Intra-Industry Trade in Agricultural Products: The Case of China
ABSTRACT This paper studies the extent and determinants of intra-industry trade (IIT) in agricultural products of China for the period 1997-2006. The IIT index shows that the level of IIT in agricultural products between China and its thirteen main trading partners is not high. Using a panel data analysis, the empirical results of determinants of IIT indicate that differences in per-capita income and geographical distance have a negative effect on Chinese IIT in agricultural products. Free trade agreements between China and some trading partners weaken the negative effect of per-capita income differences on IIT. The results also suggest that cultural similarity between China and some countries has a positive influence on this type of trade.
Carlos Pestana Barros & Nicolas Peypoch
A Comparative Analysis of Productivity Change in Italian and
Wang Jing, Nuno Carlos Leitão & Horácio Faustino
Intra-Industry Trade in Agricultural Products: The Case
Department of Economics
ISSN Nº 0874-4548
School of Economics and Management
TECHNICAL UNIVERSITY OF LISBON
Intra-Industry Trade in Agricultural Products: The Case of China
Wang Jing - School of Economics and Management, Northeast Agricultural University, Harbin, P.R. China
Nuno Carlos Leitão – ESGTS, Polytechnic Institute of Santarém, Santarém, Portugal
Horácio C. Faustino – ISEG-Technical University of Lisbon, Portugal
Abstract: This paper studies the extent and determinants of intra-industry trade (IIT) in agricultural
products of China for the period 1997-2006. The IIT index shows that the level of IIT in agricultural products
between China and its thirteen main trading partners is not high. Using a panel data analysis, the empirical
results of determinants of IIT indicate that differences in per-capita income and geographical distance have a
negative effect on Chinese IIT in agricultural products. Free trade agreements between China and some
trading partners weaken the negative effect of per-capita income differences on IIT. The results also suggest
that cultural similarity between China and some countries has a positive influence on this type of trade.
Key words: agricultural products; intra-industry trade; China
JEL Classification: F14,
Wang Jing (corresponding author)
School of Economics and Management, Northeast Agricultural University, Harbin, P.R. China
150030 Tel: (+86)45153956315; E-mail: firstname.lastname@example.org
Nuno Carlos Leitão
Escola Superior de Gestão e Tecnologia de Santarém, Complexo Andaluz 295 2001-904 Santarém,
Portugal. Tel: (+351) 243303200 ;E-mail: email@example.com.
Home Page: http://leitaocarlosnuno.webnode.com/
Horácio C. Faustino ISEG- Instituto Superior de Economia e Gestão, Rua Miguel Lúpi, 20.
1249-078 Lisboa, Portugal Tel: (+351) 213925902 Email: firstname.lastname@example.org.
Home Page: www.iseg.utl.pt/~faustino
Intra-industry trade (IIT) has attracted much attention from scholars since Verdoon first
discovered this phenomenon in 1960. Traditional trade theories based on comparative
advantage could not explain this type of trade pattern, therefore, a new trade theory was
called for. Few of the empirical studies based on the new international trade theory – as
proposed by Krugman (1979, 1980, 1981) and Lancaster (1980) – have considered the
agricultural sector. In 1991, McCorriston and Sheldon first took the United States and the
European Union as an example to analyse the intra-industry trade (IIT) in processing
agricultural products. They found that in this type of products, the United States is typical
of an inter-industry trading country. In contrast, in the EU, the IIT is predominantly in
The liberalisation of the Chinese economy and its impressive GDP growth rate has
attracted the attention of the academic world. China has become a global powerhouse in
terms of international trade. World Trade Organisation (WTO) statistics show that China is
currently the second-largest trading country in the world. According to the WTO, China’s
trade-to-GDP ratio is 74.3. Therefore, we can conclude that most of its economic growth
has stemmed from the growth of trade.
At the same time, when conducting research into the Chinese economy, its present
situation should not be overlooked. More specifically, China is still largely an agricultural
country, in which farmers and land workers account for the largest proportion of the
national population. Hence, the development of agricultural trade would contribute to
improving the incomes and standards of living of the Chinese rural population. The
identification of the determinants and the level of IIT in agricultural products would provide
valuable insights into the trading patterns and the status of Chinese agricultural products in
the world market. In turn, this would enable policymakers to plan and take measures to
expand agricultural exports.
