Domestic Value Added in Chinese Exports Hiau Looi Kee and Heiwai - - PowerPoint PPT Presentation

Domestic Value Added in Chinese Exports

Hiau Looi Kee and Heiwai Tang

World Bank and Tufts University

December 2011 The …ndings and results of this paper do not represent the views of the World Bank, its Executive Directors, or the countries they represent

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 1 / 32

Designed by Apple in California, Assembled in China

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 2 / 32

US-China Trade, 1995 and 2010

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 3 / 32

Introduction

The widening bilateral imbalance in US-China trade has attracted a lot of heated discussions, mainly focus on the US labor market impact

• f Chinese exports

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 4 / 32

Introduction

The widening bilateral imbalance in US-China trade has attracted a lot of heated discussions, mainly focus on the US labor market impact

• f Chinese exports

Autor, Dorn and Hanson (2011) …nd that Chinese imports into the US signi…cantly lower job creation, wages, and labor market participation

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 4 / 32

Introduction

The widening bilateral imbalance in US-China trade has attracted a lot of heated discussions, mainly focus on the US labor market impact

• f Chinese exports

Autor, Dorn and Hanson (2011) …nd that Chinese imports into the US signi…cantly lower job creation, wages, and labor market participation Scott (2011): “growing US trade de…cit with China costs 2.8 million jobs between 2001 and 2010.”

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 4 / 32

Factory of the World

China being the “factory of the World,” due to its participation in the global production chain, particularly at the …nal assembly stage

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 5 / 32

Factory of the World

China being the “factory of the World,” due to its participation in the global production chain, particularly at the …nal assembly stage While many products are “made in China”, they embody inputs from around the world

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 5 / 32

Factory of the World

China being the “factory of the World,” due to its participation in the global production chain, particularly at the …nal assembly stage While many products are “made in China”, they embody inputs from around the world For Apple’s iPod, only US$4 out of its value of US$150 can be attributable to producers located in China, with the rest being created mostly in the US, Japan, and Korea (Dedrick, Kraemer and Linden, 2009)

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 5 / 32

Factory of the World

China being the “factory of the World,” due to its participation in the global production chain, particularly at the …nal assembly stage While many products are “made in China”, they embody inputs from around the world For Apple’s iPod, only US$4 out of its value of US$150 can be attributable to producers located in China, with the rest being created mostly in the US, Japan, and Korea (Dedrick, Kraemer and Linden, 2009) Majority of Chinese exports are under the processing trade regime, whereby …rms in China import materials or parts to be further assembled, processed and exported

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 5 / 32

Factory of the World

China being the “factory of the World,” due to its participation in the global production chain, particularly at the …nal assembly stage While many products are “made in China”, they embody inputs from around the world For Apple’s iPod, only US$4 out of its value of US$150 can be attributable to producers located in China, with the rest being created mostly in the US, Japan, and Korea (Dedrick, Kraemer and Linden, 2009) Majority of Chinese exports are under the processing trade regime, whereby …rms in China import materials or parts to be further assembled, processed and exported Domestic value added in Chinese exports may be far less than actual gross exports

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 5 / 32

0.553 0.552 0.553 0.552 0.554 0.548 0.527

200 400 600 800 1000 Billion USD 2000 2002 2004 2006 year Total Processing Exports Processing Share Regular Exports Total Exports

China's Aggregate Exports by Type

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 6 / 32

What this paper is all about?

This paper provides evidence on the trend and the pattern of the domestic value added in Chinese exports

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 7 / 32

What this paper is all about?

This paper provides evidence on the trend and the pattern of the domestic value added in Chinese exports Existing research includes Chen, Chang, Fung and Lau (2001), Hummels, Ishii and Yi (2001), Koopman, Wang and Wei (2008), and Koopman, Powers, Wang and Wei (2010), Johnson and Noguera (forthcoming)

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 7 / 32

What this paper is all about?

This paper provides evidence on the trend and the pattern of the domestic value added in Chinese exports Existing research includes Chen, Chang, Fung and Lau (2001), Hummels, Ishii and Yi (2001), Koopman, Wang and Wei (2008), and Koopman, Powers, Wang and Wei (2010), Johnson and Noguera (forthcoming) These studies mainly rely on input-output tables at the sector level to assess foreign content in Chinese exports

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 7 / 32

What this paper is all about?

