Patterns and Determinants of China's Bilateral Intra-Industry Trade with Japan and Korea.

Abstract

This study investigates the patterns and determinants of Chinab s intra-industry trade (IIT) with her major two trading partners in Northeast Asia, namely, Korea and Japan. Using numerical measures, we examine the evolution of trading characteristics of these three countries and find that, due to high growth rate and rapid integration into the world market, trade patterns of these countries are experiencing a great change. Although inter-industry trade still accounts for the majority, its importance relative to intra-industry trade is declining significantly. In addition, based on cross-industry panel data from 1992 to 2003, we develop econometric models to test the specific determinants of IIT between China and Japan and between China and Korea. The empirical results show that product differentiation, research intensity and inward foreign direct investment played an important role in driving Chinese bilateral intra-industry trade with Japan and Korea, while economies of scale, trade imbalance and income inequality are negatively correlated with Chinab s IIT. Findings generally conform to what we expected under the economic theory.