The Location Substitution Effect: Does it Apply for China?

The notion that China is the factory of the world is now changing. Factories in China are shifting their production base to neighbouring Asia, primarily because of higher input costs in China, a volatile Chinese exchange rate and protectionist measures targeted against Chinese exports. In this article, we examine the location substitution effect for China: Chinese firms are exporting primary, intermediate and machinery items, meant for producing final output in the Greater Mekong Subregion (GMS), which include Laos, Thailand, Vietnam, Cambodia and Myanmar. Results suggest that GMS countries are exporting finished items to China, that are increasingly getting manufactured using primary and intermediate inputs imported from China.