This paper provides evidence on the trend and the pattern of the domestic value added in Chinese exports Existing research includes Chen, Chang, Fung and Lau (2001), Hummels, Ishii and Yi (2001), Koopman, Wang and Wei (2008), and Koopman, Powers, Wang and Wei (2010), Johnson and Noguera (forthcoming) These studies mainly rely on input-output tables at the sector level to assess foreign content in Chinese exports This paper takes a ground-up approach: we use transaction-level trade data and …rm-level production data to assess the domestic value added in Chinese exports from 2000 to 2006

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 7 / 32

How is it done?

1

Identify a set of …rms that only participated in processing exports in a single HS 2-digit industry: all imports are used to produce processing exports within the industry

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 8 / 32

How is it done?

1

Identify a set of …rms that only participated in processing exports in a single HS 2-digit industry: all imports are used to produce processing exports within the industry

2

Merge these …rms to their production data from China’s NBS

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 8 / 32

How is it done?

1

Identify a set of …rms that only participated in processing exports in a single HS 2-digit industry: all imports are used to produce processing exports within the industry

2

Merge these …rms to their production data from China’s NBS

3

Compare import to export ratio of customs data to material to sales ratio of production data ) weed out …rms that specialized in importing or exporting

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 8 / 32

How is it done?

1

Identify a set of …rms that only participated in processing exports in a single HS 2-digit industry: all imports are used to produce processing exports within the industry

2

Merge these …rms to their production data from China’s NBS

3

Compare import to export ratio of customs data to material to sales ratio of production data ) weed out …rms that specialized in importing or exporting

4

Use the clean sample to compute a …rm’s domestic value added ratio (DVAR) of the year, which simply equals the ratio of net exports to gross exports at the …rm level

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 8 / 32

How is it done?

1

Identify a set of …rms that only participated in processing exports in a single HS 2-digit industry: all imports are used to produce processing exports within the industry

2

Merge these …rms to their production data from China’s NBS

3

Compare import to export ratio of customs data to material to sales ratio of production data ) weed out …rms that specialized in importing or exporting

4

Use the clean sample to compute a …rm’s domestic value added ratio (DVAR) of the year, which simply equals the ratio of net exports to gross exports at the …rm level

5

Aggregate up all the …rms in our clean sample to the HS 2 industries they are operating to calculate the industry DVAR based on the …rms exports and imports data

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 8 / 32

How is it done?

1

Identify a set of …rms that only participated in processing exports in a single HS 2-digit industry: all imports are used to produce processing exports within the industry

2

Merge these …rms to their production data from China’s NBS

3

Compare import to export ratio of customs data to material to sales ratio of production data ) weed out …rms that specialized in importing or exporting

4

Use the clean sample to compute a …rm’s domestic value added ratio (DVAR) of the year, which simply equals the ratio of net exports to gross exports at the …rm level

5

Aggregate up all the …rms in our clean sample to the HS 2 industries they are operating to calculate the industry DVAR based on the …rms exports and imports data

6

Use export weighted average of the industry DVARs to …gure out the domestic value added of …rms operating across multiple industries

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 8 / 32

How is it done?

1

Identify a set of …rms that only participated in processing exports in a single HS 2-digit industry: all imports are used to produce processing exports within the industry

2

Merge these …rms to their production data from China’s NBS

3

Compare import to export ratio of customs data to material to sales ratio of production data ) weed out …rms that specialized in importing or exporting

4

Use the clean sample to compute a …rm’s domestic value added ratio (DVAR) of the year, which simply equals the ratio of net exports to gross exports at the …rm level

5

Aggregate up all the …rms in our clean sample to the HS 2 industries they are operating to calculate the industry DVAR based on the …rms exports and imports data

6

Use export weighted average of the industry DVARs to …gure out the domestic value added of …rms operating across multiple industries

7

Aggregate up all …rms to calculate domestic value added by export destinations

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 8 / 32

Results

Domestic value added in Chinese processing exports was around 50 percent in 2000, and it gradually increases to 62 percent in 2006

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 9 / 32

Results

Domestic value added in Chinese processing exports was around 50 percent in 2000, and it gradually increases to 62 percent in 2006 Such increase is wide spread across HS-2 industries as well as across destination countries

