Customs trade model in which a foreign client provides materials to a Chinese manufacturer for assembly without a transfer of ownership for the supplies. The lailliao jiagong arrangement is characterized by the fact that the foreign party retains title to the raw materials and the finished products throughout the entire process. In this model, the Chinese factory is essentially a service provider that receives a processing fee for its labor and the use of its facilities.
This fee is the only revenue that the manufacturer earns from the transaction, as it does not sell the final products on the open market. This trade model was historically popular in the early stages of China’s economic opening and remains a significant way for foreign companies to utilize low cost manufacturing capacity without the risks of local purchasing.
Agreement between the foreign client and the Chinese factory focuses on the specific details of the assembly or transformation process that will be performed. Under lailliao jiagong, the foreign company is responsible for sourcing the materials and shipping them to the manufacturer in China. The factory must follow the client’s specifications and quality standards to ensure that the final products meet the requirements of the international market.
Because the manufacturer does not own the materials, it does not need to use its own foreign exchange to pay for them. The foreign client typically provides the designs, the specialized equipment, and the technical training necessary for the production. This close collaboration allows the foreign company to maintain tight control over the manufacturing process while benefiting from the logistical advantages of producing in China.
Legal title to all inputs and the resulting outputs remains with the foreign enterprise, creating a clear distinction between the materials and the factory’s own assets. During the lailliao jiagong process, the raw materials are imported into China under a bonded status and must be kept separate from other inventories in the warehouse. The Chinese manufacturer cannot use these materials for any purpose other than the specific project defined in the contract.
Any waste or scrap generated during production also belongs to the foreign client and must be properly accounted for or returned. This separation of ownership simplifies the accounting process for the manufacturer and reduces the need for local capital investment. However, it also means that the factory has less control over the supply chain and is more dependent on the foreign client for the continuity of its operations.
Exemption from import duties and value added taxes is granted to the materials because they are intended to be re-exported as part of the finished products. The lailliao jiagong model is supervised by the customs authorities who monitor the movement of goods through a processing trade handbook. Unlike other trade models, the processing fee paid to the manufacturer is also typically exempt from value added tax, provided that the finished products are exported out of the country.
If the foreign company decides to sell the products within China, it must first obtain a domestic sales approval and pay all the deferred taxes and duties. This tax neutral environment makes the model very attractive for companies that are only looking to use China as an export platform. Accurate reporting of the consumption of materials is a requirement to avoid penalties and to maintain the bonded status of the factory.
Consistent compliance with these customs rules is essential for the smooth operation of this specialized trade arrangement.
Corporate transfer pricing adjustments that alter finished assembly prices retroactively trigger severe customs duty debits on sub-tier processing trade imports.
Expertise is a utility, not a secret. sentiention™ publishes its working knowledge as open reference: intelligence layer covering the materials it sources, the markets it enters, and the reference that serves both.