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Assembly Trade and Technology Transfer: The Case of China

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 Assembly Trade and Technology Transfer:
the Case of China

World Development, May 2004 (vol.32, N°5).

Mrs. Françoise LEMOINE (CORRESPONDING AUTHOR)

Senior economist
Centre d’Etudes Prospectives et d’Informations Internationales, Paris, France

Work
CEPII
9, rue Georges Pitard
75015 Paris
France
Tel : 33 1 53 68 55 32
Fax : 33 1 53 68 55 03
E-mail : [email protected]

Home
16 rue de l’Ouest
75014 Paris
France
Tel: 33 1 43 35 01 25

Mrs. Deniz ÜNAL-KESENCI

Economist
Centre d’Etudes Prospectives et d’Informations Internationales, Paris, France

Work
CEPII
9, rue Georges Pitard
75015 Paris
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Tel : 33 1 53 68 55 05
Fax : 33 1 53 68 55 04
E-mail : [email protected]

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Tel : 33 1 42 50 76 13
 -2-

Assembly Trade and Technology Transfer:

the Case of China

REVISED VERSION – 25 JULY, 2003

Summary. — The paper shows that China’s outstanding export performance is directly linked to its integration
in the international segmentation of production processes. China has engaged in production sharing with Asian
countries and has specialized in assembly operations, which has allowed for a rapid diversification of its
manufactured exports, from textiles and clothing to the electric and electronic industries. Assembly has
considerably helped the technological upgrading of China’s trade. Up to now, these outward-oriented and highly
competitive industries, which are based on imported technology and foreign affiliates, seem to have had limited
impact on local production and on the diffusion of technology in China’s domestic industry.

Key words — China, Asia, technology transfer, trade specialization, FDI, international production sharing
 -3-

1. INTRODUCTION

For the last twenty years China’s foreign trade has expanded at an outstanding pace (almost 15% per year) and

its share in world trade has more than trebled, from less than 1% to about 3.5%. Most remarkable have been the

rapid expansion and the diversification of its industrial manufactured exports which have risen at the rate of 20%

a year. They accounted for almost 90% of its total exports in 2001, as against 40% in 1980. During the 1980s,

China’s exports were driven by textile products, and during the 1990s by electric and electronic products. This

article shows that China achieved such a performance thanks to its strong involvement in the international

segmentation of production processes. It argues that China’s specialization in assembly trade has given rise to a

highly competitive and internationalized manufacturing sector, which has been the main channel of technology

transfers, while the traditional export sector has lagged behind. The second section of the paper reviews the

international experience pertaining to the links between trade and catch-up. The paper then examines how

China’s trade policy in favor of processing trade has enhanced production sharing with Asian partners, and

allowed for a rapid diversification of China’s exports (section 3). Then, it presents an original analysis of

China’s trade by stages of production and by technology content, showing that intermediate goods have played a

crucial part in the technological upgrading of China’s foreign trade (section 4). Section 5 gives some evidence

that the outward-oriented sector has had relatively limited linkage effects with the rest of industry, and section 6

discusses whether China’s accession to the WTO may alleviate this dualism.

2. TRADE AND TECHNOLOGICAL CATCH-UP:

A REVIEW OF INTERNATIONAL EXPERIENCE

According to the classical or neo-classical theory of international trade, countries’ specialization is determined

by their comparative advantages. Given its almost unlimited resources in cheap labor, China’s rise in

international trade can be explained by its comparative advantage in labor-intensive products. However this

explanation falls short of accounting for the rapid changes in its sectoral trade pattern and for the successful

adaptation of its exports to international demand.

The dynamic of the creation of new comparative advantage in Asian countries has often been interpreted within

the framework of the “flying geese model” developed by Akamatsu (1961), who observed that “diffusion of new

techniques to rising industrial nations proceeds rapidly, and these nations approach the technological level of

advanced nations” and that “the underdeveloped nations are aligned successively behind the advanced industrial

nations in the order of their different stages of growth in a wild-flying geese pattern”. According to this model,

innovations spread from the innovating nation to the other nations and the development trajectory of the late-
 -4-

comers replicates the development experience of the countries ahead of them. “Their economic rise is tightly

linked to the emergence, maturation and decline of particular industrial sectors” (Bernard & Revenhill, 1995).

This interpretation thus incorporates Vernon’s product-cycle theory, which examines how the life-cycle of

products affects the locus of their manufacturing production. The production of new products requires

innovation and R&D and thus occurs in high income countries. As the product becomes mature, its input

requirements change (capital expenses and labor costs take a greater importance) and the production tends to

migrate to less advanced countries. Finally, at the standardized production stage, production requires mainly

unqualified labor and moves to the countries which have lower labor costs.

Numerous empirical studies have underlined that the development of East Asian economies has proceeded in

waves, Japan coming the first, followed by successive tiers of economies which have tended to catch up

(ESCAP, 1991; Kojima, 2000; UNCTAD, 1996). Since 1980, the first tier of New Industrialized Economies

(NIEs, i.e. South Korea, Taiwan, Singapore, Hong-Kong) has gradually shifted its specialization from labor

intensive industries (textiles, footwear) towards higher-technology sectors (electrical machinery,

telecommunication equipment). They moved their production capacity in low-tech sectors to overseas export

platforms, through foreign direct investment and out-processing operations. This migration has helped the

emergence of the second and third tier of New industrialized economies (first Thailand, Malaysia, Philippines,

then China and Indochina). Initially, these countries have developed comparative advantages in resource-based

and low-tech sectors but they have progressively upgraded their industrial capacities and exports. “Recycling

comparative advantages” has thus been at the core of East Asian industrialization.

However, the changes in the global economy, together with the development in technology and production

techniques have precluded homogeneous trajectories. Although late-comers may export similar products as the

leaders did in earlier stages, their structures of production are quite different (ESCAP, 1991;

Bernard & Ravenhill, 1995; OECD, 1999; Guerrieri, 2000; UNCTAD, 1996). In fact, while Japan has

developed a strong indigenous innovative base, prior to the increase of its global economic presence in the

1950s, Taiwan and Korea have remained dependant on imported technology, components and equipment from

the industrialized economies (mainly Japan). The late-comers, South-East Asian countries, have industrial

structures which are characterized by the lack of a domestic manufacturing tradition, their high dependence on

foreign controlled firms, a high import content of exports and limited backward linkage with local component

suppliers.
 -5-

The heterogeneity of the trajectories can be traced back to the globalization process which has enhanced the

reorganization of production on a world-wide basis. Production processes have become internationally

fragmented and firms located in different countries take part in the production of a commodity, but at different

stages of the value-added chain, which is split-up across countries. Multinational firm strategies have developed

outsourcing policies which rely on foreign and even distant suppliers, and have localized the production of

components in different countries, with the aim of better utilizing different countries’ comparative advantages.

The different stages of production correspond to different production functions so that a country may have a

comparative advantage in some stages of production, and a comparative disadvantage in other stages. Two types

of specialization can thus be distinguished: “horizontal” specialization, when a country has a comparative

advantage in the whole process of production of a given product, from upstream to downstream stages; “vertical”
1
specialization when a country has a comparative advantage only in some stages of production, and a

2
disadvantage in others. As a consequence, trade in intermediate products , which results from the interruption of

the domestic production processes, has taken on a growing importance and assembly trade has become a crucial

element in the international segmentation of production process. Late-comers generally specialize in the

assembly of final products, the most labor-intensive segment of production, while more advanced countries

supply capital- and technology- intensive intermediate goods.

Trade in intermediate goods implies specific gains as imports of intermediate products increase the number of

varieties of inputs available to the producers. More variety upstream increases the efficiency in the use of

resources. Moreover trade in intermediate goods is an important channel of the transmission of technology

(Coe & Helpman, 1995; Coe, Helpman & Hoffmaister, 1995; Keller, 2001 and 2002). For emerging economies,

imports of components for assembly may become the easiest way to acquire high-technology. It makes it

possible for them to enter new production lines characterized by strong global demand growth and potential

productivity gains.

