Free trade agreements (FTAs) have gained increasing global popularity. Although East Asia has lagged behind other regions in concluding FTAs, the 1990s saw a marked change in considering formal regional cooperation treaties in East Asia.1 One of the leading factors that led to the emergence of such heightened interest is the rapid growth of intraregional trade. In turn, an important new development that has contributed to the expansion of intra-East Asian trade is the international exchange of intermediate goods, which includes parts and components rather than final goods. This phenomenon results from the emergence of a new form of global production – international fragmentation of production where the production process of a final product is split into two or more steps and each production step is undertaken in different locations across national boundaries. Many alternative names have been coined for such a phenomenon, including “slicing the value chain” (Krugman, 1995), “vertical specialization” (Hummels, Ishii and Yi, 2001), “international production sharing” (Ng and Yeats, 2001) and “outsourcing” (Hanson and others, 2001).

(MARKHUB publication)