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 9 / 32

Results

Domestic value added in Chinese processing exports was around 50 percent in 2000, and it gradually increases to 62 percent in 2006 Such increase is wide spread across HS-2 industries as well as across destination countries Firm level regressions con…rm that export processing …rms substitute imported materials with domestic materials which explains the rising DVAR

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 9 / 32

Results

Domestic value added in Chinese processing exports was around 50 percent in 2000, and it gradually increases to 62 percent in 2006 Such increase is wide spread across HS-2 industries as well as across destination countries Firm level regressions con…rm that export processing …rms substitute imported materials with domestic materials which explains the rising DVAR Rising DVAR is not driven by rising domestic production costs

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 9 / 32

Results

Domestic value added in Chinese processing exports was around 50 percent in 2000, and it gradually increases to 62 percent in 2006 Such increase is wide spread across HS-2 industries as well as across destination countries Firm level regressions con…rm that export processing …rms substitute imported materials with domestic materials which explains the rising DVAR Rising DVAR is not driven by rising domestic production costs This result suggests that China may be moving up the global production chain and is no longer only responsible for the …nal stage

• f productions

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 9 / 32

Results

Domestic value added in Chinese processing exports was around 50 percent in 2000, and it gradually increases to 62 percent in 2006 Such increase is wide spread across HS-2 industries as well as across destination countries Firm level regressions con…rm that export processing …rms substitute imported materials with domestic materials which explains the rising DVAR Rising DVAR is not driven by rising domestic production costs This result suggests that China may be moving up the global production chain and is no longer only responsible for the …nal stage

• f productions

However, foreign content remains high in Chinese exports ) policy analysis based on gross trade ‡ows will grossly overestimate the impact of Chinese exports

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 9 / 32

Road Map Ahead

Data Methodology

1

Multiproduct …rms

2

Negative domestic value added

Results Conclusions

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 10 / 32

Data

The main data set covers the universe of Chinese import and export transactions in each month between 2000 and 2006

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 11 / 32

Data

The main data set covers the universe of Chinese import and export transactions in each month between 2000 and 2006 It reports values (in US dollars) of imports and exports at the HS 8-digit level (over 7000 products) from a …rm to/from each country (over 200 destination and source countries)

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 11 / 32

Data

The main data set covers the universe of Chinese import and export transactions in each month between 2000 and 2006 It reports values (in US dollars) of imports and exports at the HS 8-digit level (over 7000 products) from a …rm to/from each country (over 200 destination and source countries) We also use …rm-level data from the annual surveys of industrial …rms conducted by China’s National Bureau of Statistics (NBS) for the 1998-2007 period

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 11 / 32

Data

The main data set covers the universe of Chinese import and export transactions in each month between 2000 and 2006 It reports values (in US dollars) of imports and exports at the HS 8-digit level (over 7000 products) from a …rm to/from each country (over 200 destination and source countries) We also use …rm-level data from the annual surveys of industrial …rms conducted by China’s National Bureau of Statistics (NBS) for the 1998-2007 period The surveys cover all state-owned …rms and all non-state-owned …rms with sales above 5 million yuan

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 11 / 32

Data

The main data set covers the universe of Chinese import and export transactions in each month between 2000 and 2006 It reports values (in US dollars) of imports and exports at the HS 8-digit level (over 7000 products) from a …rm to/from each country (over 200 destination and source countries) We also use …rm-level data from the annual surveys of industrial …rms conducted by China’s National Bureau of Statistics (NBS) for the 1998-2007 period The surveys cover all state-owned …rms and all non-state-owned …rms with sales above 5 million yuan The data set contains detailed information for about 100 variables, including …rm ID, address, ownership, output, value added, four-digit industry code (480 categories), six-digit geographic code, exports, employment, original value of …xed asset, and intermediate inputs

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 11 / 32

Figure 1: Chinese exports by type, 2000-2006

0.553 0.552 0.553 0.552 0.554 0.548 0.527

200 400 600 800 1000 Billion USD 2000 2002 2004 2006 year Total Processing Exports Processing Share Regular Exports Total Exports

