Cross-Border Price Differentials and Goods Market Integration in East Asia

As cross-border movements of goods, capital, and labor are intensifying, it is likely that goods
markets in East Asia will become increasingly integrated. This study investigates the current
state of goods market integration in East Asia by measuring the extent of cross-border price
differentials. Specifically, this study shows that compared with the European Union (EU), East
Asian markets are neither sufficiently integrated nor are they showing any price convergence
over time. Examining the factors and hurdles that prevent East Asian countries from
approaching the European level of market integration, this study also shows that such wide
price differentials could be explained largely by greater exchange rate volatilities and wider
intra-regional income gaps, together with insufficient regionalization efforts. This result highlights
the importance of a three-pronged integration strategy covering trade, money, and development
policies, and of East Asia-wide regional institutions which, incorporating both developed and
developing Asian countries, help promote more free trade agreements (FTAs) and prevent
financial crises.