Trade Integration and Business Cycle Synchronization in East Asia

As trade integration deepens in East Asia, closer links among the business cycles of East Asian countries can be expected. Theoretically, however, increased trade could lead to either closer or looser business cycles across trading partners. This paper seeks to understand how the business cycles of 12 Asian economies have been influenced by increased trade among them. It finds that the increasing trade itself is not necessarily associated with an increased synchronization of their business cycles. Intra-industry trade, rather than inter-industry trade or the volume of trade itself, is the major channel through which their business cycles become synchronized. This result has important implications for the prospects for a unified currency in the region.