China's Aggregate Exports by Type

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 12 / 32

Table 1: Top 10 Destinations for Chinese Processing Exports

2000 2003 2006 Rank Share $ (Bil) Share $ (Bil) Share $ (Bil) 1 United States 0.25 25 United States 0.25 50.1 United States 0.25 113 2 Hong Kong 0.22 22.2 Hong Kong 0.23 44.6 Hong Kong 0.23 105 3 Japan 0.18 18.2 Japan 0.15 30.1 Japan 0.1 47.1 4 Korea 0.04 4.17 Germany 0.04 8.65 Germany 0.05 21.3 5 Germany 0.04 3.8 Netherlands 0.04 7.85 Netherlands 0.04 18.9 6 Singapore 0.03 3.17 Korea 0.04 7.81 Korea 0.04 18.2 7 Netherlands 0.03 3.07 Singapore 0.02 4.92 Singapore 0.03 12.8 8 UK 0.03 2.77 UK 0.02 4.81 UK 0.02 11.1 9 Taiwan 0.02 2.06 Taiwan 0.02 4.45 Taiwan 0.02 9.89 10 France 0.02 1.59 France 0.02 3.94 Malaysia 0.02 7.17 Total 101 198 449 Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 13 / 32

Figure 2: Share of processing exports in top 10 destinations

.2 .4 .6 .8 US HK JP KR DE NL GB SG TW IT

Share of Processing Exports by Top 10 Destinations

2000 2006

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 14 / 32

Figure 3: Shares of processing exports in HS 2 industries

0 .2 .4 .6 .8 1 0 .2 .4 .6 .8 1 0 .2 .4 .6 .8 1 0 .2 .4 .6 .8 1 2 3 4 5 6 7 8 9 101112131415 16 17 18 19 20 21 22 23 24 25 26 27 2829303132333435363738 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 7273747576787980818283 84 85 86 87 88 89 90 91 92 93 94 95 96 97 01-05: Animal & Animal Products 06-15: Vegetable Products 16-24: Foodstuffs 25-27: Mineral Products 28-38: Chemicals & Allied Industries 39-40: Plastics/ Rubbers 41-43: Raw Hides, Skins, Leather, Furs 44-49: Wood & Wood Products 50-63: Textiles 64-67: Footwear / Headgear 68-71: Stone / Glass 72-83: Metals 84-85: Machinery / Electrical 86-89: Transportation 90-97: Miscellaneous

Graphs by group_desc Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 15 / 32

In Summary

Processing trade is wide spread across industries and export destinations

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 16 / 32

In Summary

Processing trade is wide spread across industries and export destinations For many destinations, such as the US, processing trade is the main form of exports from China

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 16 / 32

In Summary

Processing trade is wide spread across industries and export destinations For many destinations, such as the US, processing trade is the main form of exports from China For many industries, such as Electronics, Transportation, Plastic Products, Toys, processing trade is the main form of exports from China

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 16 / 32

In Summary

Processing trade is wide spread across industries and export destinations For many destinations, such as the US, processing trade is the main form of exports from China For many industries, such as Electronics, Transportation, Plastic Products, Toys, processing trade is the main form of exports from China Given the high imported content in processing exports, any analysis based on gross trade ‡ows can be highly misleading

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 16 / 32

Methodology

Start with a textbook identity, where the total revenue of a …rm (PY ) , consists of the following components: pro…ts, (π) , wages (wL) , cost of capital (rK) , cost of domestic material

• PDMD

and cost of imported material

• PI MI

PY = π + wL + rK + PDMD + PI MI

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 17 / 32

Methodology

Start with a textbook identity, where the total revenue of a …rm (PY ) , consists of the following components: pro…ts, (π) , wages (wL) , cost of capital (rK) , cost of domestic material

• PDMD

and cost of imported material

• PI MI

PY = π + wL + rK + PDMD + PI MI In theory, for processing trade …rms, PY = EXP PI MI = IMP

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 17 / 32

Methodology

Start with a textbook identity, where the total revenue of a …rm (PY ) , consists of the following components: pro…ts, (π) , wages (wL) , cost of capital (rK) , cost of domestic material

• PDMD

and cost of imported material

• PI MI

PY = π + wL + rK + PDMD + PI MI In theory, for processing trade …rms, PY = EXP PI MI = IMP Hence domestic value added (DVA) for processing trade …rms is EXP IMP = π + wL + rK + PDMD = DVA

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 17 / 32

Methodology

Start with a textbook identity, where the total revenue of a …rm (PY ) , consists of the following components: pro…ts, (π) , wages (wL) , cost of capital (rK) , cost of domestic material

