Unexceptional Exporter Performance in China? The Role of Processing Trade

The firm level trade literature finds exporters are exceptional performers for a wide range of countries and measures. Paradoxically, the one documented exception is the world's largest exporter, China. We show that this puzzling finding is entirely driven by firms that engage only in export processing – the activity of assembling tariff exempted imported inputs into final goods for resale in the foreign markets. In China roughly a fifth of exporters, accounting for about one-third of total export value, are engaged in processing trade only. These firms are 4% to 30% less productive than non-exporters. For other types of exporters – those doing only non-processing trade and those doing both processing and non-processing trade – the traditional superior performance relative to non-exporters hold. We provide possible explanations why processing exporters are less productive. Our results show that distinguishing between processing and non-processing exporters is crucial for understanding firm-level exporting behavior in China. It should also be investigated closely in other countries for which processing trade is important