Data and Setting

To test our two hypotheses, we use bilateral trade data between PRC provinces and their foreign trading partners for the period 1997–2005 compiled by the General Administration of Customs of the People's Republic of China. For each bilateral trade, this data set provides information on the economy of origin and destination and the type of trade (ordinary versus processing).

For the purposes of the present analysis, we focus solely on processing trade. The summary statistics provided in Table 1 [ PDF 41.3KB | 1 page ] show the importance of processing trade in the PRC's overall trade. Between 1997 and 2005, processing exports consistently accounted for approximately 55% of total PRC exports (column 4), while processing imports consisted of 39–49% of total PRC imports (column 5). In addition, column 3 of Table 1 illustrates the high foreign content in the PRC's processing exports. Between 1997 and 2005, approximately two thirds of the PRC's processing export value corresponded to the value of the imported components embodied in these exports.¹³

In Table 2 [ PDF 40.4KB | 1 page ], we list the primary source economies of the PRC's processing imports and destination economies of the PRC's processing exports in 2005. The table unveils two interesting facts related to the PRC's processing trade. First, columns 1 and 3 of Table 2 show that, despite Hong Kong, China's relatively small economic size, it is the PRC's largest source of processing imports and the second largest destination market for its processing exports. A key reason why Hong Kong, China is such an important trading partner is that a large portion of the PRC's processing imports and exports are transshipped through Hong Kong, China (Feenstra, Hanson, and Lin 2004). Because the PRC's Customs Administration does not necessarily know the original source economy of imports and destination economy of exports transshipped through Hong Kong, China, they record Hong Kong, China as the trade partner. To account for these transshipments, we used a data set from the Government of the Hong Kong Special Administrative Region Census and Statistics Department on the economy's re-exports to identify the original source and final destination of these transshipments (see Appendix 2 [ PDF 66.4KB | 1 page ] for details). A comparison of columns 1 versus 2 and columns 3 versus 4 in Table 2 illustrates the significant impact that adjusting for transshipments through Hong Kong, China has on the PRC's processing trade with its major trading partners. More specifically, it almost doubles the share of processing imports originating from the PRC's major trading partners (other than Hong Kong, China) and increases by a quarter the share of processing exports destined for these same economies.

The second interesting fact Table 2 reveals is that the main source economies for the PRC's processing imports differ from the primary destination economies for processing exports. For the supply of its processing imports, the PRC relies heavily on its neighbor economies, with 77.2% of its processing imports originating from within East Asia (after adjusting for Hong Kong, China transshipments). Conversely, the majority of the PRC's processing exports are destined for countries outside of East Asia, with 61.3% sent to the non-Asian OECD countries. Overall, more than 90.0% of the PRC's processing trade is with the listed East Asian and OECD economies. In our regression analysis below, we will restrict our data sample of export destination economies to the 10 East Asian economies (excluding Hong Kong, China) and the 28 non-Asian OECD economies listed in Table 2.

In Table 3 [ PDF 41.2KB | 1 page ], we list by province the weighted average distance of the economies from which the PRC imports its processing inputs (import distance) and to which the PRC ships its processing exports (export distance). The table demonstrates that in a cross-section of 29 PRC provinces, export distance is negatively correlated with import distance (see Figure 1). In addition, Table 3 shows that adjusting for transshipments through Hong Kong, China significantly increases import and export distance. In 2005, for example, the weighted average distance of Guangdong province's processing exports and imports increased by 1,723 and 2,174 miles, respectively, after Hong Kong, China transshipments were taken into account.

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