Geography and offshoring to China

An often asked question with reagrd to production these days is Why do firms offshore manufacturing to China? Alyson C. Ma and Ari Van Assche use data from China's processing trade regime to argue that a hidden driver is the country's geographic proximity to its East Asian neighbours.

Anecdotal evidence is rife with tales of multinational firms that have offshored their production to China, stoking fears that it is leading to a hollowing-out of manufacturing around the world. Many private sector analysts and policymakers attribute this offshoring wave to Chinese home-grown factors such as its low labour costs, stable political system, aggressive export promotion policies, and undervalued exchange rate.

But the usual explanations may not tell the whole story. China depends heavily on imported intermediate inputs [ ... ]. In recent research we consider the possibility that some of China’s attractiveness stems from its proximity to East Asian suppliers of industrial inputs [ ... ]. In short, another factor behind China’s success may simply be the bliss of its proximity to its East Asian neighbours.

So China's attractiveness as an offshoring location is due, in part, to the smiple fact that it is close to other countries in East Asia. Its geographic proximity to its East Asian neighbours provides it with access to the region's upstream suppliers and downstream markets. These results should be no surprise if we look at other famous offshoring locations around the world. They virtually all are located next to large and wealthier economies. Mexico neighbours the US. Turkey and Poland are located next to the EU-15. China, Thailand and Vietnam are in the vicinity of Japan, Korea, and Taiwan.

Geography does matter.