Asymmetry of Processing Trade in China : Theory and Empirics

• Main Author: XING, Zhaopeng
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2006
• Subjects: Cointegration; Outsourcing; Processing Trade; REER; Labor Economics
• Online Access: https://ink.library.smu.edu.sg/etd_coll/6; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1005&context=etd_coll
• Institution: Singapore Management University

This paper studies decision of whether outsourcing or localization in China. Both strategies can enjoy low wage advantage. But outsourcing induces processing trade, while localization, which has additional localization cost can turn processing trade of some goods to ordinary trade. The asymmetric effect lies on that once localized, it is hard to return to outsourcing due to competition or fixed expenditures involved. If wage difference larger, it is more preferable to localized. Therefore, we can expect asymmetric effect of processing trade due to movement of relative wage difference, which was proved by econometrics on recent data by cointegrating analysis within a VECM model.