Measuring value added in the People's Republic of China's exports: A direct approach

We apply a direct approach to estimate domestic value added embedded in the People's Republic of China's (PRC) exports. The estimates suggest that the domestic value added of processing exports and processing high-tech exports gradually increased from 30% and 25%, to 44% and 45%, respectively, between 1997 and 2012. On the other hand, the domestic content of processing exports with supplied materials fell to 14% from the peak of 35%. In 2012, the domestic value added of the PRC's total exports remained below 77%. Our estimates prove to be the upper limits of the corresponding trade in value added. Compared to our estimates, the Organisation for Economic Co-operation and Development's Trade in Value Added database (TiVA) significantly overestimates the domestic content of the PRC's exports. TiVA's estimates are also inconsistent with the fact that the share of processing exports in the PRC's total exports has decreased steadily. In addition, we show that the PRC's processing exports demonstrate significant heterogeneity across its trading partners; processing exports account for a large portion of total exports to high income countries but a relatively small portion of exports to low income countries. This heterogeneity implies that the domestic content of the PRC's exports varies significantly by destination.