• PDMD

and cost of imported material

• PI MI

PY = π + wL + rK + PDMD + PI MI In theory, for processing trade …rms, PY = EXP PI MI = IMP Hence domestic value added (DVA) for processing trade …rms is EXP IMP = π + wL + rK + PDMD = DVA Domestic value added ratio (DVAR) is therefore DVAR = DVA EXP = EXP IMP EXP = 1 IMP EXP

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 17 / 32

Two Important Assumptions

1

we assume that there is no imported content in domestic materials, such that PDMD embodies purely domestic contents

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 18 / 32

Two Important Assumptions

1

we assume that there is no imported content in domestic materials, such that PDMD embodies purely domestic contents

2

we assume that imported materials have no Chinese contents, such that IMP is completely foreign made

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 18 / 32

Two Important Assumptions

1

we assume that there is no imported content in domestic materials, such that PDMD embodies purely domestic contents

2

we assume that imported materials have no Chinese contents, such that IMP is completely foreign made If violated, the …rst assumption will lead to an over-estimation of DVA

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 18 / 32

Two Important Assumptions

1

we assume that there is no imported content in domestic materials, such that PDMD embodies purely domestic contents

2

we assume that imported materials have no Chinese contents, such that IMP is completely foreign made If violated, the …rst assumption will lead to an over-estimation of DVA If violated, the second assumption will lead to an under-estimation of DVA

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 18 / 32

Two Important Assumptions

1

we assume that there is no imported content in domestic materials, such that PDMD embodies purely domestic contents

2

we assume that imported materials have no Chinese contents, such that IMP is completely foreign made If violated, the …rst assumption will lead to an over-estimation of DVA If violated, the second assumption will lead to an under-estimation of DVA The overall bias due to the two assumptions is not clear, but there is nothing we can do at this stage to assess the direction of bias.

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 18 / 32

Multiproduct …rms

Above framework is helpful to …gure out DVAR at …rm level, but not useful for product level or industry level analysis

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 19 / 32

Multiproduct …rms

Above framework is helpful to …gure out DVAR at …rm level, but not useful for product level or industry level analysis Majority of …rms produce multiple products ) not be possible to assign the imported materials to each of the HS 6 digit products a …rm exports without knowing its …rm level production structure

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 19 / 32

Multiproduct …rms

Above framework is helpful to …gure out DVAR at …rm level, but not useful for product level or industry level analysis Majority of …rms produce multiple products ) not be possible to assign the imported materials to each of the HS 6 digit products a …rm exports without knowing its …rm level production structure Focus on the subset of export processing …rms that only operate within a single HS 2 industry

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 19 / 32

Multiproduct …rms

Above framework is helpful to …gure out DVAR at …rm level, but not useful for product level or industry level analysis Majority of …rms produce multiple products ) not be possible to assign the imported materials to each of the HS 6 digit products a …rm exports without knowing its …rm level production structure Focus on the subset of export processing …rms that only operate within a single HS 2 industry Example of HS 2 industries: Woven apparel products (HS 62), Non-woven apparel product (HS 61), Footwear, gaiters and the like (HS 64), Electrical machinery and equipment and parts (HS 85), Toys, games and sports requisites (HS 95)

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 19 / 32

Multiproduct …rms

Above framework is helpful to …gure out DVAR at …rm level, but not useful for product level or industry level analysis Majority of …rms produce multiple products ) not be possible to assign the imported materials to each of the HS 6 digit products a …rm exports without knowing its …rm level production structure Focus on the subset of export processing …rms that only operate within a single HS 2 industry Example of HS 2 industries: Woven apparel products (HS 62), Non-woven apparel product (HS 61), Footwear, gaiters and the like (HS 64), Electrical machinery and equipment and parts (HS 85), Toys, games and sports requisites (HS 95) For these set of single HS 2 industry processing …rms, all its imports are for exports within their HS 2 industry ) estimate the average DVA for each HS 2 industry using the sample of single-HS2 exporters

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 19 / 32

Negative Domestic Value Added

About 10% of single-industry …rms have negative DVA, which is when imports >> exports

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 20 / 32

Negative Domestic Value Added

About 10% of single-industry …rms have negative DVA, which is when imports >> exports Two problems that may cause processing imports to be greater than processing exports within a …rm in a given year

