Much has been said about the role of the People’s Republic of China (PRC) in international trade, especially since its accession to the World Trade Organization (WTO) in 2001. The rise of the PRC has been fostered by ever-increasing global production processes, now highly-fragmented and located in different regions of the planet. This development has enabled China to occupy a central role in the productive processes of multinational companies, so that most of manufactured goods on world markets now bear the “Made in China” label.
From a national accounts perspective, this means that the total value of the millions of products churned out in Chinese factories is recorded in China’s current account, which measures the net difference between exports and imports of goods and services. It is because of this method of calculation that over the years the trade deficit of the highly industrialized countries (especially the United States) with China has grown exponentially.
However, it is well known in both trade and consumer circles that the majority of Chinese products are only assembled in the PRC and that a substantial portion of their components are imported into China from regional suppliers. The result of this highly fragmented production process is that the portion of the added value (the price of a good minus the costs of the intermediate goods used to produce it) of a finished product actually attributable to the PRC is only a tiny fraction of the manufacturing price. In other words, there is a quite significant difference between the market value (final price) of China’s exported products and the added-value after assembling them in the Chinese “factory cities.”
The production of an Apple brand product is often cited as a good example to explain this phenomenon. China’s added-value contribution to the final price of the Apple product leaving a Foxconn factory in Longhua, Shenzhen, is very marginal, as it consists of only labor and amounts to only between two or three percent of the total retail price of the product. The most substantial added-value is contributed by South Korea, Japan, the United States, Germany, Taiwan, the Philippines, Thailand, South Korea, Singapore, and Malaysia. This basically means that China’s trade consists of importing raw and auxiliary materials, parts and components, accessories, and packaging materials from its trade partners in bulk, and re-exporting assembled products. Although the share of this “processing trade” is in decline in China’s total trade, it still generated 39 percent of China’s trade income in 2010, down from nearly half (49 percent) in 2000.
The processing trade has a considerable impact on Chinese economic policy. The percentage of a country’s exports that can be attributed to either domestic inputs or third parties has serious implications for its competitiveness policies on the one hand, and growth and employment levels on the other. The WTO and the Organization for Economic Organization and Development (OECD) launched a new initiative in April 2011 called “Made in the World.” The stated aim is “to support the exchange of projects, experiences and practical approaches in measuring and analyzing trade in value-added terms.” For the first time these two international organizations have made available a database that collects detailed statistics on trade in value-added, accompanied by input/output tables and figures summarizing a large number of countries and economic sectors. The information collected by the database allows experts, among other things, to have a clearer picture of the role of China as an international trade hub in East Asia, both in terms of exports and imports.
This trade data provides a more accurate picture of the importance of the added-value attributable to components of ‘foreign’ origin to the total value of the PRC’s exports. The value of parts, components, accessories, and packaging materials produced abroad prior to assembly in China amounted to approximately 30 percent of the total value of Chinese exports, a figure that rises to around 40 percent in some sectors, such as consumer electronics products and natural resources. In addition, the data shows how well China is playing within global value chains. On average, of the total inputs that are used in the production of goods for foreign or domestic markets, 48 percent are imported, although they are on declining path since 2005. But the proportion remains high in various sectors characterized by highly-fragmented production processes, such as textiles and electronics.
One of the stated goals of releasing this new set of statistics is to contribute to a better understanding of the origins of the strong trade imbalances in some countries and to help reducing them. While it is true that the U.S. trade deficit has grown enormously in recent years and represents a serious threat to the economic stability of the country, it should be noted that studies that have made estimates using the value-added approach have greatly reduced the role of China in this trade deficit. Indeed, if the value-added approach instead of the traditional calculation is used, China’s share in the U.S. trade deficit is reduced by 40 percent.
The “Made in the World” data shows that the U.S. trade deficit with China in 2012 was $45 billion less than traditionally calculated figures suggested. The European Union’s and UK’s trade deficit with China also appeared far lower when calculated with this method. On the other hand, the new data demonstrates that many countries, such as Germany, South Korea and Japan, ran smaller trade surpluses with China in the recent past. The last two cases are interesting because they show that, by using the added-value method and measurement, Japan’s trade with China is actually balanced rather than in the red. Finally, South Korea, which is the second largest exporter to China due to close economic integration, e.g., international production networks or supply-chain trade in economic jargon, sees a significantly reduced trade volume with China when the value-added method of calculation is applied.
Richard Rousseau is Associate Professor and Chair of the Department of Humanities and Social Sciences at the American University of Ras Al Khaimah, United Arab Emirates. His research, teaching and consulting interests include Russian politics, Eurasian geopolitics, international political economy, and globalization. He lived three years in Baku, Azerbaijan.
This article was originally published in the 2013 special annual APEC CEO Summit Magazine. Published with permission.
Photo: Martin Abegglen (cc).
