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Françoise Nicolas

The expansion of intra-East Asian trade over the past decades is now well documented. To explain this development, two salient features have often been underlined in the recent literature; firstly, the central contribution of China as a result of its economic rise, and secondly, the crucial role played by trade in parts and components and the emergence of regional production networks. To be more specific, it is a well-known fact that parts, components and intermediate goods account for the bulk of China’s imports from East Asia (especially from Japan, Korea and Taiwan), and that intra-East Asian trade is essentially intra-industry trade resulting from processing activities. Over the past few years, however, a number of developments have occurred which may bring about major changes in the way these countries are connected. Shifts in China’s economic policy in response to the global economic crisis constitute such changes. The objective of the chapter is to examine the changing nature and structure of two key bilateral relations, namely, Korea-China and Japan-China trade and investment linkages, to suggest explanations for these changes, and to highlight the implications for the definition of the countries’ economic policies and for their performances. The chapter starts by providing a comprehensive description of China’s role in the regional supply chain and the resulting pattern of trade and foreign direct investment (FDI) flows between China and Japan and China and Korea. It highlights the diverging paths followed by Japanese and Korean firms in their approaches to China. The chapter concludes by examining the implications this may have on the countries’ respective policy options, with a focus on their free trade agreement (FTA) strategies. Key words: regional production networks, processing trade, intra-industry trade, China, Japan, Korea.