Trade interdependence, comparative advantage and FDI between China and EU

The objective of this paper is to examine the connection between international trade and Foreign Direct Investment (FDI), by assessing some salient features of China and EU's market structures and their current patterns of the revealed comparative advantage, and how their two-way investments are related to the changes in the comparative advantage and trade between China and EU. We postulate that the EU firms venturing in China plays an important role in changing patterns of China's comparative advantage. A increasing similarity of trade structure and decreasing complementarity of the Chinese and EU economies limit the absorptive capacity of each other's products, which further challenges China's entrepreneurs to a high commitment of direct investment into EU.