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As China’s juggernaut export machine employs many imported inputs, there are manypolicy questions for which it will be crucial to knowthe extent of domestic value added (DVA) in its exports.The best known approach is the concept of “vertical specialization” proposed by Hummels, Ishii and Yi(2001)(HIY for short). This approach is not appropriate for countries that engage in a lot of processing exports such as China, Mexico, and Vietnam. We develop a general formula for computing domestic and foreign contents when processing exports are pervasive. Because the new formula requires some input-output coefficients not typically available from a conventional input-output table, we propose a mathematical programming procedure to estimate these coefficients by combining information from detailed trade statistics with input-output tables. Byour estimation, the share of foreign content in China’s exports is at about 50%, almost twice as high as the estimate from the HIY formula. There arealso interesting variations across sectors and firm ownership. Those sectors that are likely labeled as relatively sophisticated such as electronic devices have particularly high foreign content (about 80%). Foreign-invested firms also tend to have higher foreign content in their exports than domestic firms.
UC Berkeley on May 6-7, 2011 Link to Book