China builds brighter prospects for processing trade

China's Ministry of Commerce and nine other government departments recently rolled out a guideline to improve the development of the processing trade.

The guideline puts forward 12 measures across six categories, outlining a blueprint for creating a "2.0 version" of China's processing trade.

Workers manufacture high-end aluminum alloy parts for new energy vehicles in a workshop of a new material enterprise in Huaibei, east China's Anhui province. (People's Daily Online/Wan Shanzhao)

Compared to general trade, the processing trade sector imports raw materials and exports finished products. It includes various forms such as processing with supplied materials and processing with imported materials.

Since the implementation of the reform and opening up in 1978, processing trade has played a significant role in promoting China's opening up to the outside world, driving industrial upgrading, and ensuring employment.

According to data from China's General Administration of Customs (GAC), the average annual growth rate of imports and exports of China’s processing trade reached nearly 20 percent from 1981 to 2023, with a cumulative increase of nearly 500 times.

However, traditional processing trade typically usually resides at the lower end of the "smiling curve" of the international value chain, characterized by labor-intensiveness, low added value, and high substitutability.

With the profound changes in domestic and international environments, the scale and proportion of traditional processing trade in China's foreign trade pattern have been declining. At its peak, traditional processing trade accounted for over half of China's foreign trade, but its share gradually dropped to around 1/5.

In the first three quarters of 2023, the total import and export value of processing trade in China reached 5.57 trillion yuan ($781.42 billion), accounting for 18.1 percent of the country's foreign trade.

Over the past 40 years, China's processing trade has achieved leapfrog development. As Chinese enterprises participated in the global division of labor through processing trade, their business models have gradually shifted from Original Equipment Manufacturers (OEMs) to Original Design Manufacturers (ODMs) and Original Brand Manufacturers (OBMs).

Take south China's Guangdong province, where the processing trade is well-developed, as an example. Today, the proportion of ODM and OBM has risen to about 2/3 of the province's total processing enterprises.

In Dongguan of Guangdong, an important base for processing trade, over 2,000 processing trade enterprises have established their own brands, and together they hold more than 13,000 brands. The proportion of ODM and OBM products in the city's exports has increased to 75.3 percent from 40.8 percent in 2009.

Pipes are produced in a workshop of Xinbo Oil and Gas Pipeline Manufacturing Co., Ltd. in Alashankou, northwest China's Xinjiang Uygur autonomous region. (People's Daily Online/Yusuf Eni)

According to insiders, China's processing trade sector has evolved into various forms, such as goods processing trade that has a high requirement for cross-border logistics, services processing trade that highly demands human resources, and digital processing trade that relies on open networks and intelligent development.

The guideline puts forward targeted measures focusing on strengthening logistics and energy supply, meeting multi-level employment demands, supporting the expansion of the domestic market, and other aspects. The goal is to promote the transformation and upgrading of processing trade from low-value-added products to high-value-added, high-tech products, and enable processing trade to better serve high-quality economic and social development.

According to data released by the GAC, the technological level of China's processing trade exports has been continuously improving, with high-tech products accounting for over 60 percent.

Among them, six types of high-end industries, including new materials, biopharmaceuticals and medical instruments, high-end equipment, electronic information, new energy vehicles, and instruments and meters, have shown significant increases in the import and export volume and growth rate of processing trade. Their share in the total import and export value of processing trade has increased from 8.6 percent in 2012 to 34.4 percent in 2022.

Driven by the processing trade industry, the Yangtze River Delta, Pearl River Delta, Beijing-Tianjin-Hebei region, and Chengdu-Chongqing region have formed distinctive high-tech industry clusters.

As the Belt and Road Initiative continues to develop, transportation, logistics and energy security in China's central and western regions, as well as the northeast region, have been consistently improved, which leads to further development of processing trade.

In Alashankou of northwest China's Xinjiang Uygur autonomous region, there are over 110 China-Europe freight train routes linking China with more than 20 countries and regions, providing a "fast track" for processing trade.

Xinbo Oil and Gas Pipeline Manufacturing Co., Ltd. in Alashankou, which was put into operation last year, completed a 15,000-ton welded pipe order signed with an Uzbek customer in the same year.

"Alashankou is close to the Central Asian market and has facilities for gauge conversion, which ensures fast delivery and low transportation costs. The company also enjoys tariff preferences for imported steel raw materials, which reduces production costs," said Zhou Shanzheng, deputy general manager of the company.