Assembled in Europe: The role of processing trade in EU export performance

Lucian Cernat, Michaël Pajot, 17 September 2012

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The global economic crisis has been accompanied by a heightened debate about the benefits or perils of globalisation, offshoring, particularly vis-à-vis China, exchange rates, and the relapse into protectionist tendencies.

But for those interested in an accurate picture of globalisation, the year 2012 has a lot to offer, from product-specific 'screwdriver analyses' of iPods (Dedrick et al. 2008) to global databases such as the European Commission sponsored World Input-Output Database.

Processing trade: A look at the EU special trade regime

Beyond these diverse approaches to look into global value chains, one particular lens through which global production chains can be looked at is the so-called processing trade.

Processing trade - the process through which companies sources intermediate inputs from various countries and assemble them in another for consumption in third markets - has been credited with a large role in the impressive export performance of China over the last decade. Processing trade is a special trade regime whereby imports and exports of intermediate and final products can be traded duty free and thus benefit from the 'global value chain' logic.

According to recent analyses, processing trade represents around 50% of total Chinese exports (e.g. Kee and Tang 2012). Could the share be as high in Europe?

The use of this special trade regime in the EU is not widely known. Processing trade has two main variants - outward and inward processing trade. The EU legislation allows for processing trade flows to be recorded separately at customs. These statistical regimes are briefly summarised below:

  • 'Normal' imports or exports: Goods exported definitively, or goods imported and released into free circulation in the EU customs territory;
  • Imports or exports under inward-processing procedures: Intermediate goods are imported duty-free temporarily so that they can be further processed (assembled or transformed) and then all the resulting processed products are exported outside Europe.
  • Imports or exports under outward-processing procedure: Intermediate goods are temporarily exported for further processing in a non-EU country and the processed products are re-imported into the EU. The imported processed products benefit from a full or partial exemption from custom duties and levies.

The non-negligible performance of EU inward-processing exports

Based on these statistical categories, one can disentangle the EU’s trade performance into "normal" and processing trade.

The first important but unsurprising finding is that an overwhelming majority of EU trade in 2011 was conducted under the 'normal' trade regime (around 90%). But around 10% (€148 billion) of EU exports were conducted under the inward-processing regime. This is not trivial and quite surprising given the little attention paid so far by researchers and policymakers.

Geographical patterns: The role of the US

The US seems to be the most important actor in both EU inward- and outward-processing imports and exports. At €22.6 billion, the US topped the list of EU’s inward-processing imports (35%), followed by Japan and Russia. Reciprocally, 27% of the EU’s inward-processing exports go to the US (Figure 1). We also find that almost 15% of EU imports from the US and almost 18% of EU exports to the US are conducted under inward and outward processing. Other important partners are China (around 16% of EU exports but only 1.5% of EU imports), Japan (15.6% of EU exports and 8.3% of EU imports) and South Korea (almost 12% of EU exports and 6.5% of EU imports). Perhaps surprisingly, despite its relatively large share as a destination for EU inward-processed exports, China has a low share in EU processing trade, compared to other emerging economies.

Figure 1. Geographical distribution of EU processing trade

Key sectors in processing trade: The role of supply chains

Machinery and mechanical appliances account for a large share (26.9%) of EU inward-processing imports. However, other sectors are far more dependent on processing-trade. For instance, one third of certain tobacco products are imported under the inward-processing trade regime. For certain chemicals, the figure is 18%. This suggests that inward-processing is extremely important for some sectors.

One important sector is motor vehicles. It accounts for almost half (46.6%) of the EU’s inward-processing exports. Processing trade is also crucial for the overall exports of the sector itself. Out of €160 billion worth of EU motor vehicles exports in 2011, almost 43% (€69 billion) were exports of motor vehicles that were produced under the inward-processing regime, being essentially cars assembled in Europe from parts and components imported from the rest of the world.

Some tentative conclusions

This brief analysis points to some potentially interesting conclusions or questions that may deserve further reflection.

First, processing trade is a special trade regime that is inter alia aimed at boosting EU competitiveness. Accounting for around 10% of total EU exports, this special trade regime matters. This is especially true for some sectors such as the automotive sector.

The relative importance of processing trade suggests that alongside strong 'Made in Europe' exports, there are also non-negligible 'Assembled in Europe' exports.

Furthermore, while the available data does not lend itself to a rigorous value-added analysis, a simple difference between inward-processing and overall export and import statistics suggests that the European value-added generated by the 'Assembled in Europe' trade is in the range of 50-60%. While this is clearly less than the value added in 'normal exports' (around 87%) it is by no means an indication of low-value added, 'screwdriver-type' assembling activities.1

As for a handful of sectors such duty-free processing trade represents a large share of their overall trade activity, it will be important to factor this into the overall analyses of the impact of various recent trade policies such as EU trade agreements and non-tariff barriers. Also, understanding the firm-specific factors involved in processing trade may provide additional insights on how to promote the internationalisation of small enterprises through processing trade.

Finally, a 'fitness test' of various trade rules and customs procedures governing processing trade could identify 'best practices' and guidelines that would put economic operators on a level playing field across Europe.

The views expressed therein are those of the authors and do not necessarily reflect the views of the European Commission.

References

Dedrick, Jason, Kenneth L. Kraemer and Greg Linden (2008), “Who Profits from Innovation in Global Value Chains? A Study of the iPod and notebook PCs”, Alfred P. Sloan Industry Studies.

Kee H.K. and H. Tang (2012), "Domestic Value Added in Chinese Exports", February, mimeo.


1 Based on a detailed dataset of Chinese processing trade statistics, Kee and Tang (2012) found the domestic Chinese value added in processed exports to have increased over time, reaching 60% in 2006 based on a weighted average.

Topics: International trade
Tags: processing trade, production fragmentation, value chains

Chief Trade Economist of the European Commission

Former statistician in the Chief Economist Unit of the European Commission's Trade Directorate.