Even though coastal cities in East China have long been the center of the country’s processing trade, more and more such operations are being driven by increasing costs and sluggish overseas demand to move to the country’s central and western regions.

In China, “processing trade” is a term generally used to refer to the practice of importing raw materials or components needed to manufacture a product and then re-exporting the finished product after Chinese businesses have processed or assembled them. It plays an important role in the country’s foreign trade and gets a listing to itself in trade statistics, separate from that for “general trade”.

China started promoting its processing trade and trying to take full advantage of its rich labor resources after it adopted its reform and opening-up policy in 1978. China’s supportive system for the processing trade entitles processing companies to defer payments of tariffs and import-related taxes that are charged on imports of raw materials and components.

But after decades of fast development, the processing trade in coastal areas is now having to deal with increasing costs and scarce resources.

“Before 2005, China’s processing trade was mainly in coastal cities,” said Cheng Wenhua, director of the Ministry of Commerce’s department for industry of mechanical and electronic and science and technology.

“But recent years saw a shift to inland cities.”

Costs, including those of labor and land, are now the main causes of Chinese processing-trade companies’ decisions to move inland.

The government has thus called for the processing trade to shift to the country’s central and western regions, which are rich with resources and are home to workers willing to work for relatively lower pay.

In 2011, the value of the processing trade of those places increased by 78.4 percent to reach $82.3 billion, showing a growth rate much greater than the national average rate of growth for trade. From 2006 to that year, the value of those regions’ processing trade went from making up 2.5 percent of the total value of the country’s processing trade to 6.3 percent.

“Although the ratio is still small, the central and the western regions have embarked on quickly developing the processing trade,” Cheng said.

In coastal area, meanwhile, such trade has been hindered by increases in the costs of land, labor, power and other resources. Meanwhile, neighboring countries, including Vietnam, India and the Philippines, have managed to attract overseas investments from China by offering lower costs and preferential policies.

“The shift of some industries or industry chains to the central and western areas is the inevitable outcome of the market economy and also the result of globalization,” she said. “And the central and western regions are now well-prepared to embrace the shift in the processing trade after making progress in transportation, logistics and the supply of water and power.”

In October, Premier Wen Jiabao said at the Canton Fair that “China’s processing trade should gradually extend to the upper industrial chains and transfer to the central and western regions step by step”, a statement that was included in the Government Work Report on March 5.

“Export-processing companies that are being transformed or upgraded, as well as companies that are tapping both the overseas and domestic markets, are the biggest forces leading the shift to the west,” said Wang Haifeng, director of international economics at the Institute for International Economic Research, which is affiliated with the National Development and Reform Commission.

“Companies moving west can enjoy market, cost and policy advantages,” he said. “As the government expands domestic consumption, China’s consumer market at home, especially in the central and western regions, is growing very fast. Local governments are rolling out preferential policies to attract export processing with offers of cheaper land and utilities, in addition to lower labor costs.”

Some companies, usually ones that rely heavily on labor, have gone a step further and moved their manufacturing bases overseas to be closer to their international markets, Wang said.

“Export-processing companies that are going abroad are just a small proportion of the number that are moving inland,” he said. “But for advanced industries, including the textile, footwear and toy industries, moving a manufacturing base to another country can effectively reduce the heavy trade frictions they have been subjected to at home.”

Support for exports

Since 2007, the ministry has selected 44 cities in the country’s central and western regions as destinations for export-processing businesses, which are moving inland from coastal cities. Governments have since introduced measures, including financial aid and labor services, for those enterprises.

One of the destinations has been Ganzhou, a city in southern Jiangxi province.

Ganzhou has a population of 9 million and is about 450 kilometers from Shenzhen. It is now a place abuzz with the construction of factories.

Ganzhou welcomes investment from nearby places, such as the Yangtze River Delta, the Pearl River Delta and Fujian province. “Low costs, a solid labor force and well-developed infrastructure are the chief reasons why the city was chosen by the ministry in 2007,” said Hu Juwen, deputy mayor of Ganzhou.

Cai Rong, personnel director of Qinye Industry (Longnan) Co Ltd, a toymaker established in 2007 in Ganzhou, said: “It costs only 730 yuan ($120) a month to hire a worker, while a worker’s salary in Shenzhen is 1,500 yuan. And the cost of the factory’s land in Ganzhou will be from 5 to 6 yuan per square meter, half of that in Shenzhen.”

“Shipping and storage costs are higher than in the coastal city,” she said. “All told, costs in Ganzhou are about 5 percent lower than in Shenzhen.”

Last year, Ganzhou attracted $929 million in foreign direct investment, mainly in the textile and apparel, electronic, machinery and food-processing industries.

In addition to attracting export-processing businesses with relatively low labor costs, the southwestern city of Chengdu, Sichuan province, has also driven manufacturers to make upgrades.

“Technological innovation is the most important step that Chengdu BOE Optoelectronics Technology Co Ltd can take to combat the fierce competition in the industry,” said Zhang Tao, its general manager. “The company’s decision to set up a production line in Chengdu in 2008 was not only a result of the city’s preferential policies and convenient transport but also of its deep talent pool,” Zhang said.

“When the whole industry is at the bottom, making innovations to our technology and products is the main way we can survive the winter.”

Processing trade manufacturers’ migration from the coast to Chengdu has transformed the city into an inland hub for the electronic information, biopharmaceutical, machinery, petrochemical and food-processing industries, among others, said Li Hao, deputy director of the Chengdu bureau of commerce.

Intel Corp arrived in Chengdu in 2003 and was followed by more than 20 other chipmakers, including Texas Instruments Inc and Semiconductor Manufacturing International Corp.

Led by Foxconn Technology Group and Compal Electronics Inc, IT companies and component makers have swarmed into Chengdu since 2010 and established an industry worth up to 100 billion yuan.

“The benefits to the local area also include employment and consumption,” Li said.

“Foxconn employs more than 100,000 workers in Chengdu, which not only prevented those people from having to travel long distances but also stimulated local expenditure on housing, catering and similar things.”

By Li Jiabao in Ganzhou, Jiangxi