 The Author Journal compilation © Blackwell Publishers Ltd. 2008 XXX Original Articles ARE EXPORTS OF CHINA, JAPAN AND KOREA DIVERTED? HYUN-HOON LEE, CHUNG MO KOO AND EUIJEONG PARK Are Exports of China, Japan and Korea Diverted in the Major Regional Trading Blocs? Hyun-Hoon Lee, Chung Mo Koo and Euijeong Park Kangwon National University, Korea Abstract In recent years China, Japan and Korea, the three major economies in East Asia, have been gearing up their efforts to sign free trade agreements with many different regions and countries. One of the main reasons for this is that they fear that with a regionalism movement rising in every corner of the world, their exports are discriminated against and diverted in the trading blocs of other nations. The main purpose of this paper is to investigate whether this is a real fear. We utilize the gravity equation augmented with dummy variables for regional trading blocs in three different models. One is the static, standard gravity model to examine the effect of regional blocks on the ‘level’ of exports from these three countries in 2003; the second is the fixed effects and random effects panel model for the period 1993–2003; and the third is the dynamic, partial-adjustment model to examine the effect of blocks on the ‘changes’ in exports between 1993 and 2003. The results show that trade diversion is observed only for China’s exports in EU, EFTA, and EAEC, but no diversion effect is observed for Japan’s and Korea’s exports in any of the major trading blocs. On the other hand, trade creation is observed for exports from China in ASEAN, for exports from Japan in ASEAN, CACM, CARICOM, EAEC, EU and NAFTA, and for exports from Korea in ASEAN, CACM, EAEC and MERCOSUR. Thus, Japan’s and Korea’s fear of discrimination and trade diversion is ungrounded, while China’s fear is grounded only to a limited extent. 1. INTRODUCTION U NTIL the late 1990s China, Japan and South Korea (hereafter Korea), the three major economies in East Asia, stood out as the only major economies without regional trade arrangements (RTAs) in the world. In very recent years, however, the three countries have signed bilateral/plurilateral trade arrangements with many countries or groups of countries. China triggered the recent East Asian domino effect when Chinese leader Zhu Ronji suggested a free trade agreement (FTA) between China and the Association of South East Asian Nations (ASEAN) at the China–ASEAN Summit in November 2000 (Baldwin, 2006a). This surprising suggestion led to the ASEAN–China FTA in November 2004. China also concluded an FTA with Chile in November 2005 and another with Pakistan in November 2006. It is now negotiating FTAs with countries such as New Zealand, Australia, India, Singapore, South Africa and the countries of the Gulf Cooperation Council (GCC). Japan signed an FTA in January 2002 with Singapore and another in September 2004 with Mexico. It also concluded an FTA with countries including Malaysia (December 2005), the Philippines (September 2006), Chile (March 2007), Thailand (April 2007), Brunei (June 2007) and Indonesia (August 2007), and is currently Earlier versions of this paper were presented at the 5th Asia-Pacific Economic Forum (APEF), Kangwon National University, Chuncheon, Korea, July 2006, the Asia-Pacific Economic Association (APEA) 2006 Conference, University of Washington, Seattle, USA, July 2006, and the Asian Economic Panel (AEP) Annual Meeting, Brookings Institute, Washington DC, USA, April 2007. We thank Alan Deardorff, Fukunari Kimura, Charles Harvie, Tran Van Hoa, Robert Scollay, Wing Thye Woo, Kaliappa Kalirajan, Prema-Chandra Athukorala, and the conference participants for their valuable comments and suggestions. The comments and helpful criticism from the referees of this journal are also gratefully acknowledged. All errors are our own.