Analysis of Intra Industry Trade Determinants and Impact to Total Trade

Abstract

The objective of this paper is to analyze the determinants of intra industry trade and its impact to total trade of China. Over the last decade, China's foreign trade has won the best and fastest growth period in history, that people wonder what made China foreign trade so fast? The GDP, production factor endowment, production scales and or China's RMB exchange rate which is judged as an artificially undervalued currency? Since the intra industry trade increasingly took important portion in the international trade and became a measure of industrialization level. This paper applied the conception of Paul Krugman (1980) of new trade theory explaining that the main benefits of Intra industry trade come from production and exports of differentiated goods between Countries and the increasing returns in economies of scales (caused by production scales)under the imperfect competition in real economies. On one side, the analysis of Gluble Lloyd Index Global ratio between China and sample Countries explained that : the Global IIT as well as the IIT in Manufactured goods has sustainably increased over the last 15 years, while GL ratios in primary products has declined. On another side, the IIT trade balance explained that China's trade pattern has been changed, that, in some section such as SITC 2 Crude materials, inedible, except fuels and SITC4 .Animal and vegetable oils, fats and waxes, the imports values have significantly covered the exports which explained the demand of materials and the growth in manufacture industries in China. Determinants of IIT analyzed includes :GL index, Foreign direct investment, Real gross domestic product and trade partners, Real GDP per capita, Market size inequality, Development inequality, Distance and Foreign exchange rate volatility. The paper applied the non-linear logistic Balassa (1986) probability function to estimate the impact of determinants on intra industry trade. For the links between Intra industry trade and total trade, Granger Causality is engaged to predict the causal relationship between them.