However, the benefits that low-wage countries derive from their participation in international production sharing

may be smaller than suggested by trade figures. The gains may be unequally spread between the firms involved

in the value-added chain. Also, taking part in the labor-intensive stages of production does not automatically

lead to the technological spillovers needed to move up the production chain and to ensure a sustainable trajectory

of economic development (UNCTAD, 1999 and 2002; Kaplinsky & Morrus, 2002; OECD, 1999).

China provides a case study which highlights how a latecomer can enter globalization and carve out its place in

the international division of labor. This case further illustrates how the splitting-up the value-added chain
 -6-

between different locations (countries) and the development of firms’ cross-border production networks is

driving the process of industrial growth and integration in Asia (UNCTAD, 1996 and 2002; Borrus,

Ernst & Haggard, 2000). Since the mid eighties China has been involved in international production sharing

with Asian economies, as firms from Hong-Kong, Taiwan and from other Asian countries have relocated their

labor intensive industries on the mainland (Naughton, 1997; Lyons & Nee, 1994). The rapid expansion of

China’s foreign trade has been closely associated with an on-going reorganization of production in Asia. The

benefits China has derived from the becoming a production base for Asian industrial firms include a rapid rise in

exports which has contributed to economic growth, the development of an electrical and electronic industry

based on foreign technology, an accelerated economic growth of Southern coastal provinces and especially of

Guangdong province (Lardy, 2002; Wu, 1999; Naughton, 1997;; Lyons & Nee, 1994, Vogel 1989). However,

the positive effects of outward-oriented foreign direct investment on China’s domestic industry should not be

overestimated. Processing activities have been strongly stimulated by a preferential trade regime which has

benefited mainly to foreign invested enterprises, while domestic enterprises have not been in position to take

advantage of the concessional programs. This dualistic trade policy has created an institutional separation

between the domestic and the export sector and has diverted trade away from state-owned enterprises and toward

foreign joint-ventures; it has also led to an over-concentration of China’s foreign trade in some provinces

(Guangdong and Fujian) (Naughton, 1996). Moreover, processing activities out carried out by foreign affiliates

remained concentrated in low value-added production, making use of the China’s unlimited supply of low-cost

labor; they have had few backward and forward linkages (Zhang,1999; Sung, 2000, Wu, 1999); they involved

limited transfer of high technology (Naugthton, 1997; Huchet, 1997); the gains from foreign trade were much

smaller than suggested by the figures, since exports had a high import content, and since transfer pricing reduced

government fiscal revenue as well as local partners operating profits (Breslin, 1999; Sun, 1998; Sung, 2000).

The present paper provides evidence that at the end of the nineties, China’s foreign trade is still highly dualistic.

Processing trade and ordinary trade display quite different sectoral and geographic patterns. Processing trade has

been the engine of the outstanding rise and rapid upgrading of China’s foreign trade but domestic firms’ foreign

trade is still lagging behind, suggesting that the highly internationalized and competitive sector has not

significantly helped the modernization of the rest of the economy. China’s entry in the WTO is an important

step towards the unification of the foreign trade regime as it will enlarge the access of domestic firms to foreign

technology. At the same time, trade liberalization is likely to strengthen China’s specialization in labor-intensive

products.
 -7-

3 CHINA’S SPECIALIZATION IN ASSEMBLY ACTIVITIES

(a) Selective trade policy in favor of processing activities

Trade policy is an important factor determining a country’s involvement in the international splitting-up of the

value-added chain. Tariff structure may affect the degree of effective protection of the different sectors. It has

been shown that tariff exemptions and reductions on imported inputs increase the effective protection enjoyed by

the assembly activities using these inputs, as it reduces their costs of production (Grubel & Johnson, 1971).

China provides an outstanding case of such policy. Since the mid-eighties, the Chinese authorities have used

different instruments to promote exports, including duty exemptions granted to imports to be processed and re-

exported (Lardy, 2002; Ianchovichina, Martin & Fukase, 2000; Naughton 1996). These tariff exemptions have

resulted in a highly segmented trade regime. Basically, two broad regimes are distinguished: 1) processing trade,

which encompasses imports to be processed for exports and the corresponding exports; 2) ordinary trade, which

encompasses exports mainly based on local inputs, and imports aimed at the domestic market and subject to

normal tariff rates. Other trade regimes are less important and include imports of goods as equity investment in
3
joint-ventures, border trade, compensation trade, etc .

Although China reduced its average customs tariff from 41% in 1992 to 16.8% in 1998-2001, the advantage

derived from tariff exemptions has remained significant and this selective trade policy has proved very

successful in creating export-oriented industries based on imported inputs. The large gap between nominal tariff

rates and collected tariff rates provides evidence of the extensive use of tariff exemptions (see Appendix A).

China’s foreign trade expansion has relied mainly on processing operations (Table 1). As early as 1992,

processed exports made up 46% of total exports. This share rose to 55% in 1996 and has represented more than

half of China’s exports since then. During the Asian crisis (1998-1999), exports of processed goods performed

better than other categories of exports, and this resilience can be explained by their high import content which

makes them less vulnerable to the effects of a real appreciation of the exchange rate (Dées & Lemoine, 1999).

Correspondingly, imports for processing have increased rapidly since 1992 and their share in total imports rose

from less than 40% to almost 50% to 1997-1998. Since 1998 they have lagged behind ordinary imports, which

registered a strong rise partly due to the anti-smuggling measures implemented by the government but also to an

actual growth in imports driven by the rapid decline in the level of tariff rates in the late nineties. However, even
4
now, ordinary imports account for less than half of total imports . The last category (“other imports”) includes

mainly equipment imported as equity investment in joint-ventures.

- Insert Table 1 about here -

 -8-

(b) Production sharing with Asian economies

The geographic distribution of China’s trade flows differs depending on customs regimes. Asian countries’

exports to China depend heavily on processing trade (Table 2). In 1999, Asia was by far the major source of

inputs for China’s processing industries. Japan and the NIEs provided more than two-thirds of these imports.

Hence, most Asian exports to China are not aimed at satisfying domestic demand but at supplying inputs for

processing industries. Their role in China’s foreign trade reflects the international splitting-up of the value-

added chain within the region, driven by the strategies of Asian firms which have relocated the final stages of

production to the Mainland. In this way, Asian countries have already taken advantage from China’s selective

trade liberalization, as the largest part of their exports is exempted from customs tariffs. The bias in favor of

processing is especially strong in China’s imports from Taiwan and Hong-Kong (the share of processing

reaching 75%).

In 1999, Japan was the first supplier of China’s imports for processing (25%), but the NIEs accounted for the

largest share of these imports (40%), with Taiwan being by far the most important supplier (20%), followed by

South Korea. Interestingly, Taiwan and Hong-Kong taken together had a larger portion in the supply chain than

Japan, highlighting the productive integration within Greater China.

- Insert Table 2 about here -

By contrast, European and American firms contribute only marginally to the supply of goods for China’s

processing industries (they supplied respectively 5% and 7% of imports for processing in 1999). European and

American firms hold their strongest positions in China’s ordinary imports, showing that their strategy was aimed

at the domestic market: American firms and to a lesser extent, European firms, are also developing production

bases in China: in 1999, goods for processing accounted for 13% of China’s imports from the EU and for 25%

of its imports from the US.

