This paper applies structural decomposition analysis to Chinese input–output tables in order to disentangle and quantify the sources of China's import growth and China's growth in vertical specialization: that is, China's incorporation into the global supply chain. China's exports and the role of processing trade therein have increased substantially in the last decade. Yet, they account for only one third of China's import growth from 1997 to 2005. Instead, the volume growth of China's domestic final demand is found to be most important. Moreover, compared with other countries, the structural change in input–output coefficients and in the commodity composition of domestic final demand turns out to be surprisingly important. Looking only at vertical specialization, it is concluded that more than half of its growth, from 21% in 1997 to 30% in 2005, is due to the growth of China's import ratios.
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