Working Paper
Component Trade and China’s Global Economic Integration

China’s engagement in the so-called international fragmentation of production – namely ‘cross-border dispersion of component production/assembly within vertically integrated manufacturing industries’ – has become an increasingly important form of its economic integration into the regional as well as the global economy. The paper presents the recent trend of trade in parts and components between China and its main trading partners. Applying an adjusted gravity modelling method, the paper explores how China’s pattern of trade in parts and components is being determined. The paper found that China’s rapid economic growth, increasing market size and economies of scale, foreign direct investment and infrastructure development including transportation and telecommunications are important factors in explaining China’s rapid increase of bilateral trade in parts and components with its trading partners. The paper also found that the spatial distance and transportation costs have significant negative impacts on China’s trade of parts and components suggesting that the reduction in transportation costs by technological innovation and investment could enhance trade in parts and components, and thereby deepen the process of international specialization involving China and its main trading partners. The paper argues that given the prospects of the rapid growth of the Chinese economy, its current and planned massive investments in R&D and in infrastructure, its continual policies in attracting FDI and its rapid move towards liberalizing its services sectors including its financial sectors, the scope for China and its trading partners to benefit from the process of international fragmentation of production is tremendous.