The present paper is motivated by the fact that there is little existing research into IIT in
the agricultural sector and that the study of the Chinese trade pattern in agricultural
products is of value to an understanding of the Chinese economic liberalisation. In order to
introduce liberal economic policies in the agricultural sector, we should first establish
whether trade in processed agricultural products is essentially of the intra-industry type or
not. Secondly, there is a need to know what country-specific factors influence Chinese
bilateral IIT in these products. The remainder of the article is organised as follows. Section
II briefly reviews the theoretical background of intra-industry trade. Section III presents the
recent development and characteristics of Chinese agricultural trade. Section IV describes
the level of IIT in agricultural products between China and its major trading partners.
Section V presents the econometric model and analyses the results. The final section
II. The theory of intra-industry trade
The first theoretical models of IIT were made by Krugman (1979, 1980, 1981), Lancaster
(1980) and Helpman (1981). This work was synthesized in Helpman and Krugman’s (1985)
model. This is a model that combines monopolistic competition with the Heckscher-Ohlin
(HO) theory, incorporating factor endowments differences, horizontal product
differentiation and increasing returns to scale. The model generates both intra- and inter-
industry trade and gives support to the following country-specific hypothesis: the more
different are the factor endowments, the smaller is IIT. As horizontal product differentiation
considers that different varieties are of the same quality, but have different characteristics,
they may be produced with similar factor intensity. Linder’s theory can also be used to
explain IIT. Linder (1961) considered that consumers’ tastes are conditioned by their
income levels. These tastes yield demands for products and this demand structure generates
a production response. Hence, countries with similar per-capita incomes will have similar
demand structures and will export similar goods. The Linder theory of overlapping
demands suggests that goods must first be produced for home markets and then exported to
similar countries. According to Linder’s (1961) hypothesis, a negative relationship between
income differences and IIT is to be expected.
In the theoretical models, the distinction between the two types of IIT is very important.
As was stressed by Greenaway et al. (1994, 1995), there are theoretical reasons – different
determinants – and empirical evidence that justify separating the horizontal IIT (HIIT) from
the vertical IIT (VIIT). In this paper we only consider the determinants of IIT.
In the empirical studies of bilateral trade the gravity equation has been employed. The
gravity equation describes very well the bilateral trade flows as a function of the respective
economic dimensions and distance between trading partners, working successfully in the
empirical studies on developed and developing countries.
The core explanatory variables to explain bilateral trade in the gravity model are measures
of the economic size of trading partners (positive or gravitational effects) and the distance
between them (a negative effect or counter-force).
As Feenstra, Markusen and Rose (2001) proved that a wide range of theories are
consistent with a gravity-type equation, we have decided to introduce in this paper the
variables: distance and economic size, which are typical variables of the gravity models.
Trade barriers restrict international trade. Hence, it can be hypothesised that IIT will be
greater, the lower the levels of trade barriers or the higher the level of economic integration.
In addition, we can hypothesise that the IIT will be greater if the countries share a language
III. Recent development and characteristics of Chinese agricultural trade
Chinese agricultural imports and exports grew during the period from 1996 to 2008, with
the exception of 2006. The total volume of exports of agricultural products increased from
13.72 billion U.S. dollars in 1996 to 338.83 billion U.S. dollars in 2008, while total imports
by 2008 were six times larger than in 1996, rising from 8.46 billion USD to 50.41 billion
USD. Figure1 below indicates that the import growth of agricultural products was
significantly higher than export growth after China’s accession to the WTO. Imports and
exports volumes were nearest to parity in 2004. From 2004, import growth of agricultural
products slowed down. The gap between exports and imports was at its widest in 2006.
Exports maintained their rhythm of growth, whereas imports declined from 2005 to 2006.
However, imports then experienced a sharp increase over the next 2 years, so that by the
end of 2008, they exceeded exports by more than 10 billion USD.
Figure1. The trend of export and import volume
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: authors’ calculations from the data of the UN COMTRADE