The geographic structure of processed exports shows that China has become an export platform for Asian

industries aimed at world markets. China’s processing trade records its largest surpluses with the US and

Europe, while it is almost balanced with Japan and runs a deficit with Taiwan and South Korea. The surplus

with Hong-Kong is due to transit trade, as most Chinese exports to Hong-Kong are ultimately directed to third

markets, mainly to the EU and the US (EC, 1997). Almost 85% of China’s exports to Hong-Kong are re-

exported, one fourth is directed to the EU and one third to the US. If the distortions associated with this transit

(indirect) trade were removed, the geographic asymmetry of China’s processing trade would be even more
5
pronounced and China’s trade surpluses with Europe and the US would be bigger than stated in Table 2 .
 -9-

(c) The rapid diversification of China’s exports

International production sharing between China and industrialized Asian economies began in textile and clothing

in the mid-eighties and was already well entrenched in this sector in the early nineties. At that time half of

China’s clothing exports came from processing activities (Table 4). This has allowed China to become the

world largest exporter of apparel. Afterwards, the relocation strategy of Asian firms has expanded in new

industrial sectors, mainly in electrical machinery, and they have transferred to China the segments of production

in which they were loosing their comparative advantage. NIE firms have followed the path that Japanese firms

had taken earlier. Already in 1993, electrical machinery was the most important category of products supplied

for processing by Japan to China. At that time, textile products were still the most important category supplied

by the NIEs, which have since considerably expanded their exports of electrical intermediate products (Table 3).

Almost three-fourth of China’s processed exports of apparel and half of processed exports of electrical products

are directed to Asian countries (Japan and NIEs).

- Insert Table 3 about here -

- Insert Table 4 about here -

The rapid expansion of China’s processing trade was thus associated with far-reaching changes in its commodity

composition. The relative decline of processing trade in textiles and apparel can be explained by the import

quotas applied by the developed economies, which constrain the market shares of the most competitive

exporters. The traditional sectors (apparel, leather and shoes) taken together accounted for more than 40% of

processed exports in 1993, and for only 26% in 1999. The composition of processed exports shifted towards

machinery and electrical machinery: the share of these two sectors taken together rose from 24% to almost 40%

during this period (Table 4).

Processing operations have contributed decisively to the overall diversification of China’s manufactured exports

from traditional sectors towards more technologically advanced products, with rapidly expanding world markets.

In 1999, four-fifths of China’s total exports of machinery, electrical machinery, other transportation equipment

and precision instruments, depended on processing activities. In these sectors, China does not master the entire

production processes, but has established its specialization in the final, labor intensive stages of production.

The traditional sectors (textiles and apparel, leather and shoes), which lagged behind the average export

performance, are characterized by a below-average dependence on processing activities. However, some sectors

registered a rapid increase in their exports, despite a relatively low dependence on processing activities: this is

the case of chemicals, metallurgy and metallic products.

 - 10 -

(d) The role of foreign affiliates in processing trade

Foreign affiliates play an important and growing part in China’s foreign trade. In 2001, they accounted for 50%

of total exports (20% in 1992) and for 52% of total imports (32% in 1992). In fact they are responsible for most

of the expansion of China’s processing activities and they held a dominant share (more than 70%) in these

activities in 2001. They have played an outstanding role in China’s processing trade with Asian countries (Table

5). Most Asian firms which have transferred assembly operations in China have chosen to establish affiliates,

instead of contractual relationships with Chinese firms for out-processing. Moreover, to carry out these

processing activities, they have tended to establish wholly foreign affiliates, more than equity joint-ventures. In

2001, wholly foreign affiliates accounted for about 55% of processing operations by foreign invested enterprises

established in China (the proportion was less than 40% in 1995). A large portion of China’s trade thus

corresponds to intra-firm trade between parent firms in Asian countries and their affiliates in the Mainland. In

sectors such as machinery and electrical machinery, foreign affiliates account for more than three-quarters of

processed exports, and for more four-fifths of corresponding imports, providing evidence of the importance of

the cross-border production networks in explaining China’s competitiveness in these sectors. It also highlights

the role of China in the international reorganization of production, which has taken place in these industries

(Borrus and Haggard, 2000) (Table 6).

- Insert Table 5 about here -

- Insert Table 6 about here -

6
Initially, most FDI was located in the four Special Economic Zones (ZES) created in 1979 by the Chinese

authorities in order to attract export-oriented joint-ventures. But these SEZ have progressively lost their

advantage, as their prices and production costs increased relatively fast, and as several other zones have been

created opened in coastal provinces, in which FDI also benefited from preferential tax treatment (Economic and

Technical Development Zones). Moreover, as tariff exemptions for processing activities did not depend on the

location of the enterprise, China has created “a kind of gigantic export processing zone, defined not

geographically but by the juridical status of the enterprises involved” (Naughton, 1996). In 2002 the four SEZ

were responsible for about one tenth of foreign affiliates’ foreign trade.

Coastal area received the overwhelming share of overall FDI (more than 80%) and almost all export-oriented-

FDI: in 2002, 97% of exports by foreign affiliates came from coastal provinces, 40% from Guangdong, and 24%

come from Shanghai and its neighbor province of Jiangsu taken together. The geographic location of export-

oriented FDI has shifted slowly northward, away from Guangdong province and in favor of the major industrial
 - 11 -

centers, with better endowments in qualified labor. This evolution may be part and parcel of a technological

upgrading of processing activities.

4 VERTICAL SPECIALIZATION AND TECHNOLOGY TRANSFERS

The analysis of China’s foreign trade by stage of production makes it possible to understand how its

specialization in assembly influences its technological catch-up.

(a) China’s specialization profile by stage of production

7
The analysis distinguishes the following stages of production : 1) primary goods, 2) intermediate goods, which

are split up into two different categories: semi-finished products and parts & components, 3) final goods, which

are split up into two different categories: consumption goods and capital goods.

Final goods represent by far the most important export category (63% of exports in 1999), in which consumer

goods still take an overwhelming share (47%), but capital goods are rising faster (up to 15% in 1999) (Table 7).

On the import side, intermediate products are heavily dominant, accounting for two-thirds of total imports;

semi-finished products make up the most important category (42% in 1999), but parts and components has

recorded the fastest increase (rising to 23% in 1999).

- Insert Table 7 about here -

This rapid expansion of China’s trade in parts and components corresponds to a general trend in Asian trade.

Trade in components has been the most dynamic segment of East Asian trade since 1985, as a result of

production sharing in the region (Ng & Yeats, 1999). Like the other low-wage Asian economies (Indonesia,

Thailand, Malaysia) China has specialized in assembly operations (with a trade deficit in components), while

Japan and the NIEs have a comparative advantage in production of components (with a trade surplus in

components).

- Insert Table 8 about here -

As China’s exports have a high import content, the analysis of its comparative advantages should not rely on its

sectoral export performance but should rather take into account its sectoral trade balance. For that reason we

used an indicator which measures the contribution of the different sectors and stages of production to China’s

overall trade balance.(see Appendix D). Table 8 shows that China still displays its major comparative

advantages (trade surpluses) in textiles, clothing, leather and shoes. In more technologically advanced sectors

(machinery and equipment, office machinery and computers, electrical machinery, radio and TV equipment,

instruments), there is a reversal of China’s comparative disadvantages along the production processes: it

switches from a relative deficit in parts and components to a surplus in consumption, and in some cases in capital
 - 12 -

goods. This vertical specialization highlights the crucial role of international production sharing in explaining

China’s export performance in these sectors.

(b) China’s trade in high technology products

8
As would be expected given its level of development, China is a net importer of high-tech goods . High-tech

goods represent 14% of its imports and 8 percent of its exports, on average in 1997-1999 (Table 9). These

shares are relatively high by international standards, since corresponding ratios for the EU show a high-tech

content of 9.5% in both exports and imports (Fontagné, Freudenberg and Ünal-Kesenci, 1999).

- Insert Table 9 about here -

Parts and components constitute the main channel of China’s high-technology imports. In 1997-1999, 57% of its

high-tech imports were parts and components. Capital goods accounted for only one-third of high-tech imports.

