Comparative advantage in Japan, Korea, and Taiwan between 1980 and 1999: Testing for convergence and implications for closer economic relations

This paper seeks to explore the basis for a free trade agreement (FTA) between Japan and the Republic of Korea by comparing export patterns of these two countries with that of a nonmember-Taiwan-that is geographically close and is also a major exporter of machinery. After calculating indices of revealed comparative advantage (RCA) for 3-digit SITC categories, we test for convergence of export patterns between each pairing of partners (Japan-Korea, Korea-Taiwan, and Japan-Taiwan). We find that even though each partner has a statistically significant correlation of RCA indices, export patterns of Korea and Taiwan are converging with that of Japan, while in the case of Taiwan and Korea there is no significant convergence between their export patterns. Finally, we identify sectors where trade diversion is likely to occur and provide an upper-bound estimate of the potential amount of trade that might be diverted from Taiwan by a Japan-Korea FTA.