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 20 / 32

Negative Domestic Value Added

About 10% of single-industry …rms have negative DVA, which is when imports >> exports Two problems that may cause processing imports to be greater than processing exports within a …rm in a given year

1

Leakage issues

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 20 / 32

Negative Domestic Value Added

About 10% of single-industry …rms have negative DVA, which is when imports >> exports Two problems that may cause processing imports to be greater than processing exports within a …rm in a given year

1

Leakage issues

2

Inventory management

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 20 / 32

Leakage Issues

Some single-industry export processing …rms, while exporting, may import materials for other …rms

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 21 / 32

Leakage Issues

Some single-industry export processing …rms, while exporting, may import materials for other …rms Hence, processing imports can be larger than processing exports at …rm level ) DVA < 0

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 21 / 32

Leakage Issues

Some single-industry export processing …rms, while exporting, may import materials for other …rms Hence, processing imports can be larger than processing exports at …rm level ) DVA < 0 Merging the single-industry export processing …rms to their production data collected by the census of manufacturing …rms

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 21 / 32

Leakage Issues

Some single-industry export processing …rms, while exporting, may import materials for other …rms Hence, processing imports can be larger than processing exports at …rm level ) DVA < 0 Merging the single-industry export processing …rms to their production data collected by the census of manufacturing …rms Drop …rms where there is excessive imports: materials revenue < IMP EXP

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 21 / 32

Leakage Issues

Some single-industry export processing …rms, while exporting, may import materials for other …rms Hence, processing imports can be larger than processing exports at …rm level ) DVA < 0 Merging the single-industry export processing …rms to their production data collected by the census of manufacturing …rms Drop …rms where there is excessive imports: materials revenue < IMP EXP For the remaining …rms, we obtain the share of DVA in exports of the industries they operate in by summing up the imports and exports at HS 2 industry level

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 21 / 32

Leakage Issues

Some single-industry export processing …rms, while exporting, may import materials for other …rms Hence, processing imports can be larger than processing exports at …rm level ) DVA < 0 Merging the single-industry export processing …rms to their production data collected by the census of manufacturing …rms Drop …rms where there is excessive imports: materials revenue < IMP EXP For the remaining …rms, we obtain the share of DVA in exports of the industries they operate in by summing up the imports and exports at HS 2 industry level For those …rms that operate across multiple HS 2 industries, we apply the export weighted average DVA ratio of the industries they are in to

• btain their …rm level DVA ratio

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 21 / 32

Inventory Management

Current year processing imports may not be used fully for currently year processing exports, which causes DVA < 0

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 22 / 32

Inventory Management

Current year processing imports may not be used fully for currently year processing exports, which causes DVA < 0 For those industries that use a lot of commodities based materials such as iron, copper and crude oil, …rms have incentive to stock up imported materials when the international prices of such commodities are low in order to hedge again rising prices in the future

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 22 / 32

Inventory Management

Current year processing imports may not be used fully for currently year processing exports, which causes DVA < 0 For those industries that use a lot of commodities based materials such as iron, copper and crude oil, …rms have incentive to stock up imported materials when the international prices of such commodities are low in order to hedge again rising prices in the future No easy solutions

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 22 / 32

Inventory Management

Current year processing imports may not be used fully for currently year processing exports, which causes DVA < 0 For those industries that use a lot of commodities based materials such as iron, copper and crude oil, …rms have incentive to stock up imported materials when the international prices of such commodities are low in order to hedge again rising prices in the future No easy solutions But this may not be a big problem, as once we weed out …rms with excessive imports, DVA are mostly positive

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 22 / 32

Results

Domestic value added share in total processing export was 50% in 2000

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 23 / 32

Results

Domestic value added share in total processing export was 50% in 2000 It has since risen to 62% in 2006

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 23 / 32

Results

Domestic value added share in total processing export was 50% in 2000 It has since risen to 62% in 2006 Rising DVAR is observed across industries and across destinations