On average, imported parts and components embody more high technology than other categories of imports

(almost 40% of component imports have a high technology content, while this is the case for only one third of

imported capital goods). This suggests that export-oriented, internationalized industries have a higher capacity

to import and absorb high-technology than traditional, domestic-based industries.

Since imported parts and components are used (at least partially) in export processing industries, China’s exports

are more technologically advanced than would be expected given its level of development. Another

consequence is that China’s high-tech exports and imports take place in the same sectors (with the exception of

chemicals) (Table 10). High-tech trade is heavily concentrated in two sectors: radio & TV equipment and office

machinery & computers. Traded goods in both sectors have an outstanding high-tech content: 64% of imports

and 52% of exports of radio & TV equipment are high-tech goods; 84% of imports and 78% of exports of office

machinery and computers are high-tech goods. This sectoral concentration of high-tech exports helps to explain

why industrialized Asian economies are concerned by the rapid technological catch-up of China’s exports and

the risk of intensified competition in these market segments.

- Insert Table 10 about here -

The geographic pattern of China’s high-tech imports indicates that Asian countries are by far its most important

suppliers (accounting for 55% of the total), and that parts and components amount to more than three-quarters of

their high-tech supplies to China (Table 11). Production sharing with Asian countries thus plays a major role in

the technological upgrading of China’s foreign trade. While Japan is by far the largest supplier of high-tech

products to China (with 25% of its high-tech imports), Taiwan ranks second in Asia (with 12.5%).
 - 13 -

Western Europe is the second most important source of high-tech products (almost one fourth of China’s high-

tech imports). In contrast with Asia, West European high-tech products are mostly capital goods. European

transfers of technology to China follow a more traditional pattern, as they are aimed at modernizing investment

capacity and not at re-exports. China’s imports of high-tech products from America are evenly distributed

between capital goods and parts & components. America ranks second as a market for Chinese high-tech goods

(taking one fourth of China’s exports), far ahead Western Europe (14%).

It is worth stressing that although the EU stands far behind Asia as a supplier of high-tech products to China, its

exports are, on average, more technology intensive than Asian exports. This is also the case of American exports

to China. High-tech products account for 20% of China’s total imports from the EU, 17% from America, against

12% from Asia (15% from Japan). Despite geographic distance, traditional complementarities between China

and Europe, constitute a large potential for technology transfers.

- Insert Table 11 about here -

5 LINKAGES WITH THE LOCAL ECONOMY

China’s specialization in assembly trade has considerably enhanced its capacity to export high-tech products.

The share of high-tech products in China’s exports may be misleading since it does not reflect the innovative

capacity of China’s manufacturing industry, but the high-technology embodied in these exports and produced in

advanced economies.

Obviously, the outward-oriented sector has provided China’s economy substantial gains, but its dynamic impact

on the technological upgrading of the domestic industrial capacities is less easy to assess.

(a) The positive impact of outward-oriented industries

The technological level of exports indicates that China has entered lines of production for goods which are

characterized by a fast growing world demand, as for the last 20 years, international trade in high-tech products

has increased faster than average. This specialization in sectors with fast growing demand has increased the

scope of exploiting increasing returns to scales. Moreover, these new sectors are also characterized by strong

potential for productivity gains, since a close relationship between the technology intensity of products and their

potential for productivity growth can be observed (UNCTAD, 2002).

Outward-oriented industries, based on imported inputs and carried out by foreign firm affiliates, have been the

most dynamic part of China’s foreign trade in the nineties and have been responsible for a growing share of

China’s trade surplus. Their trade surplus jumped from two and half billion dollars in 1994 to 36 billion in 2001

(the corresponding figures China’s overall trade surplus were six and 22 billion dollars). These industries have
 - 14 -

also had positive effects on the domestic economy, by increasing job opportunities, improving labor training and

skills, rising income. There is no precise data which indicate the role played by these outward-oriented

industries in China’s economy, but their role can be estimated in looking at the activities of Hong-Kong and

Taiwanese affiliates, which are strongly specialized in processing activities in the Mainland. In 1999, these

affiliates accounted for 3 to 5% of urban employees, were responsible for 12% of the industrial output of the
9
organized sector , and for 14% of the profits; they held 10% of the fixed assets and paid 10% of the VAT. In

Hong-Kong and Taiwanese affiliates, the labor and capital productivity was much higher than in the Chinese

firms, due to better production and management techniques and to economies of scale associated with large

foreign markets.

Turning to the impact of overall foreign direct investment (FDI) in China (including FDI from industrialized

countries which has been more oriented towards the domestic market), its effect on the restructuring of China’s

manufacturing industry has been outstanding. In 1999, foreign affiliates were responsible for 28% of China’s

industrial output. In electronic and telecommunication equipment, they have now a dominant share (70% of

output) (see Appendix B). International comparisons of productivity show that China’s level of productivity in

manufacturing is very low, but suggests that the sectors in which foreign affiliates’ contribution to output is high,

tend to have an above average performance (leather and shoes, electrical equipment) (Szirmai, Ren & Bai,

2002).

The positive effect of foreign direct investment on growth and productivity can thus hardly be contested, but

apart from the impact linked to the presence of high-performing foreign affiliates, the spill-over effects on

Chinese producers are less easy to assess. There is some evidence that outward-oriented industries have

developed rapidly without having a decisive effect on the technological capacities and export competitiveness of

(wholly-) Chinese firms. The local content of processed exports and the evolution of domestic exports tend to

indicate that there are limited linkages between the outward-oriented sector and the rest of the economy.

(b) Foreign affiliates raise the local content of processed exports

The ratio of exports after processing to imports for processing steadily increased from 1.2 in 1994 to almost 1.5

in 1998-2001. This means that the local content of processed exports rose from 20% in 1992 to more than 30%

in 2000. Several factors explain this evolution. First, the share of profit margins and/or wage costs may have

increased more rapidly than costs of imported inputs, especially due to the real appreciation of the Yuan in 1998-

1999. Second, the value-added realized in China has also increased as a result of the growing integration of the

production process in the Mainland: the value-added chain now includes more stages of production and related
 - 15 -

services (packaging, marketing) which were previously carried elsewhere, especially in Hong-Kong. Moreover,

as the local content is higher in the sector of machinery and electrical machinery (40%) than in textiles-clothing

industry (30%), the shift which took place in processing activities towards the former sectors tended to increase

processing trade surplus (Lardy 2002).

However, a study of the electric appliances and electronics industry provides evidence that the increased local

content is due to the rapid escalation of transactions among foreign affiliates located in China (Maruya, 2000). It

shows that the increased integration of production in the Mainland has been mainly due to foreign affiliates

which have been switching from imported parts and materials towards procurements from other foreign

affiliates. Procurements from Chinese companies have remained low. The increased local content is generated

by trade flows within clusters of foreign affiliates, located in Guangdong province, but does not reflect the

upgrading of Chinese firms’ production capacities. The overwhelming share taken by foreign affiliates in

processing trade (which rose from 56% in 1994 to 72% in 2001) tends to confirm that this is a general

phenomenon.

Other reasons may explain the weak linkages between the outward oriented sectors and the domestic-based

exports: the higher quality of imported intermediates, the tighter delivery schedules of foreign suppliers, the

difficult access of foreign firms to local primary products (agricultural goods and raw materials).

(c) Ordinary trade and Chinese firms: lagging behind

From 1992 to 2001, “ordinary” exports lagged behind processed exports. The former increased by 11% a year

and the latter by 15% a year. Moreover the commodity structure of ordinary exports recorded relatively limited

changes during the nineties. Apparel still remained by far the most important sector, followed by chemical

products and raw agricultural products. In these sectors, more than half of China’s exports in 1999 relied on

“ordinary” trade. Although ordinary exports of machinery and electrical machinery increased they remained

quite marginal in 1999 (Table 12).

