Distinguishing China's processing trade in the world input-output table and quantifying its effects

ABSTRACT

Distinguishing processing trade is crucial to national input-output table-based research on China's international trade. This paper further investigates the importance of distinguishing China's processing trade in multicountry input-output table-based studies. We focus on the bias in China's bilateral trade in value added caused by China's undistinguished processing trade. We construct a product-by-product world input-output table capturing China's processing trade based on the World Input-Output Database. Empirical studies show that, if China's processing trade is undistinguished, the profile of China's bilateral trade in value added would be seriously distorted; China's bilateral net trade in value added with some economies, such as Japan, Korea and Taiwan, would be significantly underestimated, while it would be significantly overestimated for some other economies, such as the United States. Distinguishing processing trade in multicountry input-output tables is also crucial when China's bilateral trade in value added is considered.

KEYWORDS:

• Processing trade
• world input-output table
• China
• trade in value added
• bias

Acknowledgements

We would like to thank Gaaitzen J. de Vries who gave us useful help to construct the product-by-product world input-output table. We thank the anonymous reviewers and the Editors Michael Lahr and Bart Los for their constructive comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 See Timmer (2012) or Dietzenbacher et al. (2013) for a detailed introduction to WIOD.

2 The 2016 release of WIOD covers the period 2000–2014, but it adheres to the 2008 version of the SNA. In our study, we selected 2007 as a case and treated processing trade following the SNA 1993 version. Therefore, we used WIOD release 2013, which has the 2007 world input-output table and follows the SNA 1993 version.

3 The UN BEC classification refers to a classification by broad economic categories produced by the United Nations. It is used to distinguish imports by end-use categories (i.e., intermediate use, final consumption, and capital formation). The UN BEC classification also provides links between BEC and the Harmonized Commodity Description and Coding Systems (HS).

4 Product by HS 6 code is further converted to product by input-output sector using a bridge matrix between HS6 code and input-output sectors.

5 RAS is a popular method for updating and balancing IO tables (see Miller and Blair, 2009; Junius and Oosterhaven, 2003; Temurshoev et al., 2013).

6 Due to a rounding error, Table 6 shows a very minor difference between the WIOT result and the DPN-WIOT result for China's net trade in value added with the entire world, but they should be identical.

7 The countries covered by the OECD ICIO (2016 edition) have been extended to 63 countries plus RoW. See more details via http://www.oecd.org/sti/ind/inter-country-input-output-tables.htm

Additional information

Funding

Financial support by the National Natural Science Foundation of China [grant numbers 71201162, 71125005, 71673269 and 61273208], the Ministry of Commerce of China [grant number TAHP-2015-ZB-365], the 111 project [B18014] and the ‘Fundamental Research Funds for the Central Universities’ in UIBE [grant numbers 16QN07, 17Q10 and CXTD9-07] are gratefully acknowledged.