Forms, characteristics, and functions of processing and assembly trade

A. Basic Concepts and Knowledge

Processing and assembly business with foreign materials is a trade method of entrusted processing. The foreign entrusting party provides all or part of the raw materials, auxiliary materials, components, parts, supporting parts, and packaging materials, and when necessary, provides equipment. The承接方 (accepting party) enterprise processes and assembles according to the entrusting party's requirements. The finished products are handed over to the foreign entrusting party for sale abroad, and the accepting party collects processing fees. For the equipment price provided by the entrusting party, it can be offset by the processing fees earned from labor services, combined with the compensation trade practice.

B. Forms of Processing and Assembly Trade

Processing and assembly of全部来料来件 (all supplied materials and parts). The foreign entrusting party provides all raw and auxiliary materials and components. The accepting party enterprise processes them and delivers the finished products to the foreign entrusting party. Neither the parts nor the finished products are priced, and the accepting party collects processing fees according to the contract.

Processing and assembly of部分来料来件 (partially supplied materials and parts). Some materials and parts in the finished products required by the foreign entrusting party need to be provided by the accepting party. In this case, the accepting party not only collects processing fees but also collects the price for the materials and parts provided.

Counterpart contracts,各自作价 (each independently priced). The foreign entrusting party and the accepting party sign two counterpart contracts. One is a sales contract for the raw materials, auxiliary materials, and components provided by the entrusting party, and the other is a contract for the finished products exported by the accepting party. For all supplied materials and parts, the difference between the two contracts is the processing fee. For partially supplied materials and parts, the difference between the two contracts includes both the processing fee and the price of the materials and parts provided by the domestic accepting party. It must be stated in the contract that the processing and assembly trade is conducted through counterpart contracts. The accepting party does not need 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 come from abroad, and the finished products are also sold to foreign markets after processing. However, there are essential differences between them:

In processing trade with imported materials, the import of materials and the export of finished products are two independent transactions. The enterprise engaged in processing with imported materials needs to raise its own funds to purchase materials from abroad and then sell them independently to the foreign market. In processing and assembly trade, the import and export are two aspects of a single transaction; the ownership of both the materials and parts and the finished products belongs to the entrusting party. The accepting party does not need to pay import costs nor bear sales risks.

In processing trade with imported materials, the enterprise obtains the profit from exporting finished products. The amount of profit depends on the market conditions for the exported products. In processing and assembly trade, the accepting party collects processing fees. The amount of processing fees is based on the cost of labor, i.e., the wage level. Comparing the two, the income from processing trade with imported materials is higher than that from processing and assembly trade, but the risks are also greater.

In processing trade with imported materials, the enterprise has autonomy. It can select marketable goods for import processing based on its own technology, equipment, and production capacity. In processing and assembly trade, the entrusting party controls the varieties, quantity, and sales regions of production.

D. Functions of Processing and Assembly Business

For the entrusting party, the processing and assembly business utilizes the labor of the accepting party to reduce product costs. For the accepting party, it is a form of labor export with goods as the carrier.

From the late 1970s to the early 1980s, China regarded the processing and assembly business with foreign materials as a form of utilizing foreign capital and provided policy protection and support, leading to rapid development. The trade volume of processing and assembly has accounted for a considerable proportion of China's total import and export value. It should be said that this trade method has played a significant role in increasing employment opportunities, prospering local economies, and promoting export trade.

Currently, there are two types of enterprises undertaking processing and assembly trade with foreign materials: One type is where the accepting party is a Chinese enterprise or a joint venture. The relationship with the entrusting party is purely entrusted processing. By undertaking processing business, the enterprise can utilize foreign funds, exploit its production potential, expand exports, increase income, obtain information on the international market, accelerate product upgrading, improve management levels, and refine process technology. The other type is where the foreign entrusting party directly invests in factory construction domestically, then fully utilizes China's preferential policies and low labor costs through the entrusted processing and assembly method, reaping substantial profits, and to some extent competing with China's original export trade for market share. Although this "front shop, back factory" model currently brings more benefits than drawbacks to China's economic development, in the long run, it is very necessary to use policy to guide this form of utilizing foreign capital towards technology-intensive and cost-intensive industries and to strengthen tax management.