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Entrepot Trade and Its Effect on Trade Flow Perception

November 18, 2016

By Samantha Reese, CEMAC Analyst

An essential part of every CEMAC project is to examine the global trade flow of a product's critical components as well as the end product itself. In Fiscal Year 2016, CEMAC studied the value chain of integrated light-emitting diode (LED) lighting. This involved careful analysis of the trade flows of LED die and packages, which are integral to LED lighting products.

"The complex dynamics of trade combined with recordkeeping policies can result in misperceptions of manufactured product flow."

For the CEMAC project with the DOE Solid State Lighting Program, CEMAC analysts used data from to map the trade flows of packages and dies. After gathering the data, analysts noticed two anomalies that radically impacted trade flow. One anomaly showed a significant percentage of trade from China to China, and the other showed a significant export percentage from China to Hong Kong. The China to Hong Kong trade became especially apparent when the below trade flow chord chart was completed.

CEMAC purchased two Yole Développement market reports for the study—LED Packaging Technology and Market Trends 2014 and Sapphire Applications & Market 2015: from LED to Consumer Electronics—in order to explicitly identify where and how much LED die and packages were manufactured in every country. Combined with these reports, further research allowed analysts to identify which products used the most LED packages. From this, we identified that Hong Kong was not a key manufacturer for any of the products that consume LEDs, thus confirming a trade data anomaly.

To understand the discrepancy and how to handle it, CEMAC contacted the Department of Commerce and learned that:

  1. The data for Hong Kong reflects entrepot1 trade, meaning Hong Kong acts as a port or way station to which goods are brought for collection and later distribution. It is a centralized location that acts as a clearing house for goods passing through other parts of China. As an independent port city that became part of China, Hong Kong's unique history led to the important role that it plays in the transnational movement of goods.

  2. The China to China trade data reflects re-exports from Hong Kong—and how China records its trade. As the Department explained, when goods are exported from China to Hong Kong, Chinese customs cannot determine what the final destination of the shipment will be. So, these shipments are recorded as Chinese exports to Hong Kong. However, they can identify an import's country of origin that passes through Hong Kong to China. Therefore, when a shipment travels from China to Hong Kong, and then back to China, it will be recorded as a Chinese export to Hong Kong and a Chinese import from China.

Using this feedback, the data was tailored to use the import data from the majority of countries, since those countries know where the product originated. The China to China data point was eliminated, and the China to Hong Kong data point was eliminated. Additionally, for countries that showed both China and Hong Kong imports, CEMAC combined them as China, given the fact that Hong Kong was not actually a producer.

As the revised graphic indicates below, this correction made a significant difference. Instead of China dominating world LED die/package exports with a 36% share, it instead tied at #1 with Taiwan, each claiming 21% of the world's export trade. The results were also more consistent with data from the LED manufacturing industry. Insights gained through this exercise will inform future projects, underlining the fact that the complex dynamics of trade combined with recordkeeping policies can result in misperceptions of manufactured product flow.

1 Wang, Zhi, Mark Gehlhar, and Shunli Yao. "A globally consistent framework for reliability-based trade statistics reconciliation in the presence of an entrepot." China Economic Review 21, no. 1 (2010): 161-189.