What’s Behind « Made in China » ?

What’s Behind « Made in China »?

Ari Van AsscheHEC Montréal and LICOS-KU Leuven

1

Processing trade regime

• Under the processing trade regime, firms are allowed to import inputs duty-free provided they are used to produce further processed goods or final goods destined solely for exports.

• Processing trade data thus provide information on trade between three sequential nodes of a global supply chain: the location of upstream production, the location of processing (in China) and the location of downstream consumption.

3

4

5

6

Fear 1: « Factory of The World »

The Chinese export value for a unit of a 30GB video iPod in 2006 was about $150. However, only $4 of this value is attributable to producers in China (Linden et al. 2007).

8

Exported by China ≠ Made in China

• China has grown into the world’s largest exporter in 2009, but not all exports are Made in China.

• Only 30%-50% of China’s total export value is Made in China, while the other portion is the value of imported components (Koopman et al., 2008; Upward, Wang and Zheng, 2010).

• China is not the world’s factory, but rather the world’s assembler.

• U.S. and E.U. customs require that all imported products be marked with the name of a foreign country of origin.

• The country of origin of a good is generally determined by the last country in which a ‘substantial transformation’ of the good took place.

• Since China is specialized in final assembly, many products are labeled “Made in China” even though only a fraction of the value is truly made in China.

Fear 2: « Emerging Technological Superpower »

Processing export share, by technology level

Statistical Mirage• Once processing trade is taken into

account, the evidence is less strong that China is rapidly moving up the technology ladder and becoming competitive in technology-intensive areas where advanced economies should have a comparative advantage.

• Rather, China’s production activities have remained consistent with its comparative advantage in labor-intensive production activities.

Fear 3: « The Great Hollowing Out »

17

18

19Japan 977Belgium 5,606USA 5,921

20

Geography matters• China’s attractiveness as an offshoring

location is determined by its proximity to foreign input suppliers (supplier access) and vicinity to foreign markets (market access). – Eastern firms choose China as a processing

location for its exports to West– Western firms choose China as a

processing location for its exports to East

• Only a small portion of offshoring to China is conducted by Western firms that merely want to reduce their production costs.

21

What’s Behind « Made in China »?

• Once China’s role in global production networks is taken into account, a different picture of China emerges than is portrayed by the popular press.

• China’s exports do not reflect a rising dragon that single-handedly challenges Western manufacturing firms in both low-tech and high-tech industries.

• They rather represent the façade of increasingly competitive East Asian production networks that sell to Western markets.

Strategic Implications

• What is your role in global production networks? Are Chinese firms your partners or competitors?

• Who are you truly competing against?

• Are you offshoring to China for the right reasons?

24