This study describes the changing patterns of intermediate goods trade and foreign direct investment;(FDI) in East Asia and investigates the impacts of international outsourcing on the Japanese and the;Korean labour markets. The main findings of the paper are as follows. First, intra-regional trade in East;Asia grew remarkably during the period 1990-2003. While overall trade with the rest of the world roughly;doubled in this period, intra-regional trade in East Asia more than tripled. Second, the main factor behind;increased intra-regional trade in East Asia was the trade in intermediate goods through outsourcing and the;international fragmentation of production. Third, reflecting the fact that outsourcing to Asia (particularly to;China) has a negative impact on the demand for workers with lower education and a positive impact on the;demand for workers with higher education, relative wage shares of workers by educational attainment have;changed substantially both in Japan and Korea. Fourth, our empirical analysis provides evidence of labour;demand shift towards skilled labour in Japanese manufacturing as a result of outsourcing. For Korea;although the overall effects of outsourcing have been insignificant in Korea partly because a substantial;part of Korean outsourcing remained directed towards Japan, our results imply that labour demand would;shift away from less-skilled workers towards more-skilled workers if outsourcing to China increased and;outsourcing to Japan decreased in the future.