Unexceptional exporter performance in China? The role of processing trade

The firm level trade literature finds that 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. We find that processing exporters are less productive than non-processing exporters and non-exporters, and have inferior performance in many other aspects such as profitability, wages, R&D and skill intensity. Accounting for processing exporters explains the abnormality in exporter performance in China documented in the previous literature. Low fixed costs of processing exporting, as well as the trade and industrial policies favoring processing exporters are both responsible for the low productivity of processing exporters. Our analysis suggests that distinguishing between processing and non-processing exporters is crucial for understanding firm-level exporting behavior in China. It also provides caveats in analyzing the exporter performance in other developing countries that are highly integrated into the global value chains.