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Foreign Value‐Added in China's Manufactured Exports: Implications for China's Trade Imbalance

Economists have recently become interested in weighting how much domestic value-added is actually included in China's exports. Formally, the proportion of foreign and domestic contents could be identified by calculating the vertical specialization share using non-competitive input-output tables. Applying such a method to the Chinese case, however, would result in a big measurement bias because China has a large share of processing exports, which utilize a disproportionately high percentage of imported intermediates. This paper, by directly employing 2008 trade data for which imported intermediates in both processing and non-processing trade could be identified by means of various trade patterns, provides a simplified way to estimate the share of foreign/domestic value-added included in industry-level manufactured exports. This paper finds that the vertical specialization share of China's processing exports was about 56 percent in 2008, compared to about 10 percent for ordinary exports. It also finds that the sectors that experienced fast expansion of processing exports have a much higher share of foreign contents. Since processing exports account for about half of Chinese exports, the prevailing trade statistics, which focus on gross values rather than the value-added of exports and imports, has obviously overstated the bilateral trade imbalances, especially between China and the USA.