- Insert Table 12 about here -

It can be argued that the tariff exemptions granted to imports of intermediate products for processing industries

have led to a relative discrimination against industries involved in ordinary trade, or producing mainly for the

domestic market. In contrast to processing activities which benefited from “effective protection” (as tariff

exemptions correspond to an indirect subsidy), ordinary exports were affected by the level of tariffs on imported

inputs. At the same time, tariff exemptions on imports for processing may have had a negative impact on the
 - 16 -

local production of intermediate goods, thus limiting the backward linkages of processing activities (Zhang,

1999).

Ordinary trade is mostly carried out by wholly-Chinese firms. In 1999, they were responsible for the

overwhelming share (84%) of ordinary exports, and these account for almost two thirds of their total exports.

Chinese firms’ heavy reliance on this slow-growing trade segments may partly explain their poor export

performance. Chinese firms’ exports increased at the rate of only 6% a year from 1992 to 2001, compared to

25% for foreign affiliates. In fact, even in ordinary trade they have lost ground to foreign firms (Chinese firms

accounted for 94% of ordinary exports in 1994 and for 76% in 2002). Moreover, they also have failed to keep

pace with the expansion of processing activities; though domestic firms could benefit from the same tariff

exemptions as foreign affiliates for these activities, most of them had no direct trading rights, and this has

hampered their involvement in the international segmentation of production processes (Naughton, 1996). Their

contribution to processed exports fell sharply between 1994 and 2001 (from 45% to 28%).

The analysis of China’s exports by trade regime, by type of firms and by sector shows that Chinese firms and

foreign affiliates tend to be positioned in different product markets, which correspond to their respective reliance

on local versus imported inputs (Table 13). Chinese firms’ exports rely mainly on ordinary exports of garment,

textile and chemicals which are integrated in domestic production chains; while foreign affiliates’ exports are

concentrated in processed exports of machinery and electrical machinery, which result from international

production sharing. The dualism of China’s foreign trade regime has led to relatively weak linkages between the

outward-oriented sectors and the domestic-based exports.

- Insert Table 13 about here -

Finally, the outstanding part taken by foreign affiliates in China’s foreign trade reflects the weakness of the local

private sector. It has been convincingly argued by Huang (2003), that the development of private firms in China

has been severely constrained by legal discrimination and limited access to bank credit, and that foreign

investors have been a substitute for them. Foreign investors have taken advantage from the restraints put on the

development of a strong local private sector. Moreover, in order to avoid the discriminations against private

enterprises and to benefit from preferential treatment given to foreign investment, Chinese firms have been

induced to create joint ventures with foreign partners, or to set-up fake foreign affiliates, using Hong-Kong as a

transit place for their capital operations.

 - 17 -

6 THE IMPACT OF CHINA’S WTO ACCESSION

(a) Technological dependence or catch-up?

China’s foreign trade has remained highly dualistic at the eve of its entry in WTO. Competitive industries,

dominated by foreign affiliates and integrated in the international segmentation of production processes, coexist

with a traditional export sector, dominated by wholly-Chinese firms, which are lagging behind. Linkages

between the two sectors seem to be rather weak, as shown by their growth rates and their commodity

composition (Table 13 above). The circuits of high-tech exports and imports, directly associated with China’s

participation in the international segmentation of production processes, have provided rather limited spillovers to

the rest of Chinese industry.

This situation suggests that the technological upgrading of China’s foreign trade has had limited effects outside

firms involved in processing activities. While its specialization in assembly trade has enabled China to

incorporate high-tech products in its production for exports, the dissemination of foreign technology into the rest

of China’s industrial capacities has been slow. The fact that most processing trade is carried out by foreign

affiliates, and not by Chinese firms, may have contributed to this situation. These findings tends to confirm the

conclusions of previous studies (Zhang, 1999; Sung 2000; Wu, 1999; Naugthton, 1997; Breslin, 1999; Sun

1998).

The technological dualism which characterizes China’s industrial capacity explains the apparent contradiction

between two ways of assessing China’s capabilities. On the one hand, most experts stress that China’s

technological capabilities are still weak and that its technological dependence on imports has tended to increase

(Dahlman & Aubert, 2001; OECD, 2002). On the other hand, there are fears in many Asian industrialized

countries (Japan, Taiwan) of a too-rapid technological catch up of China, associated with the hollowing out of

their own industries. These countries are concerned by the rapid upgrading of China’s manufacturing exports

(especially in the electronics sector) driven by the progressive relocation of their high technology segments of

production in this country. This would accelerate the trend towards de-industrialization in the most advanced

economies in East Asia, and foster the switch of their economic structures towards services, an evolution that has

already taken place in Hong-Kong.

Indeed, for late-comers, importing foreign technology is a short-cut to modernization and it makes it possible to

save resources (as long as imports are cheaper than domestic innovation). However, this leads to an ever-

increasing dependency if the dissemination of foreign technology remains insufficient and if the country’s

innovative capacity is not enhanced. China’s technological catching up will depend on its own capacity to
 - 18 -

launch a sustained effort to improve the diffusion of technology in its economy and to strengthen its own

research and development.

In general terms, the R&D effort slowed down in China in the mid-1990s, and has only recovered since 1997.

R&D spending as a share of GDP remains low by international standards, representing 0.8% of GDP in 1999,

compared to 2.5% in South Korea, and 2.05% in Taiwan. Chinese firms spend many more resources importing

foreign technologies than financing their own research and development. Moreover licensing of foreign

technology, which is supposed to be more efficient for technology diffusion than imports, represents relatively

limited spending: less than 0.5% of merchandise imports in China’s case, against 0.7% for India, 2.2% for South

Korea and 3.2% for Japan (Dahlman & Aubert, 2001).

(b) Leveling the playing field

WTO accession may contribute to reducing the technological dualism of China’s industry, in providing domestic

firms with enlarged access to foreign equipment and technology. The reduction in tariffs and non-tariff barriers

will alleviate the distortions existing between the different customs regimes. Hence, Chinese firms producing for

the domestic market will suffer less discrimination compared to foreign affiliates carrying out processing

activities. More generally, this should help Chinese firms to improve their competitiveness in world as well as in
10
domestic markets . Lower tariff rates will trigger Chinese imports of both capital goods and consumer goods.

The expected rise in imports of investment goods aimed at the domestic market should provide Chinese firms

with more high-technology. For Chinese domestic-based firms, trade liberalization is thus a double-edge sword:

they will face increased competition from imported goods, and at the same time will have better access to foreign

technology and equipment, which up to now has been mostly imported by the “internationalized” sector. The

modernization process which up to now seems to have been concentrated in the outward-oriented industries

should be more widely extended to the inward-oriented sectors.

The institutional separation between domestic and foreign firms will also be reduced as the existing limitations

on foreign trade rights will be phased out (in 2004). Up to now, the ordinary import regime has included strong

limitations and most imports for the domestic market have to be channeled through foreign trade corporations.

Some production enterprises have been allowed to import but only for their own needs. Chinese firms’ ability to

export has thus been hampered by their restricted access to imports. As a consequence of WTO accession, all

firms will have the right to directly export, import and sell products in the domestic market and this is likely

increase the export potential of domestic firms. It will also let private Chinese firms develop export-import

activities, up to now monopolized by state-owned foreign trade corporations.

 - 19 -

The decision, still under consideration by the Chinese authorities, to phase out the preferential tax treatment

benefiting foreign affiliates would be another step towards leveling the playing field for domestic and foreign

firms.

(c) Back to textiles?

