What is Processing Trade?
What is processing trade in China? It refers to trading activities of companies that import raw materials from abroad, process them in their own country (in this case China) and then export the produced goods back to that country or any other country around the globe. Almost 50% of China’s export trading activity consists of processing trade. This has been made possible thanks to China’s export friendly regulations, for example the setting up of special export zones.
According to the available statistics, despite the 2008 crisis that rocked the financial world, exports from processing trade dominated total exports, even for 2 years after. China has gradually moved on from processing with assembly towards processing with imported materials which is a sign of its emergence as a world trading power.
This article will look at some numbers that may be helpful to trader who are planning to expand manufacturing operations into China.
What are the differences between processing with intermediate inputs and with assembly?
There are two main differences between the 2:
- Firms are not required to make payments for the raw materials they use when processing with assembly. These payments are not required as the finished products are then sent back to the companies that sold them the raw materials. In the case of processing with imported materials, however, the companies that import the raw material have to pay for it and subsequently sell the finished goods to whichever company or country they want to sell it to.
- Processing with assembly is free of all kinds of duties in China. On the other hand, companies dealing with processing with imported inputs are required to pay the duties on the imported products first. Even though they can get back these duties after they’ve exported the final processed product, the need to make this payment puts extra pressure on the company’s cash flow.
In China, the biggest three ports sharing processing import traffic are Shanghai, Shenzhen, and Nanjing. These three ports alone control over 55% of the total processing imports into the country. The top 3 ports for ordinary imports are Shanghai, Qingdao, and Jiangsu, but these deal with only about 35% of the total ordinary imports. One can see from these numbers that the ordinary imports aren’t as concentrated in a handful of geographical areas unlike the processing imports.
When planning to set up a manufacturing facility anywhere in the world, it is important to ascertain if the authorities overseeing the locality are already familiar with handling specific kinds of product. For example, it would be important to consider if Customs authorities are well versed with raw materials typically used in a certain industry. The less familiar the authorities in the site are, the more queries and challenges traders should expect to face.
One can also see from the above that the processing imports are concentrated in different regions compared to ordinary imports. One reason for this could be that the ordinary imports consist of products meant for final consumption by the end-user, who are spread all across the country as opposed to manufacturing plants which may be concentrated in a few regions.
40% of processing imports consist of transport equipment and electrical machinery. 30% share is taken by 4 other industries that include mechanical appliances/machinery, mineral fuels/oils, optical/photographic instruments, and plastic.
As far as the mode of shipment is concerned, 41% of the total processing imports are transported by sea routes. Similarly, air transportation has about 30% share while truck/land transport handles just over 27% of the processing imports. It might seem odd to some that air transport has a larger share than land transport but it must be noted that in this case, the share is determined according to the goods’ financial value and not the quantity. In other words, this just shows that on average, more expensive goods are transported by air.
There are also some important statistics about the quality of imported materials to China. When it comes to high-quality raw materials, the top 6 supplier nations include:
The highest quality of ordinary imports are dominated by the following nations:
- Cayman Islands
Over 50% of the processing imports are carried out by companies that run on foreign investments. 17% of the processing imports are executed by joint-ventures between China and other countries. Similarly, about 12% of the processing imports are done by state-owned companies whereas private companies account for about 10% of the processing imports. As far as ordinary imports are concerned, the situation is quite opposite and state-owned enterprises dominate.
In conclusion, we must point out that the variety in the nature of inputs that China imports have gone down over the years. There are two possible reasons for this. Either the items are now easily produced locally, or the industry is dominated by specialization in a certain sector. Either way, imports are a strong part of a healthy Chinese economy and this economy can only be expected to advance itself in the coming years.