Unexceptional Exporter Performance in China? The Role of Processing Trade

Abstract

The firm level trade literature finds exporters are exceptional performers for a wide range of countries and measures. Paradoxically, the one documented exception is the world’s largest trader, China. We show that this puzzling finding is entirely driven by the presence of firms that engage in export processing – the activity of assembling tariff exempted imported inputs into final goods for resale in foreign markets. In China roughly a fifth of exporters, accounting for about one-third of total export value, are engaged in processing trade only. These firms are 4% to 30% less productive than non-exporters. Removing processing exporters restores the traditional finding that exporters have superior performance relative to non-exporters. Our results show that distinguishing between processing and ordinary exporters is crucial for understanding firm-level exporting behavior in China. It should also be investigated closely in other countries for which processing trade is important.

Keywords: processing trade, firm productivity, exports

JEL Classification: F1, O1