Intra-Industry Trade Between China And European Union: 1999-2006

Intra-industry Trade (IIT) refers to that a country imports and exports product of the same industry at the same time. It is also called two-way trade compared to the Inter-Industry Trade that countries only export or import certain kind of products. It was first discovered by Verdoorn (1960) based on the observation of trade flow among Benelux countries. As the classical trade theory could not explain this phenomenon, economists began to explore new explanations for IIT since that time. Both the explanations and measurements of IIT developed a lot as more economists concentrated on the relative research. Lots of empirical analysis on IIT also has been done among different countries and regions. However, there is little literature on China's IIT, especially with the EU. Considering EU has become China's biggest trade partner and China is EU's second biggest in 2006, the IIT between these two large economies is worthy to be studied.The central research question of the thesis is: What is the extent of Intra-industry Trade between China and EU in the year 1999 to 2006 and what are the determinants of Sino-EU IIT? In order to answer this question, the paper first reviewed the previous methods on the measurement of IIT and the models on determinants of IIT. The proper method was applied on the Sino-EU trade data, illustrating the extent of IIT both in the cross-country and cross-industry scope. Possible determinants was examined and illustrated on the Sino-EU trade. Regression models were constructed to tackle the cross-country determinants by quantitative analysis while case studies on specific industry giving implications on the cross-country determinants.Through the empirical analysis, the major findings are as follow: The extents of Sino-EU IIT are varying both across different industries and among different member states. In the industry-specific scope, chemical products is mainly two-way trade with significant degree of horizontal IIT while textiles is the only sector that totally occupied by one-way trade from China to EU. Both machinery and electrical equipments are dominated by vertical IIT. As to the cross-country results, Germany, Austria, Italy, Sweden, Finland are the top 5 countries that have high extents (G-L indexes more than 0.55) of IIT with China. Most Central and Eastern European Countries have very moderate IIT (G-L indexes less than 0.2) with China compared to the old member states. Factor endowments, FDI, trade barriers, macroeconomic performance, distance and exchange rates are influential factors determining the extents of Sino-EU IIT. Among them, the average GDP per capital is the most positive influential factor while the difference on GDP per capital is the most negative one. FDI is also proved to have positive effects on Sino-EU IIT by regression model. In specific industries, government policy and R&D investment have direct influence on the two-way trade. Based on the above conclusions, possible policy recommendations are: Firstly, as the average GDP per capital of two countries is highly positive with the extents of IIT between the two countries, improving the GDP per capital of both EU and China will lead to more Intra-industry trade among the two economies. Specifically speaking, on one hand, EU should put more emphasis on the development of the new member states of Central and Eastern European Countries. On the other hand, as to China, in order to improve the GDP per capital of the whole country, it should put more emphasis on the rural areas and the income of farmers. Secondly, trade barriers are the direct influential factors on the extent of IIT. To eliminate technical barriers, the two economies should cooperate on the product regulations and standards under the WTO Technical to Barrier Trade Agreement. The protection of health, safety, national security and environment should be separated from the incentives of trade protectionism. A freer trade environment will benefit both sides in the long run. Thirdly, FDI should be categorized according to their nature and treated differently. For example, if the investment is going to put into the high-tech industry with advanced technology from abroad, it should be encouraged and supported by preferential terms. If the investment is pouring to the medium-tech industry with many similar firms existed in market, it should be given same treatment as the domestic firms. Moreover, it is also the time to encourage the competitive domestic firms to invest abroad by giving them special terms. Through the proper adjustment on FDI policies, it is possible to encourage two-way trade flow. Fourthly, as technology innovation is very crucial to the sustainable development in nowadays economy, it also shows influence on IIT. Government should put more money on technology innovation, expecting more returns in the long run. The protection of intellectual property rights should also be strengthened both from the update legislation and the effective enforcement of the existing laws on IPRs.