A major effect of WTO accession on China’s economy will be to foster the expansion of the textiles and clothing

industry. First, trade liberalization will strengthen China’s specialization in the sectors in which it has a

comparative advantage, namely labor intensive industries. Second, the phasing out of MFA quotas by 2005 will

enable China to enlarge its world market share. Studies simulating the impact of WTO accession on China’s

economic structure indicate that it would enlarge the share of textile and clothing industries in industrial output,

employment, exports and imports (Li & Zhai, 2002; Ianchovichina & Martin, 2001; OECD, 2002). This

evolution would slow-down or reverse the structural changes which have taken place in China’s industry since

the mid-1980s in favor of electrical and electronic industries, transport equipment and against textiles. The

accelerated expansion of labor-intensive industries will help contain the rise of unemployment which has

become the most serious problem of China’s economy since the end of the 1990s, as the reform of the state-

owned sector, aimed at increasing its productivity, has resulted in massive lay-off. In the next ten years,

unemployment will remain a major challenge for China’s economic policy, due to demographic trends which are

raising the working age population by 1% a year (10 million people per year), as well as due to the labor surplus

in agriculture which is estimated at around 120 to 140 million people. The service sector, which is less exposed

to international competition, will absorb an increased proportion of the labor force. Manufacturing industry

based on low-cost labor will retain its comparative advantage.

7 CONCLUSION

This in-depth analysis of China’s foreign trade has amply shown that China’s outstanding performance in world

markets during the 1990s can be traced back to its involvement in the international segmentation of production

processes, which has been deliberately encouraged by a selective trade policy granting preferential tariff

treatment to assembly. The final stages of production of matured Asian economies have migrated to China,

boosting its export capacities. Its vertical specialization has enabled China to rapidly diversify its exports, and

especially to build up its strengths in the electrical machinery sector. The study points out that this specialization

has driven the technological upgrading of China’s foreign trade, since imported parts and components have

constituted an important channel of technology transfers. It provides evidence that this strategy has led to the

building-up of highly internationalized and competitive industries, but has not helped the upgrading of the
 - 20 -

traditional exporting sector, based on domestic inputs, which has lagged behind. These findings tend to confirm

the conclusions put forwards in several studies (Zhang,1999; Sung, 2000, Wu, 1999; Naugthton, 1997; Breslin,

1999; Sun 1998).

The paper argues that trade and investment liberalization associated with WTO accession will alleviate the

institutional dualism of China’s foreign trade. This will make it possible for the modernization process, which

has up to now been concentrated in export-oriented industries, to spread more widely to the rest of the economy.

However, WTO accession also provides China with the opportunity to expand its textile productions and

exports, thus strengthening its specialization in labor intensive industries, which will help contain the rise of

unemployment. China’s manufacturing industry is thus bound to keep a relatively high degree of technological

dualism. Due to its huge size, China can avoid a narrowly defined specialization and combine comparative

advantages in labor-intensive goods with strengths in high-tech and skill- intensive industries brought in by FDI.

In this context, what is crucial for China’s catch-up process is the development of a strong domestic sector of

competitive firms, which are able to assimilate and disseminate foreign technologies and to create their own

innovative capacities. This is what is at stake in the current effort to rationalize and privatize the state-owned

enterprises. This also makes it necessary to reform the financial system to allow for the expansion of the new

private sector.

NOTES

1. Note that the notions “horizontal” and “vertical” have a different meaning when they refer to product

differentiation: the former concerns similar products, i.e. different varieties, and the latter different qualities.

2. The term “intermediate good” is used for any manufactured goods which are reintroduced into the

production cycle and disappear during that cycle.

3. Trade figures corresponding to these different trade segments are available since 1992. Within each

category it is possible to identify the respective contributions of domestic (wholly Chinese) firms and of the

affiliates of foreign enterprises since 1994.

4. Of course, there is a fraudulent use of import duty exemptions. Goods embodying duty free imports are

sold on the domestic market, as well as parts and components imported on a duty free basis.

5. It is estimated that about 60% of China’s recorded surplus with Hong-Kong (which amounted to 30 billion

US dollars in 1999) stemmed from its trade with the EU and the US. The adjusted figure for China’s surplus

with the EU would be 13 billion US dollars (instead of 4.8 billion); and with the US it would be 32 billion US
 - 21 -

dollars (instead of 22 billion). For the methodology, see European Commission (1997); Feenstra, Hai,

Woo & Yao (1999).

6. ZES of Shenzhen, Zhuhai, Shantou and Xiamen.

7. According to a classification based on the United Nations’ Broad Economic Categories (see Appendix C,

Table 17).

8. For the definition of high-technology products, see Appendix C.

9. Excluding small firms, which represent 40% of the total industrial output.

10. Of course, “successful stories” show that several Chinese firms have been able to take leading positions in

competitive markets but these cases seem to be more the exceptions than the rule.

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TABLES

Table 1. China’s foreign trade by customs regimes (in %)

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Total exports 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Ordinary exports 51.4 47.1 50.7 47.9 41.6 42.7 40.4 40.6 42.2 42.0
Exports after processing 46.6 48.2 46.5 49.5 55.8 54.5 56.9 56.9 55.2 52.1
Other exports 2.0 4.7 2.7 2.6 2.6 2.8 2.7 2.3 2.6 5.9
Total imports 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Ordinary imports 41.7 36.6 33.2 32.8 28.3 27.4 31.1 40.5 44.5 46.6
Imports for processing 39.1 35.0 41.1 44.2 44.9 49.3 48.9 44.4 41.1 38.6
Other imports 19.2 28.4 25.7 23.0 26.8 23.3 19.9 15.1 14.4 14.8
Source: General Administration of Customs of the P. R. China, China Custom Statistics, authors’ calculations.

Table 2 Breakdown of China’s foreign trade by main partner and customs regime, 1999
World EU15 US Japan New industrialized economies
Total Hong- Singapore South Taiwan
Kong Korea
in %
Total imports 100 15 12 20 29 4 2 10 12
Ordinary imports 40 9 6 6 7 1 1 4 2
Imports for processing 44 2 3 11 19 3 1 6 9
Other imports 15 4 2 3 3 0 0 1 2
Total exports 100 16 22 17 27 19 2 4 2
Ordinary exports 41 7 6 7 9 6 1 2 1
Processed exports 57 8 15 10 17 12 2 2 1
Other exports 3 0 0 0 1 1 0 0 0
billion US dollars
Total trade balance 29 5 22 -1 5 30 0 -9 -16
Ordinary trade 12 -2 1 3 7 11 0 -2 -1
Processing trade 37 13 25 0 2 19 1 -6 -12
Other regimes -20 -6 -3 -4 -4 1 -1 -1 -3
Source: General Administration of Customs of the P. R. China, China Custom Statistics, authors’ calculations.
 - 25 -

Table 3. China’s imports for processing from Asian countries (in %)

Selected sectors b Japan a
NIEs
1993 1999 1993 1999
Electrical machinery 28 38 17 27
Fiber, thread & cloth materials 17 13 30 21
Chemical products 15 15 19 20
Metallurgy 16 12 7 10
Others 24 22 27 22
All sectors 100 100 100 100
a
New industrialized economies.
b
Sectors accounting for 10 percent or more of China’s imports from Asian countries in 1999.
Source: General Administration of Customs of the P. R. China, China Custom Statistics, authors’ calculations.
Table 4. China's processed exports (in %)
a Processed exports
Selected sectors
Sector breakdown Share in sector total exports
1993 1999 1993 1999
Electrical machinery 18 25 84 84
Machinery 6 14 57 79
Apparel 20 13 49 46
Leather & shoes 15 9 78 66
Toys & various manufactured goods 12 9 79 69
Others 29 30 29 42
Total processed exports 100 100 48 57
a
Five top sectors in processed exports in 1999.
Source: General Administration of Customs of the P. R. China, China Custom Statistics, authors’
calculations.

