Will New Trends in Foreign Direct Investment Change the Structure of Intra-industry Trade between China and Japan?

It is generally believed that Japan's cost-oriented and export-oriented direct invest­ment has introduced a bilateral intra-industry trade pattern in China–Japan trade through which China imports accessories from Japan, processes them and exports the product to Japan. Based on investment and trade data in the machinery sector, this paper discusses whether Japan's market-oriented investment in China since 2000 has changed the structure of the trade between two countries. We conclude that the vertical division of labour, as described by the ‘flying-geese’ model and applied to the machinery industry, is gradually disappearing. In its place, no stereotypical East Asian vertical division of labour has been formed in transport machinery industry, despite it being the sector into which investment has grown fastest since 2000. Rather, factor endowment is the main determinant of intra-industry trade in the machinery industry between the two countries.