China's Intra-product Trade: The Status Quo And Its Effects

With rapid developments in transportation and communications technology, Intra-product specialization develops gradually since 1970's. Intra-product specialization describes the production process in the sense that a final manufactured good consists of parts manufactured in a variety of different countries, with each country specializing in particular stages. Intra-product trade is the intermediate goods trade caused thereby. Compared to traditional goods trade, Intra-product trade implies a finer international division of labor, is more favorable for each country to take advantage of its comparative advantage, and has important implications.This paper examines several relevant concepts, including intermediate goods trade, vertical specialization, outsourcing, and makes a brief comparison between intra-product trade, intra-firm trade and intra-industry trade. After that, this paper investigates tentatively the status quo of China in this international fragmentation of production process. Processing Trade plays a dominant part in China's involvement of intra-product specialization. From the evidence of trade statistics, China reveals comparative advantage mostly in the stage of assembling and processing, and has a geographical asymmetry in its trade direction. This paper analyses the effects of China's involvement in intra-product specialization in the framework of H-O model. Attention is paid most to its import sector, which from the traditional viewpoint, concerning capital-intensive or technology-intensive industries. The main conclusions include that involvement in intra-product trade in import sector will increase output in these sectors and the national welfare rises, etc. With the aid of specific factor model, this paper illustrates the combined short-term effect of processing trade and FDI attracting policy towards output and factors.Although China's involvement in intra-product trade has played an important positive effect on China's upgrade of industry structure and its export commodity composition, this result should be taken cautiously. The combination of processing trade and FDI attracting policy may result in problems also, such as weaker relative demand for skilled labor in the long run, heavy reliance on foreign firms, and weaken domestic technology capacity in the end. As a result, the adoption of trade policy should reckon with china's position in intra-product specialization and the trend hereof.