Processing trade is the customs regime under which a Chinese factory imports raw materials and components with duties and import VAT suspended, processes them into finished goods, and re-exports the output. The two classic forms are processing with supplied materials, where the foreign client keeps ownership of the materials, and processing with imported materials, where the Chinese factory buys them. Everything is tracked through an electronic customs handbook that records permitted inputs, consumption ratios and outputs, reconciled periodically with customs.
Why it matters
Processing trade is the machinery behind a large share of China's export manufacturing — electronics assembled in Dongguan from imported chips, garments cut from imported fabric. For foreign buyers, the regime affects you even if you never touch the paperwork: your supplier's bonded materials legally cannot be diverted into the domestic market, the consumption ratios cap how much scrap and wastage customs will accept, and selling bonded-material products domestically without paying back duties is smuggling. If your factory's handbook reconciliation fails, your production line can stop while customs investigates. The regime also interacts with where the work happens — factories inside a bonded zone or free trade zone enjoy simpler logistics for returns and repairs — and with the supplier's customs credit, since AEO certification smooths handbook approvals.
How it works in practice
A Japanese electronics brand has a Dongguan factory assemble car dashboards from imported Japanese displays and chips. The factory's handbook records the bill of materials and a 2% wastage rate. Displays enter bonded; finished dashboards export to Nagoya; customs reconciles the handbook each cycle. When the brand wants to sell 5,000 units domestically, the factory files to convert them, paying duties and VAT on the imported content first.
Common mistakes
- Letting bonded materials leak into domestic sales without duty payment — treated as smuggling
- Setting unrealistic consumption ratios that fail reconciliation
- Ignoring scrap disposal rules for bonded materials
- Assuming goods can move freely between processing factories without customs transfer filings
- Not checking a contract manufacturer's handbook status before committing production