The Tricks of China’s Trade

BEIJING – Last year, China ostensibly reached another milestone in its meteoric rise, surpassing the United States to become the world’s largest trading country, with its total trade turnover valued at CN¥25.83 trillion ($4.16 trillion). But this achievement is largely illusory – and should not be allowed to obscure China’s need to transform its trading model.

Since the 1990s, China’s has been building up its “processing trade” – whereby it imports intermediate inputs from other countries, processes or assembles them, then exports them – causing the ratio of intermediate-product trade to overall external trade to grow rapidly. Intermediate inputs comprise around 28% of global exports, but 40% of China’s total exports. Given that traditional trade accounting is based on country of origin, the resulting global segmentation of value added and the multilayered international division of labor can distort trade figures.

For example, the “triangular trade” model – whereby China imports significant quantities of intermediate inputs from East Asian countries like Japan and South Korea, then exports the assembled products to the US – allows for substantial redundancy in trade records. In 2010, more than one-quarter of the world’s $19 trillion in exports was counted more than once.

China’s dependence on low value-added activities like processing and assembly is rooted in its historical lack of capacity to invest in research and development. For a long time, the country was able to overcome this deficiency by capitalizing on its abundant labor force to become a global leader in low-cost, labor-intensive manufacturing.