This chapter examines the relationship between FDI, the processing trade and the China–Japan trade imbalance using data for the period 1984–2009. Fragmentation and Japanese direct investment in China have played important roles in both China’s processing trade and vertical specialization. This bilateral trade was prompted by the forces that are typically associated with vertical specialization: aggressive FDI promotion by China followed by direct investment from Japan into China’s processing trade.
In recent years, a growing trade imbalance between China and Japan has led to increased trade friction. ...