PRC's Processing Trade

The PRC's Customs Statistics (CCS) distinguishes between imports and exports linked to processing trade and ordinary imports and exports.³ Imports for processing are goods that are brought into the PRC for processing and subsequent re-export. Processed exports, as classified by the Chinese customs authorities, are goods that are produced in this way. Imports for processing are imported duty free and neither these imported inputs nor the finished goods produced using these imports enter PRC's domestic market. By contrast, ordinary imports are goods that are not imported duty free and ordinary exports are goods that are produced primarily using local inputs. Feenstra and Wei (2009) reported that 84% of the PRC's processed exports were produced by foreign-invested enterprises.

Figure 1 [ PDF 22.1KB | 1 page ] shows that most of the PRC's trade surplus until 2008 and all of the PRC's trade surplus after 2008 was due to processing trade. CCS divides processing trade into two categories, “processing and assembly” trade and “processing with imported materials” trade. As Gaulier, Lemoine, and Unal-Kesenci (2005) discussed, the first category refers to foreign suppliers importing intermediate goods that belong to them and using these inputs to produce goods for re-export. The second category refers to foreign suppliers importing inputs from other firms and using these to produce goods for re-export. The surplus in the first category averaged US$20 billion between 2007 and 2009 and the surplus in the second category averaged US$250 billion. This implies that, while the degree of intra-firm imports by foreign-invested enterprises (FIEs) has remained stable, arms length transactions by FIEs in the PRC are increasingly taking place with other firms located in the PRC.

Figure 2 [ PDF 29.5KB | 2 pages ] disaggregates processing trade using Harmonized System (HS) classifications. It shows that machinery and electrical products (HS 84–85) have become increasingly important on both the import and export side while textiles (HS 41–43, 50–63) have become progressively less important. Thus processing trade largely involves importing sophisticated parts and components and using them to produce computers, telecommunications equipment, and other high-tech goods.

Table 1 [ PDF 21.9KB | 1 page ] shows the PRC's processing trade disaggregated by country between 2006 and 2008. Two-thirds of the PRC's imports for processing came from Japan, members of the Association of Southeast Asian Nations (ASEAN), and the newly industrialized economies (NIEs), while only about 5% each came from the US and Europe. On the other hand, East Asia, the US, Europe, and Hong Kong, China each received about 20% of processed exports.⁴ As a result, the PRC ran deficits of about US$100 billion with East Asia in processing trade and surpluses of US$100 billion with Europe and US$130 billion the US and Hong Kong, China.

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