Vertical Specialization, Intra-product Trade And Development Of China's Economy

With the development of the economic globalization and the revolution of the science & technology, the mode of economic relationship between countries has been greatly transformed in the late several decades. Comparing with the traditional international trade , contemporary international trade has the very different form and characteristic. One of the striking phenomenon is the emergence of the global production network, the splitting of a production process which would localize in one country before into two or more steps that can be undertaken in different locations but that lead to the same final product ,so the international specialization has evolved from inter-industries specialization and intra-industry specialization to intra-product specialization, this form of international specialization is vertical specialization, and the international trade arising from the vertical specialization is the intra-product trade.Why the vertical specialization has developed rapidly in the late several decades? the author suggests: First, the technology progress lessened the cost of transportation and communication and data process. Second, the trade liberalization reform reduced the tariff barrier and the non-trariff barrier. Third, the developing countries'policy of attracting FDI and promoting processing export accelerated the global vertical specialization. Finally, the more complicate and competitive market situation spurred the firms to join into the vertical specialization.The economic rationality of the production fragmentation of the multinational enterprises (MNEs) can be explained by the Heckscher-Ohlin Model of the orthodox international trade theory together with the scale economy model of the neo-trade theory. As the different production process varied in the input of production factors, the vertical specialization can benefit from the comparative advantage; As the different production process varied in the effective output scale, the vertical specialization can gain benefit from the effect of scale economy. The comparative advantage can decide the location of production process., but the effect of scale economy can not . In the hypothesis that labor can float without cost, when importing-competing industries of the developed countries fragment production of labor-intensive components, wages rise and industry employment and output expand. National welfare increases. For a large country, the term of trade improve, raising national welfare still further. This theoretical analysis was verified by the research of effect of vertical specialization on USA. The developing countries would benefit from the vertical specialization through the improvement of resources allocation and technology spillover.For MNEs, whether or not fragmenting the production process across the countries is the trade-off between the gain and the cost from the vertical specialization. The main factors that influenced firm's choice of the vertical production organization is wage difference, trade cost and transaction cost. The cost of vertical specialization is composed of trade cost and transaction cost.Chinese going through from closing to opening-up is the course of the widely and deeply participating in the global vertical specialization, the commodities structure and technologic level have greatly changed over past 20 years. Foreign invested enterprises (FIEs) play main role in the Chinese intra-product trade; The degree of Chinese vertical specialization is higher than that of the developed countries, but lower than that of the newly industrialized countries; China ranks first in the share of the global intra-product trade comparing with other developing countries, In the global product process production network, China mainly participating in the low value added production.Intra-product trades have made remarkable contribution to China's economic growth. A great number of China's surplus labors have been enrolled by the intra-product trade sector. The rare resources such as capital and technology have been brought into China accompanying FDI in Chinese intra-product trade sector. The empirical analysis shows that export of the non-intra-product trades sector made more contribution to Chinese economic growth than that of intra-product trades sector.The empirical analysis shows that at present the western China region can gain relatively more benefit over the central China region and the eastern China region from intra-product trade in the field of economic growth. The correlation is not significant between the economic growth and the intra-product trade in the eastern China region.Intra-product trade will exert certain influence on the location selection of enterprises(especially FIEs)through cost function, this have lead to the result that the main part of intra-product trade firms have clustered in coastal areas in eastern China since the reforms and opening-up. This agglomeration reflects the economic development gap between the east and the central-west.In the condition of open market economy, the influence of intra-product trade on development of Chinese industries is positive. As China which specializing in the labor-intensive production process participates in MNEs'global production network with the comparative advantage of the abundant labors, and the main part of intra-product trade firms are FIEs, the positive influence is limited.Intra-product trade can improve Chinese industrial competitiveness, but can not change Chinese inferior position of the technology-intensive and the capital-intensive industries into the reverse; Intra-product trade can promote Chinese industrial structure, but the technology-intensive and capital-intensive industries which specialize in labor-intensive production process in China are mainly controlled by MNEs, so the upgrade of Chinese industrial structure by intra-product trade is fragile.Author proved that intra-product helped to raise industrial agglomeration level by means of calculating the correlation between VS and index of industry concentration. There are obvious agglomerations advantages in the industries in which intra-product trade is active. Intra-product trade can stimulate industrial cluster.Intra-product trade is an important force of the technology progress in China. Chinese technology progress can be promoted by intra-product trade through the knowledge spillover effect and the personnel capital development effect in the course of participating in the global production process network.