Measuring the Competitiveness of China's Processed Exports

• Author: Willem Thorbecke
• Date: 01 January 2015
• Published date: 01 January 2015
• DOI: http://doi.org/10.1111/cwe.12100

78 China & World Economy / 78–100, Vol. 23, No. 1, 2015

©2015 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Measuring the Competitiveness of

China’s Processed Exports

Willem Thorbecke*

Abstract

China’s surplus in processing trade remains large. Processed exports are final goods

produced using parts and components that are imported duty free. Because much of the

value-added of these exports comes from East Asia, exchange rates throughout the region

should affect their foreign currency prices. This paper presents data on value-added exchange

rates for processed exports over the 1993–2013 period and reports that they significantly

affect exports. While the renminbi appreciated 36 percent between the beginning of 2005 and

the end of 2013, exchange rates in supply chain countries depreciated. This has mitigated the

effect of the RMB appreciation on the price competitiveness of processed exports.

Key words: Chinese exports, competitiveness, global supply chains

JEL codes: F10, F14, F40

I. Introduction

China recorded a surplus in processing trade of over US$360bn in 2013. Between 2000 and

2013 its surpluses in processing trade cumulate to US$3tn. Processing trade refers to a

customs regime where exports like tablet computers are assembled with parts and components

such as microprocessors that are imported duty free. China’s other major customs regime,

ordinary trade, has been in deficit since 2009. China’s total surplus was recorded at US$261bn

in 2013 (see Figure 1).

Many economists respond to China’s surpluses by recommending that the renminbi

(RMB) appreciate (see US Treasury, 2014). Evidence presented in Cheung et al. (2012) and

elsewhere indicates that an appreciation of the RMB would reduce China ’s exports. However,

a renminbi appreciation would especially affect lower-end ordinary exports such as shoes

and toys because most of the value-added of these goods comes from domestic inputs. For

processed exports much of the value-added comes from sophisticated intermediate inputs

*Willem Thorbecke, Researcher, Research Institute of Economy, Trade and Industry, Tokyo, Japan.

Email: wthorbec@gmu.edu, willem-thorbecke@rieti.go.jp.

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Measuring the Competitiveness of China’s Processed Exports

©2015 Institute of World Economics and Politics, Chinese Academy of Social Sciences

produced in Taiwan of China, Korea and other parts of East Asia. While the renminbi

appreciated by 36 percent in real effective terms between the first quarter of 2005 and the

end of 2013, many currencies in supply chain countries depreciated. Thus, the appreciation

of the renminbi has had an attenuated effect on the price competitiveness of China ’s

processed exports.

Figure 2 presents data on China’s exports in two key sectors, clothing and computers.

Clothing is primarily exported under the ordinary trade customs regime and computers are

largely exported under the processing trade customs regime. In the 1990s the value of

clothing exports far exceeded the value of computer exports. However, during the 2005 –

2013 period when the RMB was appreciating, clothing exports tapered off but computer

exports soared. One reason for this differential performance is that the renminbi appreciation

Figure 1. China’s Ordinary, Processing and Total Trade Balances

Ordinary

balance

Processing

balance

Total balance

-200

-100

0

100

200

300

400

500

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

US$bn

Source: China Customs Statistics.

Year

Figure 2. China’s Exports of Computers and Clothing

Clothing

Computer

equipment

0

50

100

150

200

250

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

US$bn

Year

Source: The CEPII-CHELEM database.