Though already deeply integrated into East Asia's value chains, China's processing trade still shows vigorous advancement

In the 70 years since the founding of the People's Republic of China and especially during the past 40 years of reform and opening-up, the processing trade has made important contributions to the country's rapid economic development. These contributions should not be underestimated in any way.

The total value generated by exports of China's processing trade in 2018 was U.S.$797 billion and accounted for 32 percent of China's total exports that year. The total value of imports reached $470 billion, 22 percent of China's total imports, for a trade surplus of $327 billion.

However, with uncertainties looming larger for the global economy and for China's pursuit of industrial upgrading, should the country vigorously develop its processing trade? Despite the challenges, there are indeed reasons why China should still develop its processing trade.

First, the processing trade and export-oriented processing industry have attracted a large amount of foreign investment and they provide a large number of employment opportunities in China. According to statistics from the Customs Administration, the import and export volume of the processing trade of foreign-invested enterprises reached $1.031 trillion in 2018, accounting for 81 percent of the total import and export value of the processing trade.

Data also show that the processing trade, with foreign-invested enterprises as the main driver, provides jobs for about 30 million people in China. In the general context of the uncertain prospects for the development of the world economy, the processing trade, which can attract foreign investment and alleviate the pressure on employment to some extent, becomes especially important.

Second, the large-scale production and manufacturing capacity created by the development of the processing trade in the past 40 years has become an important advantage for China's manufacturing industry and foreign trade.

According to statistics, the mechanical and electrical products exported by means of the processing trade in 2016 amounted to $561 billion, accounting for 79 percent of the total exports of the processing trade, and the high-tech products exported by means of imported materials processing amounted to $347 billion, accounting for 49 percent of the total exports of the processing trade. Undoubtedly, the "Made in China" label that has amazed the world cannot be separated from the development of the processing trade over the past 40 years.

Finally, the processing trade is an essential arrangement for the formation and development of East Asia's production network and the regional value chain.

One of the core features of cross-border production networks and value chains is the cross-border flow of intermediate products such as raw materials and components.

In order to run efficiently, a regional production network needs to eliminate the import tariff barriers faced by the cross-border flows of intermediate products, and realize the zero-tariff cross-border flows of intermediate products. Major economies in the East and South-East Asia have formed a very unique regional zero-tariff flow network for intermediate products by means of bonded areas, export processing zones, free ports, free trade zones and the likes that have supported the production networks and value chains throughout the entire regions.

So far, China has been deeply involved and integrated into the East Asia's production networks, and become its core component after developing for over 40 years. Therefore, the processing trade, as a pillar of the whole regional production network system, still shows vigorous development although it needs system improvement.

Over the past 70 years since the founding of the People’s Republic of China, foreign trade has developed from the initial "mutual exchange of needed products" to active participation in, and integration into, the East Asia's production networks by means of the processing trade. And the process trade has made important contributions to the rapid development of China's economy.

Looking into the future, the processing trade and regional production networks are adjusting and reconstructing rapidly,  driven by the flourishing development of China's domestic consumer market, and will promote the further development of economic globalization.

The author is an associate professor at Institute of International Economy of University of International Business and Economics. The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch. All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.