The purpose of this chapter is to examine the role of vertical specialization in the expansion of Chinese foreign trade. The investigation of this issue is particularly important in the context of rising cross-border trade in intermediate inputs. In an environment in which cross-border trade in intermediate inputs is rising rapidly, the standard measure of exports (which is determined by the market value of goods sold internationally) can be much higher compared to domestic value-added (not including the value of imported components), providing an overestimated value of exports and hence inaccurate representation of net trade. As China’s foreign trade continues to expand, especially following its accession to the World Trade Organization (WTO), the examination of the role of vertical specialization in this process can provide useful policy insights.
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