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 23 / 32

Figure 5: Estimated average domestic value added ratio in Chinese exports

.5 .55 .6 .65 2000 2002 2004 2006 year Arithmetic mean Export-weighted mean

Average domestic value added ratios of processing exports

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 24 / 32

Figure 6: Estimated domestic value added ratios by HS 2 industries

0 .2 .4 .6 .8 1 0 .2 .4 .6 .8 1 0 .2 .4 .6 .8 1 0 .2 .4 .6 .8 1 3 7 8 16 19 20 21 22 28 29 30 32 33 34 38 39 40 41 42 43 44 48 49 5254555657585960616263 64 65 66 67 68 69 70 71 72 73 74 76 82 83 84 85 86 87 89 90 91 92 94 95 96 01-05: Animal & Animal Products 06-15: Vegetable Products 16-24: Foodstuffs 28-38: Chemicals & Allied Industries 39-40: Plastics/ Rubbers 41-43: Raw Hides, Skins, Leather, Furs 44-49: Wood & Wood Products 50-63: Textiles 64-67: Footwear / Headgear 68-71: Stone / Glass 72-83: Metals 84-85: Machinery / Electrical 86-89: Transportation 90-97: Miscellaneous

(Exp-Imp)/Exp

Graphs by group_desc Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 25 / 32

Figure 6: Distributions of domestic value added ratios

1 2 3 4 kdensity dvar .2 .4 .6 .8 1 x 2000 2003 2006

Distribution of domestic value added, all sectors

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 26 / 32

Figure 7: Domestic value added vs capital intensity

16:Preparations of 19:Prep cereals, f 20:Prep of vegetab 21:Misc edible pre 22:Beverages, spir 28:Inorganic chemi 29:Organic chemica 30:Pharmaceutical 32:Tanning or dyei 33:Essential oils 34:Soap, organic s 38:Miscellaneous c 39:Plastics and ar 40:Rubber and arti 41:Raw hides and s 42:Articles of lea 43:Fur skins and a 44:Wood and articl 48:Paper & paperbo 49:Printed books, 52:Cotton 54:Man-made filame 55:Man-made staple 56:Wadding, felt a 57:Carpets and oth 58:Special woven f 59:Impregnated, co 60:Knitted or croc 61:Apparel and clo 62:Apparel and clo 63:Other made up t 64:Footwear, gaite 65:Headgear and pa 66:Umbrellas, sun 67:Prep feathers a 68:Articles of sto 69:Ceramic product 70:Glass and glass 71:Natural or cult 72:Iron and steel 73:Articles of iro 74:Copper and arti 76:Aluminum and ar 82:Tools, implemen 83:Misc articles o 84:Machinery and m 85:Electrical mach 86:Railway or tram 87:Vehicles other 89:Ships, boats an 90:Optical, photog 91:Clocks and watc 92:Musical instrum 94:Furniture; bedd 95:Toys, games and 96:Misc manufactur

.2 .4 .6 .8 1 .5 1 1.5 2 (mean) lcapint2 95% CI Fitted values (Exp-Imp)/Exp

slope = -0.045; t stat =-1.62; N=56

DVA Ratios and Capital Intensity (2006)

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 27 / 32

Why is domestic value added ratio rising?

It could be due to rising production costs in China ) China is losing competitiveness

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 28 / 32

Why is domestic value added ratio rising?

It could be due to rising production costs in China ) China is losing competitiveness It could be because …rms substitution imported materials with domestic materials ) China is moving up the value added chain in global production network

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 28 / 32

Dependent variable: domestic value added ratio

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 29 / 32

Dependent variable: import to material ratio

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 30 / 32

In Summary

Regression results suggest that processing …rms are substituting imported materials with domestic materials

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 31 / 32

In Summary

Regression results suggest that processing …rms are substituting imported materials with domestic materials Evidence of China move up the value added chain and no longer only responsible for the …nal assembly of products

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 31 / 32

Conclusions

We assess domestic value added in Chinese exports based on customs transaction data

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 32 / 32

Conclusions

We assess domestic value added in Chinese exports based on customs transaction data Our results are similar to those existing papers that use aggregate input-output table

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 32 / 32

Conclusions

We assess domestic value added in Chinese exports based on customs transaction data Our results are similar to those existing papers that use aggregate input-output table Domestic value added only consists of about 60 percent of Chinese exports

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 32 / 32

Conclusions

We assess domestic value added in Chinese exports based on customs transaction data Our results are similar to those existing papers that use aggregate input-output table Domestic value added only consists of about 60 percent of Chinese exports Bilateral imbalance between US and China could be grossly

• verestimated based on gross trade …gures

Kee and Tang (WB and Tufts) Domestic Value Added in Chinese Exports 12/11 32 / 32