Made by China versus Made in China

The sheer annual volume of goods exported from China to the rest of the world has attracted attention not only from academics, but also from the policy world. While academic research has mainly focused on examining Chinese trade with the various indicators, policy-makers have mainly anchored their efforts in analyzing the global imbalances caused by trade surplus and deficit, especially during the current global recession, triggered by US housing market bubbles in 2008. From the academic side, the structure of Chinese exports—its characteristics, its changes over time, its causes and implications in terms of income and growth, employment, and fragility with respect to domestic and international shocks—has been a popular topic among researchers.

To a certain degree, it is not surprising to see such enormous interests in the volume of China’s trade (imports and exports). Over the last three decades since 1978, the Chinese economy has embarked on a remarkable growth path with an annual growth rate of GDP at around 9% and the growth rate of China’s imports and exports are even higher. For instance, in 2012, China’s exports to the world reached US$2048.9 billion, with an annual growth rate of nearly 30% from 2001. The sheer size of the exports from China has certainly attracted eyeballs, but the structure of China’s exports is very complicated. Although changing, “processing trade” still accounts for a large share of China’s exports, about half. Processing trade is a term coined by China’s customs officials for tax purposes, which refers to these imports and exports as the followings: China imports raw materials, component parts and equipment from other countries/regions, and then uses its factories to assemble and process those inputs into final goods to be sold abroad. Scholars have generally agreed that China’s “processing trade” type has relatively little value added from China itself (mainly in the form of labour-intensive assembling and packaging work). Table 1 shows China’s export type from 2001 to 2008 (January to October, the latest available from the website of Ministry of Commerce, PRC), which indicates that about half of China’ exports are categorized as processing trade, though ordinary trade has picked up shares slowly over the years.

What is equally interesting in China’s exports is that foreign affiliates—firms controlled by foreign direct investment (FDI)—have played an important role. Table 2 documents the volumes and shares of exports from different firm types in China from 2001 to 2008 (January to October).  The firms are grouped by their ownership as state-owned enterprises (SOE), Foreign-controlled (Foreign), Collective-owned (Collective), Private-owned (Private) and others. The numbers clearly show that FDI-affiliates have been the driving forces in China’s exports: on average, 55% of exports are from foreign-owned subsidiaries. The numbers highlight the fact that China has become an important destination for “processing” or foreign firms’ global production chain. That means exports from China provide an indirect export route for other economies to the rest of the world. Such an integrated supply chain not only puts China at the center of the production network, but also creates imbalances in China’s bilateral trade accounts with some of its major trading partners, resulting in bilateral tensions. In particular, it has contributed to China’s large and persistent current account surpluses with the US and EU, making China an easy target for protectionist lobbies in these countries. But, as the numbers clearly indicate, made in China is not equal to made by China. The global production chains by multinational enterprises worldwide create the need for new approaches to look at global trade imbalances, and require new ways to solve bilateral trade imbalances.

Yanling Wang, Associate Professor at The Norman Paterson School of International Affairs

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