Is There a Bilateral Trade-Off Between Foreign Direct Investment and Trade?

Larger inflows of foreign direct investment (FDI) induce a high volume of trade because supply chains set up by multinational enterprises intensify trade networks across nations. Several empirical studies have uncovered complementary relationships between trade and FDI among East Asia nations, but do not consider the dynamic transition of the Chinese economy and the role of the trilateral free-trade agreement (FTA). This article studies the feedback effects of FDI on trade among China, South Korea, and Japan from 1994 to 2010. Our empirical models capture the dynamic transition of trade and FDI between China and Korea or Japan and can also be used to predict the impact of the trilateral agreement on the network of trade and FDI among these countries. Our results indicate that the Trilateral Agreement could generate longterm positive reciprocal benefits from China to Japan and Korea.