How vertically specialized is Chinese trade?
Two recent phenomena have transformed the nature of world trade: the explosive growth of Chinese trade, and the growth of vertically specialized trade due to international production fragmentation. While vertical specialization may explain much of the growth and unique features of Chinese trade, few papers have quantitatively assessed these two phenomena together. In part, this is because it is difficult to measure just how vertically specialized Chinese trade is. The unique features of China’s extensive processing trade cause both the identification of imported intermediate goods, and their allocation across sectors, to depend upon the Chinese trade regime. In this paper, we estimate the vertical specialization of Chinese exports, addressing these two challenges. Using two Chinese benchmark input-output tables, and a detailed Chinese trade dataset which distinguishes processing trade from other forms of trade, we develop a new method of identifying intermediate goods imported into China. Vertical specialization is then estimated using two methods. The first method uses the Hummels, Ishii and Yi (2001) measure, the official benchmark IO tables, and incorporates our identification correction. The second method follows the first, but also incorporates the Koopman, Wang and Wei (2008) method of splitting the benchmark IO tables into separate tables for processing and normal exports, in order to address the allocation problem. Results show strong evidence of an Asian network of intermediate suppliers to China, and the two methods provide a range of estimates for the foreign content of Chinese exports. In 2002 aggregate exports ranges between 25% and 46%, with some individual sectors are as high as 52%-95%. Across destinations, under both methods, the vertical specialization of Chinese exports declines with the level of development of the trading partner.
Introduction: In recent years, two interrelated important phenomena have occurred that transform the nature of global trade. The first phenomenon is the international fragmentation of production. Production processes are sliced thinner and thinner into many stages, and the result-ing production fragments are carried out in many countries, each specializing in different stages of the vertical production chain. The second phenomenon is the explosive growth of Chinese trade, and China’s increasing importance in these global production chains. In current dollars, the value of China’s exports plus imports rose from $280.9 billion in 1995 to $1760.4 billion in 2006–a growth of about 527%. In that year, 42 percent of China’s imports and 53 percent of China’s exports were processing trade–imports of intermediate goods which are further processed or finished, and are made solely for export. This trade is concentrated in fragments within relatively high-tech products, and is carried out largely by foreign-invested enterprises.
Author: Judith Dean, K.C. Fung, Zhi Wang
Source: Institute for Labour Market Policy Evaluation
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