5 - Vertical specialization and accelerating poverty reduction: Comparing impacts of conventional trade and processing trade patterns on income in China

Abstract

The emergence of vertical specialization and the expansion of activities of foreign invested enterprises have increased the value of imports and exports by processing trade in China. Available evidence suggests that vertically specialized trade represents a significant share of foreign trade in China. Trade statistics point out that vertical specialization occurs predominantly in China and that imports and exports by processing trade explain the patterns of vertical specialization. The chapter contributes new empirical evidence regarding the relationship between vertically specialized trade for accelerating poverty reduction in China. This is accomplished using an econometric approach that combines trade and income data, which allows more detailed tracking of the relationship between imports and exports by processing trade and income indicators. The results show that various forms of vertical specialization strongly support accelerating poverty reduction in China. Imports and exports by processing trade are associated with higher income levels and lower rural poverty and economic disparity in China, pointing to the particular importance for China to be able to integrate into vertical specialization.