According to a statement on the ministry's website, the move targets high polluting and high-energy-consuming industries in east China, chiefly those in Beijing, Tianjin, Shanghai, Liaoning, Hebei, Shandong, Jiangsu, Zhejiang, Fujian and Guangdong.

The new policy does not affect enterprises in the western region.

The Ministry of Commerce and the China Customs agreed that the new policy aims to optimize the mix of export products and curb the rapid export increase of low added-value and low-technology products in an effort to ease tensions brought about by the huge Chinese trade surplus.

The processing trade mainly involves the production of low-end spare parts and simple assembly of products with high labor-intensive and low technological levels. Multinational companies usually control core technology, product design, software support, key parts and branding. Because of this, China has fallen behind in the global production chain.

As a result, the Chinese Government plans to use policy regulations to upgrade the processing trade and increase the sector's technological level.

Wei said that according to the requirements in terms of macro-control, industrial development and environmental protection, the Ministry of Commerce will perfect the categorizing regulations of the processing trade, formulate readjustment policies for industry and product access, and regularly publish the list of products that are restricted or forbidden for export.

Regional differences

Currently, most of the companies engaged in the processing trade are located in east and south China's coastal areas, chiefly in Guangdong, Fujian and Jiangsu provinces.

In line with the government's determination to achieve balanced development, most of the processing trade in the western region won't be affected. The government is promoting more exports from this region while restricting those in the east.

It is believed that a great part of labor-intensive production in the eastern region will be transferred to the west, due to its higher cost in human resources, energy and natural resources.

However, although the western region has comparative advantages in low-cost production factors, regional development is greatly restricted by the growing transportation costs, logistics inefficiency and a less attractive business environment. Wei said the MOC is working to take measures to support the development of the western region so that the processing trade can be conveniently transferred there.

Slowing export growth

Many experts stated that the export growth rate would slow down due to renminbi appreciation, tax rebate reductions, rising labor costs and raw material prices, and stricter environmental protection standards enacted by foreign countries.

Zhang Yansheng, veteran expert with the Academy of Macroeconomic Research of the State Development and Reform Commission, also believes that export-oriented production will be greatly reduced due to the Chinese Government's effort to rein in the trade surplus.

Zhang said the government will adopt further measures to control the excessive growth of investment, especially in industries causing environmental damage and those whit higher resource and energy consumption.

But other experts contend that the booming demands from abroad will keep the export growth rate at a high level despite policy changes and the escalation of costs.

Processing Trade in China Since the early 1980s, when China introduced the reform and opening-up policy, the processing trade has been an important channel for Chinese enterprises to participate in the international division of labor, and China has built a manufacturing platform in line with international market demands. The total import and export volume of China's processing trade soared 333 times to $831.9 billion in 2006 from a mere $2.5 billion in 1981. In the first half of this year, the processing sector's import and export volume reached $440.9 billion, accounting for 45 percent of the national total. Companies based in Taiwan, Hong Kong and Macao are major investors of the mainland processing trade. According to official statistics, processing enterprises funded by investors from these regions currently number around 60,000, accounting for 65 percent of all Taiwan-, Hong Kong- and Macao-funded enterprises on the mainland. Currently, there are about 30-40 million people working in the processing trade, with the number accounting for 20 percent of the total employment of the country's secondary industry. While greatly reducing the nation's employment pressure, the processing trade has also created a large number of industrial elites.