Foreign direct investment and China's bilateral intra-industry trade with Japan and the US

Abstract

This paper analyzes the dynamic changes of China's intra-industry trade with its major trading partners, Japan and the US, from 1980 to 2004. The estimated intra-industry indexes demonstrate that, while shares of China's intra-industry trade with both Japan and US rose substantially, its intra-industry trade with Japan increased to 34% of the overall trade in 2004, considerably larger than 10% with the US. The Sino-Japanese intra-industry trade concentrated in electrical and machinery sectors and accounted for 52 and 46% of the total trade in those sectors, respectively. On the other hand, it is in chemical and food sectors where intra-industry trade represented a relatively large proportion of Sino-US trade. In addition, the paper investigates to what extent that foreign direct investment from those two countries promoted their bilateral intra-industry trade with China. The empirical results show that, Japanese direct investment performed a significant role in enhancing the bilateral intra-industry trade. However, it finds no evidence that the US direct investment contributed to the growth of the Sino-US intra-industry trade.