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declined from 36.0 percent to 28.3 percent during the same period. This unbalanced processing trade pattern is generally attributed to the reorganization of GPNs in East Asia (Yoshida and Ito 2006; Gaulier, Lemoine, and Ünal-Kesenci 2007; Haddad 2007). With rising costs in Japan and the newly industrialized economies—Hong Kong SAR, China; the Republic of Korea; Singapore; and Taiwan, China—East Asian firms are increasingly using China as a lower-cost export platform. Instead of directly exporting their final goods to the Western markets, these firms now export highvalue intermediate goods to their processing plants in China and then export them on to the West after assembly. As a result, a triangular trade pattern seems to have emerged in the GPNs in which China relies heavily on processing inputs from East Asia and sends processed goods predominantly to the West. Moreover, the share of processing imports in China’s total imports is greater for imports from East Asian countries than for imports from outside East Asia. Except for Indonesia and Vietnam, more than 35 percent of China’s imports from its major East Asian trading partners were processing imports in 2007 (figure 21.5). Almost 40 percent of its imports from Japan and between 40 and 60 percent of its imports from the newly industrialized economies were aimed at supplying inputs for processing industries. This share is significantly higher than for Western countries. The share of processing imports in China’s total imports from the EU-19, Canada, and the United States amounted to 15.4 percent, 17.6 percent, and 25.0 percent, respectively. At the same time, processing exports represent a greater proportion of China’s total exports to developed countries than to its East Asian neighbors. More than 50 percent of
the exports that China sends to the EU-19, Japan, and the United States are processing exports (figure 21.6). The share of processing exports is significantly lower for most developing East Asian countries. Third, this spatial pattern is not consistent across processing locations. In a cross-section of 29 Chinese provinces, the weighted average distance traveled by processing imports (import distance) has been negatively correlated to the weighted average distance traveled by processing exports (export distance) for most years between 1995 to 2008 (Ma, Van Assche, and Hong 2009). In other words, locations in China that import their processing inputs from nearby tend to export their processed goods far away and vice versa. Our econometric analysis provides further empirical support that China’s processing trade depends heavily on both upstream and downstream trade costs.4 Specifically, we find that both import and export distance affect processing exports negatively. Furthermore, we show that processing exports to East Asian countries are more sensitive to export distance and less sensitive to import distance than processing exports to non-Asian OECD countries. As a result, for firms in advanced East Asian countries, the key distance factor that determines China’s attractiveness as a processing location is its vicinity to Eastern input suppliers, that is, import distance. As import distance increases, China becomes less attractive as a location for processing activities, and therefore the volume of processed exports from China decreases. Conversely, for firms in Europe and North America, the critical determinant of China’s attractiveness as a processing location is its proximity to the East Asian market, that is, export distance. As export distance increases, China becomes less attractive as a location for processing activities.
Figure 21.5. Processing Imports as a Share of China’s Total Imports by Economy of Origin, 2007
processing imports (%)
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Source: Authors’ calculations based on China’s Customs Statistics.