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Trading Partners, Traded Products and Firm Performances of China’s Exporter-Importers: Does Processing Trade Make a Difference?


Financial support from The Leverhulme Trust under Programme Grant F/00 114/AM is greatly acknowledged. Zhihong Yu also thanks the British Academy and Sino-British Fellowship Trust for financial support. The usual disclaimer applies.


In this study, we explore a newly available unique data set that links China’s international trade transactions to its manufacturing firms’ census data and establish a number of interesting stylised facts linking firms’ key economic performances to their exporting-importing behaviours. One novelty of our analysis is that we distinguish between ordinary trade and processing trade; the latter involves importing inputs and materials to be assembled and re-exported to the overseas market. Several novel patterns emerge. First, we discover significant heterogeneity within two-way traders – in terms of size, productivity and factor intensity – depending on their engagement in processing exports/imports. Whilst the existing literature typically finds that two-way traders are larger and more productive than one-way traders, we show that pure processing two-way traders are actually the least productive and exhibit the lowest capita/skill intensity compared to one-way traders. Second, consistent with the market hierarchy hypothesis, larger and more productive firms trade with a larger number of trade partners that are on average ‘less popular’ as characterised by longer distances and smaller market size. Remarkably, this pattern is highly symmetric between exports and imports, as well as between ordinary and processing trade. Third, firms with greater capital and skill intensities source more complex inputs from countries with higher income per capita, and this pattern holds only for ordinary imports but not for processing imports. While some of our findings confirm existing stylised facts reported for other countries, some patterns we discover are new to the literature and remain to be reconciled with the heterogeneous firm trade theory.