FACTORS PROPORTION IN TRADE PATTERN AND INTERNATIONAL CAPITAL FLOWS INTERACTION IN ASEAN+4 COUNTRIES

Abstract

The classic thesis by Mundell, based on a modification of the Heckscher-Ohlin model, states that a substitution relationship exists between trade and international capital flows. Mundell showed that the equilibrium price of a commodity can be achieved through international factor mobility in the absence of trade in goods, or vice versa, if barriers to factor price equalization are eliminated. Therefore, factor price equalization can be achieved without requiring the exchange of goods between countries. Consequently, international trade and capital flows are often studied separately. However, empirical evidence reveals contradictory phenomena in which the two are interrelated and complementary, although the nature of their interaction is still not well understood. Recent theoretical developments suggest that these interactions can be examined through several channels, one of which is changes in comparative advantage. This paper analyzes the interaction between trade and international capital flows in ASEAN+4 countries (ASEAN plus India, China, Japan, and Korea). These countries are major participants in international trade and represent one of the largest trading blocs in the world. The interaction between trade and capital flows is examined through changes in trade structure, as reflected in the intensity of factor use across industries in each country. The results are consistent with the theory that capital flows to countries with capital-intensive industrial structures, which in turn leads to an increase in the deficit of the country’s current account balance.

Data:
Received: 15 Sep 2020
Revised: 4 Nov 2020
Accepted: 6 Dec 2020
Published: 20 Dec 2020