Table 5. Foreign affiliates in China’s foreign trade with major partners, 1999
World EU-15 US Japan Hong- Singapore South Taiwan
Kong Korea
All export flows (in %) 100 100 100 100 100 100 100 100
a 45 42 54 55 49 55 44 50
FA total exports
a 38 36 48 43 42 50 36 42
FA processed exports
All import flows (in %) 100 100 100 100 100 100 100 100
a 52 49 43 63 60 64 58 65
FA total imports
FA imports for processing 32 12 21 43 50 41 44 50
Trade balance
(in million US dollar)
Overall trade balance 29 232 4 760 22 469 -1 353 29 971 441 -9 419 -15 577
a 2 762 178 14 244 -3 754 13 893 -108 -6 524 -10 773
FA total trade balance
a 21 886 7 872 15 886 -386 11 915 570 -4 705 -8 164
FA processing trade balance
a
FA: Foreign Affiliates.
Source: General Administration of Customs of the P. R. China, China Custom Statistics, authors’ calculations.
 - 26 -

a
Table 6. Contribution of foreign affiliates to China’s processing trade by sector , 1999 (in %)
Processed exports Imports for processing
Construction materials 78 84
Vehicles 76 84
Machinery 78 82
Electrical machinery 76 80
Metallic articles 60 79
Leather & shoes 70 78
Metallurgy 47 70
Chemical products 65 68
Precision instruments 69 68
Fiber, thread & cloth materials 66 67
Wood, paper & printed books 65 66
Garments 58 62
Food products 65 61
Raw agricultural products 60 58
Toys & various manufactured goods 53 47
Raw materials, mineral & oil 35 35
Other transportation equipment 48 32
All products 67 72
a
Sectors are ranked according to the share of foreign affiliates in imports.
Source: General Administration of Customs of the P. R. China, China Custom Statistics, authors’ calculations.

Table 7. China’s trade pattern and comparative advantage by stage of production

Stages Breakdown of Breakdown of Contribution to
imports (%) exports (%) a
trade Balance
1997 1999 1997 1999 1997 1999
Primary goods 11 9 5 3 -27 -27
Intermediate goods 62 65 32 33 -148 -157
Parts & components 18 23 8 11 -50 -60
Semi-finished goods 44 42 24 22 -98 -97
Final goods 23 24 61 63 187 192
Consumption goods 4 5 49 47 219 211
Capital goods 19 19 13 15 -32 -19
Non elsewhere classified 4 3 1 1 -12 -8
Total 100 100 100 100 0 0
a
For the definition of this indicator, see Appendix D.
Source: United Nations, Comtrade database, authors’ calculations.
 - 27 -

Table 8. China’s comparative advantages by branches and stages of production:

a
indicator of contribution to trade balance , 1999
NACE Classification Primary Semi- Parts & Capital Consumption All
goods finished components goods goods stages
goods
15 Food & beverages 1 -6 14 9
16 Tobacco products 0 0 0
17 Textiles 0 -5 0 19 14
18 Wearing apparel 0 0 62 62
19 Leather & footwear 0 -5 0 30 25
20 Wood 0 -1 0 -1
21 Pulp, paper & paper products -1 -14 0 -15
22 Publishing & printing 0 0 -7 -7
23 Coke & refined petroleum products 0 -2 0 -2
24 Chemicals 0 -48 -1 -49
25 Rubber & plastic products 0 -3 2 6 6
26 Other non-metallic mineral products 2 0 4 6
27 Basic metals -12 -14 -26
28 Fabricated metal products 6 -2 1 4 8
29 Machinery & equipment 0 -13 -26 19 -21
30 Office machinery & computers -2 2 0
31 Electrical machinery 4 -5 4 1 4
32 Radio, TV & communication equipement -27 -1 7 -21
33 Medical, precision & optical instruments -3 -1 -4 7 -1
34 Motor vehicles -4 3 -1 -2
35 Other transport equipment 0 -2 -3 2 -3
36 Furniture & manufacturing n.e.c. 0 2 0 0 37 35
a
For the definition of the indicator of the contribution to trade balance, see Appendix D. In bold, branches with
vertical specialization (reversal of comparative advantage along the production process).
Source: United Nations, Comtrade database, authors’ calculations.

Table 9. China’s foreign trade by technology content and production stages (average 1997-99, in %)
Stages Imports Exports
High-tech Other High-tech Other
Primary goods 0 13 0 5
Semi-finished goods 1 40 1 21
Parts & components 8 12 3 6
Capital goods 5 10 3 7
Consumption 0 10 0 53
All stages 14 86 8 92
Source: United Nations, Comtrade database, authors’ calculations.

Table 10. Commodity breakdown of China’s exports and imports of high-tech products (average 1997-99, in %)
Nace Classification Imports Exports
24 Chemical products 5 19
28 Metal products, 1 0
29 Machinery & equipment n.e.c. 5 1
30 Office machinery & computers 17 25
31 Electrical machinery & apparatus n.e.c. 4 3
32 Radio, television & communication equipment 46 42
33 Precision & optical instruments, 9 9
35 Manufacture of other transport equipment 13 1
36 Total 100 100
Source: United Nations, Comtrade database, authors’ calculations.
 - 28 -

Table 11. China’s trade in high technology products: breakdown by production stages and major zones
(average 1997-99, in %)
Asia Western America Others World
Europe
Imports Semi-finished products 4 1 1 0 6
Parts & components 42 6 8 1 57
Capital goods 9 16 11 1 37
Consumption goods 0 0 0 0 1
All Stages 55 23 20 2 100
Exports Semi-finished products 10 5 3 1 19
Parts & components 27 5 9 1 42
Capital goods 19 5 9 1 33
Consumption goods 2 1 2 0 5
All Stages 57 16 24 4 100
Source: United Nations, Comtrade database, authors’ calculations.

a
Table 12. China s’ ordinary exports, sectoral breakdown (in %)
Sectoral breakdown Share of Chinese firms
1993 1999 1999
100 100 84
Garments 20 20 90
Chemical products 10 12 87
Raw agricultural products 12 8 77
Fiber, thread & cloth materials 13 8 92
Metallurgy 4 7 87
Raw materials, mineral & oil 10 6 79
Electrical machinery 3 6 82
Wood, paper and printed books 5 5 73
Leather & shoes 4 5 88
Toys & various manufactured goods 3 5 87
Machinery 4 5 82
Food products 6 4 76
Construction materials 2 3 70
Metallic articles 2 2 86
Vehicles 1 1 85
Precision instruments 1 1 80
a
Sectors are ranked according to their share in ordinary exports, descending order.
Source: General Administration of Customs of the P. R. China, China Custom Statistics, authors’ calculations.
 - 29 -

a
Table 13. China’s exports by custom regime and type of firm , 1999, (in % of total exports)
All Processed exports Ordinary exports
exports Foreign Chinese Foreign Chinese
firms firms firms firms
Total 100 38 19 6 34
Electrical machinery 17 11 3 0 2
Garments 15 4 3 1 7
Machinery 10 6 2 0 2
Chemical products 8 2 1 1 4
Leather & shoes 7 3 1 0 2
Toys & various manufactured goods 7 3 2 0 2
Fiber, thread & cloth materials 6 2 1 0 3
Metallurgy 5 1 1 0 2
Wood, paper and printed books 5 2 1 1 2
Raw agricultural products 4 0 0 1 2
Precision instruments 4 2 1 0 0
Raw materials, mineral and oil 3 0 0 1 2
Food products 3 0 0 0 1
Other transportation equipment 2 1 1 0 0
Construction materials 2 0 0 0 1
Metallic articles 1 0 0 0 1
Vehicles 1 1 0 0 1
a
Sectors are ranked according to their share in China's exports, descending order.
Source: General Administration of Customs of the P. R. China, China Customs Statistics, authors’ calculations.
 - 30 -

