Processing Trade, Productivity and Prices: Evidence from a Chinese Production Survey

25 Pages Posted: 1 Aug 2019

See all articles by Yao Amber Li

Yao Amber Li

Hong Kong University of Science and Technology - School of Business and Management, Department of Economics; HKUST IEMS (Institute for Emerging Market Studies)

Frederic Warzynski

Aarhus University - Department of Economics and Business Economics

Valérie Smeets

Aarhus University

Date Written: November 2018

Abstract

In this paper, we use a detailed production survey in the Chinese manufacturing industry to estimate both revenue and physical productivity and relate our measurements to firms' trade activity. We find that Chinese exporters for largely export-oriented products like leather shoes or shirts appear to be less efficient than firms only involved on the domestic market based on the standard revenue productivity measure. However, we show strong positive export premium when we instead consider physical productivity. The simple and intuitive explanation of our results is that exporters charge on average lower prices. We focus more particularly on the role of processing trade and find that price differences are especially large for firms involved in this type of contractual arrangements. We suggest three reasons to explain this result. First, lower prices may simply be due to a mechanical effect as processing trade products are not subject to tariffs nor have to pay VAT. Second, some types of processing trade activities entail that the processing trade firm receives the inputs for free from the contracting firm, therefore artificially depressing the values of inputs or materials used for the firm's production. Third, lower prices may also be a consequence of transfer pricing, as multinationals involved in FDI in China may alter the price charged for inter-company transactions to shift funds within the organization.

Keywords: trade activity, revenue, productivity, export

Suggested Citation

Li, Yao Amber and Warzynski, Frederic and Smeets, Valérie, Processing Trade, Productivity and Prices: Evidence from a Chinese Production Survey (November 2018). HKUST IEMS Working Paper No. 2018-58, Available at SSRN: https://ssrn.com/abstract=3430310 or http://dx.doi.org/10.2139/ssrn.3430310

Yao Amber Li (Contact Author)

Hong Kong University of Science and Technology - School of Business and Management, Department of Economics; HKUST IEMS (Institute for Emerging Market Studies) ( email )

Department of Economics, Hong Kong U of Sci&Tech
Clear Water Bay, Kowloon, Hong Kong SAR, China
Kowloon
Hong Kong

HOME PAGE: http://yaoli.people.ust.hk/

Frederic Warzynski

Aarhus University - Department of Economics and Business Economics ( email )

hermodsvej 22
DK-8230 Åbyhøj
Denmark
+45 89 48 61 95 (Phone)

HOME PAGE: http://www.hha.dk/~fwa/frederic.htm

Valérie Smeets

Aarhus University ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
11
Abstract Views
247
PlumX Metrics