What’s Behind « Made in China » ?
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What’s Behind « Made in China »?
Ari Van AsscheHEC Montréal and LICOS-KU Leuven
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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.
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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).
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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.
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• 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.
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Fear 2: « Emerging Technological Superpower »
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Processing export share, by technology level
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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.
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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.
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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.
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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?
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