Flow-on effects of vertical specialization trade on international business cycles: an evidence from China and nine Asian countries (regions)

GU Guoda1 REN Yizhuo1 GUO Aimei2

(1.School of Economics, Zhejiang University 310027)
(2.College of Economics, Hangzhou Dianzi University 310018)

【Abstract】The authors develop a theoretical global economic model (IMT-GEM) in this paper, introducing flow-on effects of vertical and horizontal intra-mediate trade on international business cycles and testing them by the panel data of China and nine Asian countries (regions) during 1991 to 2014. The results show that trade based on vertical specialization has significant and steadily positive effects on international business cycle co-movement; and with rising vertical specialization, international business cycle co-movement also becomes stronger. The research enriches the theory on resolving the “trade-co-movement puzzle.” The empirical research also finds that in terms of flow-on effects on East Asian business cycle co-movement, except vertical specialization, the effect of inter-industrial trade is higher than that of intra-industrial trade; the effects of some non-trade variables such as foreign direct investment, industrial structural difference and degree of policy coordination shall not be ignored, too. The research conclusions provide certain implications for reasonably making use of vertical specialization as a “double-edged sword” and ensuring sustainable and steady growth of the Chinese economy.

【Keywords】 vertical specialization; international business cycle co-movement; transmission mechanism; IMT-GEM;

【DOI】

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    Footnote

    [1]. Editor’s note of China Academic Journal (CD) Publishing House: “countries,” if involving Hong Kong and Taiwan, shall refer to “countries (regions).” [^Back]

    [2]. ① The division of labor based on vertical specialization in the 1990s underwent quite a sporadic evolution with such similar names as vertical specialization, intra-product division of labor, intra-product trade, inter-product trade and production fragmentation. Such expressions, though different, have essentially consistent connotations; in essence, they all mean that the production of any special product is divided into different stages which are carried out in several countries (or regions) and interconnected by cross-border vertical trade. Meanwhile, such similar concepts all cover international division of labor and trade patterns. Therefore, the authors adopt the name, vertical specialization, frequently and also terms from the cited literature from time to time without deliberately distinguishing them. [^Back]

    [3]. ① Most empirical research assumes that in the case of increasing geographical distance between trade partners, inter-industrial trade may significantly drop. According to such a hypothesis, the proportion of intra-industrial trade should be high between East Asian countries (or regions) geographically close to each other. However, according to the calculation of Shin and Wang (2003), intra-industrial trade of East Asia is far lower than that of Europe. [^Back]

    [4]. ① Most empirical research assumes that in the case of increasing geographical distance between trade partners, inter-industrial trade may significantly drop. According to such a hypothesis, the proportion of intra-industrial trade should be high between East Asian countries (or regions) geographically close to each other. However, according to the calculation of Shin and Wang (2003), intra-industrial trade of East Asia is far lower than that of Europe. [^Back]

    [5]. ③ Another comprehensive advantage is based on the difference of factor endowments (namely capital/labor ratio). However, according to the empirical analysis of James (1997) on industrial countries, the comparative advantage based on technological efficiency is still the key influence on cross-border specialization-based division of labor. [^Back]

    [6]. ① Subject to space, the calculation processes of control variables are not included, but they can be sent upon request. [^Back]

    [7]. ① Markusen and Maskus (1999) defined horizontal foreign direct investment as repeating largely same activities at many places. [^Back]

    [8]. ② The “flying geese paradigm” was suggested by the Japanese economist, Kaname Akamatsu, in 1932. “Flying geese division of labor paradigm” essentially means the process or trend of echelon passing of a similar (or same) industry in the East Asian countries (regions) based on different development stages and vertical specialization, and is a continuous transfer process of comparative advantage over time among the East Asian countries (regions). [^Back]

    [9]. ① The “smile curve” was suggested by Stan Shih, the Chairman of Acer Inc. in China’s Taiwan in 1992 to “regenerate Acer”: “high developing and marketing” with high value added are on both sides of the “smile curve,” and the middle part represents the assembly and manufacturing with low value added. [^Back]

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This Article

ISSN:1002-8102

CN: 11-1166/F

Vol 37, No. 07, Pages 121-132

July 2016

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Abstract

  • 1 Introduction
  • 2 Theoretical models
  • 3 Empirical test
  • 4 Conclusion
  • Footnote

    References