Vertical Specialization and Trade Growth in Northeast Asia

Abstract

As the global economy has become further integrated, the international production chain has become more sophisticated, with diversified stages of production located in different countries. Economic theorists have argued that the fragmentation of the global production chain is partly attributable to the high growth in international trade over the past several decades. In this study, we examine vertical specialization in China, Japan and Korea, and its contribution to these nations' trade. Using a multilevel model, it is illustrated that vertical specialization has encouraged increases in trade among all three countries. In particular, China's outcome is remarkable considering how recently it became a member of the WTO.

Why has China’s vertical specialization declined?

“…2 The literature (e.g. Ping, 2005;Hwang et al, 2011) documents that prior to 2005, China's VS share rose sharply. Ping (2005) showed that it soared from 14% in 1992 to 22% in 2002, an increase that had previously taken most OECD countries about 20 years to achieve.…”