Global Production Networks and China’s Processing Trade

This paper unveils a systematic pattern in China’s processing trade. In a cross-section of Chinese provinces, the average distance traveled by processing imports (import distance) is negatively correlated to the average distance traveled by processing exports (export distance). To explain this pattern, we set up a three-country industry-equilibrium model in which heterogeneous firms from two advanced countries, East and West, sell their products in each other’s markets. Each firm can use two modes to serve the foreign market. It can directly export its products from its home country. Alternatively, it can indirectly export to the foreign market by assembling its product in a third low-cost country, China, which is located in the vicinity of East. Our model establishes two theoretical predictions relating China’s geographical location to its processing trade patterns. First, China’s processing exports are negatively affected by both an increase in import distance and a rise in export distance. Second, China’s processing exports to East Asian countries are more sensitive to export distance and less sensitive to import distance than its processing exports to non-Asian countries. We find empirical support for both predictions. _____________________________________ Acknowledgments. This paper was prepared for presentation at the Conference "China, Japan, and the United States: A Deeper Integration" organized by Theresa Greaney and Mary Lovely. May 27-28, 2009, Tokyo. We thank conference participants, the organizers and our discussants Yasuyuki Todo and Eiichi Tomiura for helpful comments. We also thank participants at the 2008 Vlaams Wetenschappelijk Economisch Congres and the 2009 Eastern Economics Association Meetings for their valuable suggestions. The authors gratefully acknowledge financial support from the Asian Development Bank Institute, the East-West Center and the Brandeis University Asia-Pacific Center. Van Assche also thanks the Fonds québécois de la recherché sur la société et la culture (FQRSC) for financial support. Manuscript