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Value-Added Accounting and the Impact on China’s International Trade
October 22, 2013
Much has been said about the role of the People’s Republic of China (PRC) in international trade, especially since its accession to the World Trade Organization (WTO) in 2001. The rise of the PRC has been fostered by ever-increasing global production processes, now highly-fragmented and located in different regions of the planet. This development has enabled China to occupy a central role in the productive processes of multinational companies, so that most of manufactured goods on world markets now bear the “Made in China” label.
From a national accounts perspective, this means that the total value of the millions of products churned out in Chinese factories is recorded in China’s current account, which measures the net difference between exports and imports of goods and services. It is because of this method of calculation that over the years the trade deficit of the highly industrialized countries (especially the United States) with China has grown exponentially.
However, it is well known in both trade and consumer circles that the majority of Chinese products are only assembled in the PRC and that a substantial portion of their components are imported into China from regional suppliers. The result of this highly fragmented production process is that the portion of the added value (the price of a good minus the costs of the intermediate goods used to produce it) of a finished product actually attributable to the PRC is only a tiny fraction of the manufacturing price. In other words, there is a quite significant difference between the market value (final price) of China’s exported products and the added-value after assembling them in the Chinese “factory cities.”
The production of an Apple brand product is often cited as a good example to explain this phenomenon. China’s added-value contribution to the final price of the Apple product leaving a Foxconn factory in Longhua, Shenzhen, is very marginal, as it consists of only labor and amounts to only between two or three percent of the total retail price of the product. The most substantial added-value is contributed by South Korea, Japan, the United States, Germany, Taiwan, the Philippines, Thailand, South Korea, Singapore, and Malaysia. This basically means that China’s trade consists of importing raw and auxiliary materials, parts and components, accessories, and packaging materials from its trade partners in bulk, and re-exporting assembled products. Although the share of this “processing trade” is in decline in China’s total trade, it still generated 39 percent of China’s trade income in 2010, down from nearly half (49 percent) in 2000.
The processing trade has a considerable impact on Chinese economic policy. The percentage of a country’s exports that can be attributed to either domestic inputs or third parties has serious implications for its competitiveness policies on the one hand, and growth and employment levels on the other. The WTO and the Organization for Economic Organization and Development (OECD) launched a new initiative in April 2011 called “Made in the World.” The stated aim is “to support the exchange of projects, experiences and practical approaches in measuring and analyzing trade in value-added terms.” For the first time these two international organizations have made available a database that collects detailed statistics on trade in value-added, accompanied by input/output tables and figures summarizing a large number of countries and economic sectors. The information collected by the database allows experts, among other things, to have a clearer picture of the role of China as an international trade hub in East Asia, both in terms of exports and imports.
This trade data provides a more accurate picture of the importance of the added-value attributable to components of ‘foreign’ origin to the total value of the PRC’s exports. The value of parts, components, accessories, and packaging materials produced abroad prior to assembly in China amounted to approximately 30 percent of the total value of Chinese exports, a figure that rises to around 40 percent in some sectors, such as consumer electronics products and natural resources. In addition, the data shows how well China is playing within global value chains. On average, of the total inputs that are used in the production of goods for foreign or domestic markets, 48 percent are imported, although they are on declining path since 2005. But the proportion remains high in various sectors characterized by highly-fragmented production processes, such as textiles and electronics.
One of the stated goals of releasing this new set of statistics is to contribute to a better understanding of the origins of the strong trade imbalances in some countries and to help reducing them. While it is true that the U.S. trade deficit has grown enormously in recent years and represents a serious threat to the economic stability of the country, it should be noted that studies that have made estimates using the value-added approach have greatly reduced the role of China in this trade deficit. Indeed, if the value-added approach instead of the traditional calculation is used, China’s share in the U.S. trade deficit is reduced by 40 percent.
The “Made in the World” data shows that the U.S. trade deficit with China in 2012 was $45 billion less than traditionally calculated figures suggested. The European Union’s and UK’s trade deficit with China also appeared far lower when calculated with this method. On the other hand, the new data demonstrates that many countries, such as Germany, South Korea and Japan, ran smaller trade surpluses with China in the recent past. The last two cases are interesting because they show that, by using the added-value method and measurement, Japan’s trade with China is actually balanced rather than in the red. Finally, South Korea, which is the second largest exporter to China due to close economic integration, e.g., international production networks or supply-chain trade in economic jargon, sees a significantly reduced trade volume with China when the value-added method of calculation is applied.
Richard Rousseau is Associate Professor and Chair of the Department of Humanities and Social Sciences at the American University of Ras Al Khaimah, United Arab Emirates. His research, teaching and consulting interests include Russian politics, Eurasian geopolitics, international political economy, and globalization. He lived three years in Baku, Azerbaijan.
This article was originally published in the 2013 special annual APEC CEO Summit Magazine. Published with permission.
Photo: Martin Abegglen (cc).
