PROCESSING TRADE BIASES THE MEASUREMENT OF VERTICAL SPECIALIZATION IN CHINA

Vertical specialization (VS) is often measured by the import contents of the exports, using an input-output (I-O) framework. Half of China's exports are processing exports, which largely depend on imported intermediate inputs and tie up upstream as well as downstream trade partners. Thus, one would expect to find strong VS for China. Using the 'ordinary' I-O tables, however, this is not the case. Because the production of processing exports is only a small part of total production, the average input structure in the I-O table hides the typical features of processing exports. Using adapted, tripartite I-O tables (for 2002 and 2007) in which the processing exports have been singled out, indeed reveals the expected strong VS in China.