David’s post on Mongolian Cashmere highlights the difficulty Mongolia has had in branding its top quality cashmere. It reminds me of a recent study by Feenstra, Hanson and Lin (2004) on the value of information and other intermediary services in international trade. The study shows that during the 1990s, about 53% of Chinese exports to the rest of the world were re-exported through Hong Kong (China). Re-exporting means that the goods did not receive “substantial transformation” en-route, but did benefit from sorting, packaging, or the application of service activities such as marketing or transport.
Traders in Hong Kong (China) engage in a range of activities that benefit their clients. Large trading houses such as Li and Fung identify firms on the mainland that can engage in outward processing, whereby inputs are imported into China duty free and processed there, with the final outputs re-exported through Hong Kong (China). The mark-up on Hong Kong (China) re-exports of Chinese goods averaged 23% of the value of exports. That is, the same good to the same destination fetched 23% more when shipped through Hong Kong (China) compared to exportation directly from mainland China. And the benefit to the foreign firm buying the goods is also substantial: this is estimated to be about 4-5 times the stated mark-up.
Further, the study notes that firms in Hong Kong (China) help attract FDI inflows to mainland China by engaging in “property rights arbitrage”: they use their specific knowledge of business conditions in China and the security of property rights in Hong Kong (China) to broker deals with agents who want access to China's market but are wary about its insecure property rights.
Similar intermediary services could help exports of Mongolian Cashmere by building a brand name for the product, connecting buyers and sellers globally and bringing in the necessary investments and technology into Mongolia.
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