China's Processing Trade : Trends and Implications

China, the largest trading partner of Korea, is emerging as a key player in the world economy. However, China’s processing trade is not emphasized despite its role and importance due to the wrong perception concerning processing trade. Only low value-added products are associated with processing trade, which is thought to decay in the near future. However, in China-Korea trade, the proportion of processing trade is high (nearly half), and it is concentrated in high value-added industries such as electronics. Therefore, it is expected to continue in the future. In the early days, the processing trade of China was concentrated in labor-intensive items, but with foreign-funded enterprises and related R&D expansion, the proportion of technology-intensive items such as electronics and machinery increased gradually. This contributed to the enhancement of the overall technology level of China. There is an assessment that contributes towards relieving the unemployment problem in China. However, still a significant portion of the processing trade consists of the simple processing and assembling stages. The high portion of simple processing trade is an obstacle to the advancement of industrial structure and China’s own brand value. As part of the background to these discussions, the Chinese government has been expanding the scope of the processing trade restrictions continuously to promote the advancement of the domestic industry since 1999. However, as part of the economic stimulus package to offset the impact of the global financial crisis, processing trade restrictions were eased in 2009. Along with the recovery of the world economy in 2010, the Chinese government is again expanding the scope of the restrictions. It is expected that more prohibited items for processing trade will be added, which will be a burden for related industries. In this study, we provide strategic implications for Korea’s approach to China by analyzing the structural changes and related policy changes in China. In particular, this paper attempts to analyze the industrial processing trade between Korea and China by using China Custom trade data