Trade in Greater China

This paper discusses the nature and determinants of trade of Mainland China, Hong Kong, and Taiwan, a region often called Trade between Hong Kong and China is characterized by at least two features: re-exports and outward processing. China is both the largest source and largest market for Hong Kong's re-exports. In addition, in 1995, 45% of Hong Kong's re-exports to China and 82% of Hong Kong's re-exports from China were related to outward processing. Trade between Taiwan and China can be classified into two types: indirect and direct. Indirect trade is mainly re-exports through Hong Kong, while direct trade includes transshipment and some coastal barter trade. Trade between Hong Kong and Taiwan has also been growing, with total exports form Taiwan to China reaching more than US$ 18 billions. Using a gravity model, we test the empirical relevance of the concept of Greater China and also to identify determinants of trade of Greater China. We found that Greater China's trade is positively related to its own GDP, its trading partner's GDP and per capita GDP. It also trades more with countries in East Asia and members of APEC. Overall, the success of the gravity model in explaining trade in Greater China suggests the usefulness of the concept of an economically integrated China, Hong Kong, and Taiwan.