APPENDIX A

Table 14. China’s nominal and collected tariff rates on manufactured products (in %)
1997 Tariff Rate
Nominal Collected
Processed food 23.2 3.7
Beverage 60.2 24.0
Tobacco 49.1 10.6
Textile 27.5 0.2
Apparel 41.8 0.7
Leather 35.5 0.3
Sawmills and furniture 14.4 2.5
Paper & printing 11.0 3.1
Social articles 3.1 1.0
Petroleum refining 8.7 4.8
Chemicals 10.8 3.0
Medicine 10.9 7.2
Chemical fibers 15.5 1.0
Rubber and plastics 19.8 2.0
Building materials 20.8 3.6
Primary iron and steel 8.1 2.0
Non-ferrous metals 7.1 0.9
Metal products 13.1 2.4
Machinery 13.7 4.2
Special equipment 14.1 2.6
Automobile 50.7 32.6
Other transport equipment 5.6 1.3
Electrical machinery 17.9 3.1
Electronics 11.8 2.1
Instruments 12.5 2.3
Other manufacturing 38.9 0.9
Manufacturing sector average 11.2 2.5
Source: Li & Zhai (2002).
 - 31 -

APPENDIX B
a
Table 15. Foreign affiliate industrial output by sector in China, 2001 (in %)
Output by sector Share in sector output
Total industry 100.0 28.5
Electronic and telecommunications equipment 24.4 73.8
Transport equipment 7.4 30.9
Electric equipment and machinery 6.7 33.4
Chemical products 5.0 21.8
Textile industry 4.5 21.9
Garments & other fiber products 4.4 46.0
Metal products 3.7 35.7
Food processing 3.6 23.8
Plastic products 3.4 43.7
Leather, furs 3.1 54.5
Ordinary machinery 2.8 22.0
Nonmetal mineral products 2.8 19.1
Food manufacturing 2.4 40.3
Papermaking & paper products 2.1 31.6
Instruments, office machinery 2.0 58.3
Beverage manufacturing 2.0 29.9
Smelting & pressing of ferrous metals 1.7 8.1
Medical & pharmaceutical products 1.7 22.2
Petroleum & coke processing 1.5 9.1
Special purpose equipment 1.5 17.7
Cultural, educational & sports goods 1.5 60.0
Rubber products 1.1 34.8
Non ferrous metals 1.1 12.1
Printing & recording 0.9 33.5
Chemical fiber 0.8 22.1
Timber processing, 0.8 28.8
Petroleum & natural gas extraction 0.8 7.5
Furniture manufacturing 0.7 45.7
a
Sectors are ranked according to their share in foreign affiliate output.
Source: National Bureau of Statistics of China (2002).
 - 32 -

APPENDIX C. PRODUCT CLASSIFICATION AND GROUPINGS

The trade data used in this study come from two sources: China’s Customs Statistics and the Comtrade database

of the United Nations.

1) Trade data from China’s Customs statistics were available at the two-digit level of HS classification

(Harmonized Nomenclature). The 98 items have been grouped into 17 sectors (Table 16).

Table 16. Grouping by manufacturing sectors

Sectors HS
Raw agricultural products 01, 02, 03, 05, 06, 07, 08, 10, 12, 13, 14,
Food products 04, 09, 11, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24,
Raw materials & fuels 25, 26, 27,
Chemical products 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40
Wood and paper products 44, 45, 46, 47, 48, 49, 94
Leather and shoes 41, 42, 43, 64
Fibber and cloth 50, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60
Wearing apparel 61, 62, 63,
Building materials 68, 69, 70
Metallurgy 72, 73, 74, 75, 76, 78, 79, 80, 81
Metal products 82, 83
Machinery 84, 93
Electrical machinery 85
Motor vehicles 87
Other transport equipment 86, 88, 89
Precision instruments 90, 91, 92
Toys & miscellaneous manufactured products 65, 66, 67, 71, 95, 96, 97, 98
2) Comtrade data were available at the six-digit level of HS classification. Using this most-detailed

classification, three types of groupings were made:

• Products have been grouped in branches of NACE classification (2 digits).

• Products have been reclassified by stage of production, using a correspondence table based on a revised

version of the Broad Economic Categories (BEC) of the United nations. The BEC has been elaborated by

the UN, and it was derived from the SITC, rev.3 (standard International Trade Classification). SITC items

are reclassified according to the principal use of products. More specifically, foreign trade data has been

reclassified into categories corresponding to the final or intermediate use of the products, in accordance with

the system of National Accounts. In this study, BEC categories have been reclassified as indicated in

Table 17.
 - 33 -

Table 17. Grouping by stages of production

3 stages 5 stages Code BEC Title BEC
Primary goods 111 Food and beverages mainly for industry
21 Industrial supplies, n.e.c., primary
31 Fuels and lubricants, primary
Intermediate goods Semi-finished goods 121 Food and beverages, processed, mainly for industry
22 Industrial supplies, n.e.c., processed
321 Motor spirit
322 Other processed fuels and lubricants
Parts & components 42 Of capital goods, except transport equipment
53 Of transport equipment
Final goods Capital goods 41 Capital goods except transport equipment
521 Other industrial transport equipment
Consumption goods 112 Food & beverages, primary, mainly for household
consumption
122 Food & beverages, primary, processed, for house.
consumption
51 Passenger motor cars
522 Other non-industrial transport equipment
61 Durable consumer goods n.e.c.
62 Semi-durable consumer goods n.e.c.
63 Non-durable consumer goods n.e.c.
• Products have been defined as high-technology products following the classification proposed in the study

by Fontagné, Freudenberg and Ünal-Kesenci (1999). The classification derives from a joint list elaborated

by the OECD and Eurostat. It includes 252 high-technology products identified at the six-digit level of the

HS classification. They belong to nine production sectors: 1) aeronautics, 2) office machinery and

computers, 3) electronics and telecommunications equipment, 4) pharmaceuticals, 5) precision instruments,

6) electrical machinery, 7) chemicals, 8) non-electrical machinery, 9) arms.

APPENDIX D. THE INDICATOR OF CONTRIBUTION TO TRADE BALANCE

Different types of indicator have been used for measuring revealed comparative advantages. The early attempts

to quantify revealed comparative advantages were based on export data. These ratios were in fact indexes of

“export specialisation” and failed to take into account imports while it has become more and more necessary to

incorporate imports in the measure of comparative advantage. As the international division of labour has

intensified, imports have become an important factor for explaining export performance.

The indicator which is used in this part of the paper to analyse the comparative advantages of China follows the

methodology designed at the CEPII for building the indicator of contribution to trade balance.

 x − mik x − mi x + mik 
CTB =  ik − i x ik  x1000 where i = country; k = branch; x = exports; m = imports.
 ( xi + mi ) ( xi + mi ) xi + mi 

The first term measures the country’s trade balance for a given commodity weighted by the total trade of the

country.
 - 34 -

Comparative advantage is a concept which refers to the structural characteristics of the national economies

(Lafay, 1994) so, the second term is meant to eliminate the effects of short-term fluctuations (trade deficits or

surplus), connected to macroeconomic factors. It measures the “expected” trade balance of the given

commodity, assuming that each commodity contributes to the overall trade balance in proportion of its weight in

total trade. The overall trade deficit is thus distributed among commodities according to their respective share in

total trade.

The indicator of contribution to trade balance thus compares the country’s actual trade balance for a given

commodity to the “expected” trade balance for this commodity. The difference between the actual trade balance

for a commodity and the “expected” trade balance for the same commodity measures its specific contribution to

the total trade balance. The contribution is positive when the actual trade surplus is larger than the expected

trade surplus and also when the relative trade deficit is smaller than the expected trade deficit. The indicator

highlights the relative strengths and weaknesses of individual sectors in the country’s trade. The commodity

contributions to the country’s trade balances may be added and the sum is zero, by definition.

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