Made and created in China: the role of processing trade

Abstract

AbstractThis paper examines the main participants of China's processing trade regime – firms that engage in both processing and ordinary exports. By matching several datasets from China, including a unique sample of transaction‐level customs data with firms' branding information, we uncover three stylized facts. First, these “mixed” firms exhibit superior performance in various margins such as revenue and physical productivity. Second, even within firms, there is a link between export mode choice and brand ownership – own‐branded products are typically exported under ordinary trade while products under other firms' brands are exported under processing trade. Third, there is a price premium associated with selling one's own‐branded products. To rationalize these findings, we present a simple theoretical framework where firms with multi‐attributes (i.e., “making” and “creating”) endogenously determine their specialization within a production network. We find evidence for the model's main prediction that firms in China intensified their branding activities when faced with favorable processing trade policies upstream.