Intermediate Goods Trade Analysis

The last three decades has witnessed the emergence of intra-product specialization as an important form of labor division, and the drastic growth of trade in intermediate goods. Via intra-product specialization and intermediate goods trade, developed countries and developing countries specializing in the specific process and parts and components in the chain of production and trade, affect their industries structure, employment structure and income distribution. Issues related to intermediate goods trade thus become one of the hot topics of contemporary trade theory.In recent years, China, as the largest developing country, has participated in the new international division in form of the processing trade, and has become the center of world processing and trade. However, most of existing works were based on the conditions of developed countries, and had little relationship with developing countries, especially China. Thus, it is of practical significance to analyze the present conditions and effects of intermediate goods trade in China, and of help to know about China's status in the international division system, to treat the growing trade surplus between China and the West objectively, and to take the policy of processing trade as an effective strategy of industrialization.This study focused on intra-product specialization and intermediate good trade, consisting of four parts. Introduction, chapter1 and chapter 2 compose of the first part, mainly on related concepts, research methodologies and theoretical basis of intra-product specialization and intermediate goods trade. The second part is chapter 3, descriptions of present conditions and causes of intermediate goods trade. The third part consists of chapter 4 and chapter 5, empirical study on its economic effects and technological spillover effect in China. Chapter 6 is the fourth part, mainly on policy suggestions.After reviewing the related literature, the part of introduction points out that economists abroad had done much work on the measurement, causes, theoretical basis, economic effects and technology spillover effects of intra-product specialization and intermediate goods trade. Meanwhile, domestic economists just show their initial interest on the subject. However, they have got increasing achievements in recent two years. Finally, it puts forward the questions to be studied and study framework.Chapter 1, to some extent, is the foundation of this study. After reviewing the definition of intra-product, the range of intermediate goods trade, the comparisons of related concepts, and the methods frequently used to calculate intermediate goods trade, this part nails down the method to be used in this study.Based on the theories of previous works, Chapter 2 shows that traditional theories of comparative advantage and theory of scale economies is rational in explaining the phenomena of intra-product specialization and intermediate goods trade, while the range of production factors should be expanded, namely, the productive factors not only embody labor, farmland and capital, also technology, invisible capital and rule and so on. In addition, the chapter provides the channels of improving comparative advantages for developing countries.In chapter 3, using China Customs'statistical data, and from the perspectives of trade volume, major trade partners'location, technology content and comparative advantage indicator, this chapter describes China's present conditions of intermediate goods trade systemically. Results are as following: the first, the import of China's intermediate goods relies heavily on other countries; the second, the major trade partners of China's intermediate good is located in East Asia; the third, the share of intermediate good trade in high-technology is high; the forth, China's intermediate goods trade is of comparative disadvantage. In addition, the chapter points out that its immediate causes include emergency of East Asian production network, China's favorable processing trade policy and transnational corporations'economic activities in China.As processing trade is the major form of China's participating in the intra-product international division, Chapter 4 analyses the economic effects of intermediate goods trade from the processing trade viewpoint. Results are that China's processing trade has played a positive role in improving China's economic growth, employment, foreign trade, international balance of payments and trade commodities structure. In addition, it thinks that factor terms of trade is a more appropriate tool to reflect China's trade dynamic capability, under the intra-product international division and the intermediate goods trade, China's terms of trade is improving, rather than deteriorating as reflected in the terms of trade prices. At the same time, because China is at disadvantage in distribution of benefits for China's bottom status in chains of production and trade, the gap between China and developed countries will be bigger for the long run. In addition, the intermediate goods trade and the form of processing trade, lead to "triangular trade" model among East Asian countries, China and Europe and the United States, and it is the origin of the sharp increase of trade surplus of Sino-U.S., Sino-EU, thus the power of RMB's appreciation to solve the surplus is limited.Chapter 5, the key part of this dissertation, empirically studies the technology spillover effect of intermediate goods trade in China. Compared with other related works, the highlight of this part is that, it is the first try to take the imported intermediate goods as one of the chief channels of technology spillover.The specific process is as follows:Dependent Variables: Using the program of Data Envelop Analysis (DEA), which is superior to traditional methods, to calculate the total factor productivity (TFP), the index of technology development (TC) and the index of technology efficiency (TE) of 16 industries, and all these three variables (TFP, TC, TE) are dependent variables. According to the results of calculation, during the period of 1999 and 2003, China's improvement on technology development and technology efficiency both had impacts on the growth of TFP, and the effects of technology development is relatively significant.Independent Variables: calculating the ratio of China's import in intermediate good from the exporting country to its GDP as weights, in first process deals with R&D expenditure of selected countries. Then the chapter takes the R&D expenditure of Asian countries and Western countries after adjustment as independent variables respectively. In addition, domestic R&D expenditure of specific industry, and domestic R&D expenditure of other industries are other independent variables.Specification: Based on the panel data and the modified model of Coe D. and Helpman E.(1995), Chapter 5 empirically tests the relationship between the dependent variable and the independent variables.Results:Firstly, both the R&D expenditure of selected East Asian countries and selected Western countries have positive impacts on the improvement of China's TFP and technology development, however, they have negative effect on technology efficiency.Secondly, the magnitude of technology spillover of selected Western countries is less than that of selected East Asian countries.Thirdly, the R&D expenditure of specific industry has positive effect on the industry's TFP, on one hand, it has less impacts than that of the R&D expenditure of foreign countries; on the other hand, it has more significant effects on the improvement of technology efficiency in the industry.Fourthly, domestic R&D expenditure of other industries has negative effect on the industry's TFP.Finally, based on the above research, chapter 6 proposes policy recommendations on the three following issues:First, the theory of intra-product international specialization challenges and inspirits to the trade strategies and policy. Under the intra-product international specialization and intermediate goods trade, the objects stimulated by export policy or protected by import policy maybe other countries'products, thus challenging the current strategies and policy in China. In addition, it also provides new ideas for China to upgrade its industrial structure in term of the theory of intra-product international specialization.Second, China should enhance its status in international labor division. For joining the international labor division with some primary factor like labor, China is in disadvantage status. Thus the emphasis of China is to formulate measures to cultivate factors with later-comer advantage, so as to achieve the purpose of enhance its status. Specific measures includes: establishing of invocation system, implicating of strategic trade policy, enlarging range of"go out"policy, taking processing trade as industrializations strategy, cultivating producer services system.Third, this part discusses whether taking the processing trade as China's industrializations strategy in detail, and issues about the upgrading of processing trade. According to the empirical results and previous study, it reaffirmed the processing trade as a strategy for China. Meanwhile, to achieve structural upgrading via processing trade, it should improve quality of workers of processing trade industries, develop high and new technology industries, increase the share of intermediate good purchased in local markets.