How processing trade assists local industrial upgrading: input-output analysis of export processing zones in China

Processing trade and related policies have been at the center of some major disputes concerning global segmentation. China has built numerous Export Processing Zones (EPZs) with the backing of local governments to facilitate greater integration into the global supply chain and boost local industrial upgrading. We create a series of backward and forward linkage indices and examine the spillover effect of the increase in EPZ processing trade on local economic activities and industry upgrades using Chinese firm-level industrial trade data and input-output table. Evidence reveals that EPZs have enhanced nearby enterprises' performance and productivity in the policy zone's upstream and horizontal industries. But the downstream industries show no signs of improvement. We also find that foreign-owned and young enterprises profit more from proximity to an EPZ. Additionally, the spillover benefits of EPZs are greater when the zone is moderate in size, supports high-tech industries, or encourages heavy import-and-assembly processing trade. The study sheds light on the processing trade's industrial linkage effects. The findings will provide an invaluable resource for developing policies aimed at both deeper integration into the global value chain and fostering local industrial upgrading.