Forms and characteristics of processing and assembly trade

        A. Basic Concepts 

　　Processing and assembly operations with foreign materials are a trade mode of contract processing. The foreign client provides all or part of the raw materials, auxiliary materials, parts, components, accessories, and packaging materials, and if necessary, equipment. The contractor processes and assembles them according to the client's requirements. The finished products are handed over to the foreign client for sale abroad, and the contractor collects processing fees. The cost of the equipment provided by the foreign client can be offset against the processing fees earned from labor services, similar to the practice of compensation trade. 

　　B. Forms of Processing and Assembly Trade 

　　Full supply of materials and parts for processing and assembly. The foreign client provides all raw, auxiliary materials, and components, which the contractor processes into finished products and returns to the foreign client. Neither the materials nor the finished products are priced; the contractor collects processing fees according to the contract. 

　　Partial supply of materials and parts for processing and assembly. Part of the materials or components required for the finished products is supplied by the contractor. The contractor installs collect both processing fees and the cost of the supplied materials. 

　　Counterpart contracts with separate pricing. The foreign client and the contractor sign two counterpart contracts. One is a sales contract for the raw and auxiliary materials and components provided by the client; the other is a contract for the finished goods exported by the contractor. For full material supply, the price difference between the two contracts represents the processing fees. For partial supply, the price difference includes both the processing fees and the cost of materials provided by the contractor. Processing and assembly trade conducted through counterpart contracts must explicitly indicate this in the agreement. The contractor is not required to pay foreign exchange. 

　　C. Differences Between Processing and Assembly Trade and Processing Trade with Imported Materials 

　　The common feature of these two types of processing trade is that raw materials and components originate from abroad, and the finished products are also sold to foreign markets. However, there are fundamental differences between them: 
　　In processing trade with imported materials, the import of materials and the export of finished products are two separate transactions. The enterprise allocates its own funds to purchase imported materials and then sells the finished products independently on the international market. In contrast, the import and export in processing and assembly trade are two aspects of a single transaction. The ownership of both materials and finished products belongs to the foreign client. The contractor does not pay for imports nor bear sales risks.

　　In processing trade with imported materials, the enterprise earns profits from the exported finished products, with profit margins depending on market conditions. In processing and assembly trade, the contractor collects processing fees, which are based on labor costs, i.e., wage levels. Comparatively, processing trade with imported materials offers higher returns but also greater risks. 

　　In processing trade with imported materials, enterprises have autonomy and can select suitable products for processing based on their technology, equipment, and production capacity. In processing and assembly trade, the client controls the variety, quantity, and sales region of production. 

　　D. Role of Processing and Assembly Operations 

        For the foreign client, processing and assembly operations utilize the contractor's labor to reduce product costs. For the contractor, this represents a form of labor export embodied in goods. 

　　Since the late 1970s to early 1980s, China has regarded processing and assembly operations with foreign materials as a form of utilizing foreign investment, providing policy protection and support, leading to rapid development. Processing and assembly trade accounts for a significant share of China's total import and export volume. It can be said that this trade mode has played a major role in increasing employment opportunities, boosting local economies, and promoting export trade. 

　　Currently, there are two types of enterprises undertaking processing and assembly trade: First, contractors are domestic Chinese enterprises or joint ventures, maintaining a pure contract processing relationship with the client. Through such operations, these enterprises utilize foreign funds, tap into production potential, expand exports, increase revenue, gain access to international market information, accelerate product upgrades, and improve management and technology. Second, foreign clients directly-establish factories in China, utilize preferential policies and cheap labor through contract processing to reap substantial profits, sometimes competing with China's original export markets. Although the current "front store, back factory" model generally brings more benefits than drawbacks to China's economic development, in the long run, it is necessary to guide this form of foreign investment usage toward technology-intensive and capital-intensive industries through policies and strengthen tax management.