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Processing trade in China has been prevalent, despite rapid economic growth and consequent structural changes. This study examines the role of the processing trade, especially as it relates to exports productivity and export variety. Our model predicts that high productivity of processing exports, which can be characterized by leverage and coverage, may enhance the productivity of the sector. An empirical analysis gives firm support to the model. It also shows a learning effect of processing exports to the productivity of ordinary exports.

What has China learned from processing trade?