What’s Behind « Made in China » ?

1. What’s Behind « Made in China »? Ari Van Assche HEC Montréal and LICOS-KU Leuven

3. Processing trade regime • Under the processing trade regime, firms are allowed to import inputs duty-free provided they are used to produce further processed goods or final goods destined solely for exports. • Processing trade data thus provide information on trade between three sequential nodes of a global supply chain: the location of upstream production, the location of processing (in China) and the location of downstream consumption.

7. Fear 1: « Factory of The World »

8. The Chinese export value for a unit of a 30GB video iPod in 2006 was about $150. However, only $4 of this value is attributable to producers in China (Linden et al. 2007).

9. Exported by China≠Made in China • China has grown into the world’s largest exporter in 2009, but not all exports are Made in China. • Only 30%-50% of China’s total export value is Made in China, while the other portion is the value of imported components (Koopman et al., 2008; Upward, Wang and Zheng, 2010). • China is not the world’s factory, but rather the world’s assembler.

10. U.S. and E.U. customs require that all imported products be marked with the name of a foreign country of origin. • The country of origin of a good is generally determined by the last country in which a ‘substantial transformation’ of the good took place. • Since China is specialized in final assembly, many products are labeled “Made in China” even though only a fraction of the value is truly made in China.

11. Fear 2: « Emerging Technological Superpower »

13. Processing export share, by technology level

15. Statistical Mirage • Once processing trade is taken into account, the evidence is less strong that China is rapidly moving up the technology ladder and becoming competitive in technology-intensive areas where advanced economies should have a comparative advantage. • Rather, China’s production activities have remained consistent with its comparative advantage in labor-intensive production activities.

16. Fear 3: « The Great Hollowing Out »

19. Japan 977 Belgium 5,606 USA 5,921

21. Geography matters • China’s attractiveness as an offshoring location is determined by its proximity to foreign input suppliers (supplier access) and vicinity to foreign markets (market access). • Eastern firms choose China as a processing location for its exports to West • Western firms choose China as a processing location for its exports to East • Only a small portion of offshoring to China is conducted by Western firms that merely want to reduce their production costs.

23. What’s Behind « Made in China »? • Once China’s role in global production networks is taken into account, a different picture of China emerges than is portrayed by the popular press. • China’s exports do not reflect a rising dragon that single-handedly challenges Western manufacturing firms in both low-tech and high-tech industries. • They rather represent the façade of increasingly competitive East Asian production networks that sell to Western markets.

24. Strategic Implications • What is your role in global production networks? Are Chinese firms your partners or competitors? • Who are you truly competing against? • Are you offshoring to China for the right reasons?