Exaggerating China's Competitiveness

IHT August 30



HONG KONG Half the world seems in thrall to China's economic achievements. Taiwan is moving to liberalize cross-straits trade and investment. Singapore recently announced a new economic strategy, with Prime Minister Goh Chok Tong proclaiming that "our biggest challenge is ... to secure a niche for ourselves as China swamps the world with her high-quality but cheaper products." The journal of Anglo-American glib solutions, The Economist, advises the likes of South Korea to concentrate on product design and leave manufacturing of everything from steel to chips to a more competitive China.

This is music to the ears of Beijing, which knows that good publicity is self-reinforcing by attracting new foreign investment. But China is more aware than outsiders of its own weaknesses. Foreign assumptions need closer analysis.

That China's exports so far this year have been modestly positive while those of South Korea, Taiwan, Singapore etc. have slumped is at least as much due to the composition of its exports as to added competitiveness. Information technology and telecoms form a relatively small part of its exports. China has performed only marginally better than Southeast Asian countries such as Thailand, or even Indonesia, that have limited exposure to these sectors.

In the lead-up to entry into the World Trade Organization, China has been continuing to attract foreign investment in manufacturing while investment in Southeast Asia is still recovering from the regional crisis, so China's export performance is not extraordinary.

Taiwan's immediate problems stem largely from the sheer size of its IT sector, which was the basis of its remarkable performance in the previous five years. It is a moot point whether opening to China will enhance the prosperity of Taiwan. What is clear is that Taiwan firms own a lot of the technology and manufacturing know-how in their exports, whether these are made in Taiwan or in their mainland factories.

That underlines a major problem for both China and Singapore: Their manufactured exports rely so heavily on foreign investment that they are particularly vulnerable to a shift in its flow or direction. Critics of the government argue that Singapore's current problem is not so much China as its past success in attracting foreign manufacturing with incentives but disadvantaging local entrepreneurship and services.

The world now has a large surplus of capacity in a wide range of industries, IT-related in particular, and profits for global players are in a slump. This bodes ill for future foreign investment into export-related ventures, in China and elsewhere. Some low-tech manufacturing will continue to move to China from Japan and other advanced countries, but this will mainly be because of cheap labor, not rapidly rising skills.

High-tech joint venture investments in China in globally oversupplied sectors like chip foundries are going ahead partly because of government seed money, large tax concessions and implied promises of protection. In the case of Taiwanese companies, they are also driven by politics, as Beijing offers a carrot instead of a stick to its would-be compatriots.

China has assembled a critical mass of IT engineering talent, particularly around Shanghai, which has become a magnet for Taiwan investors and a competition threat to equivalent industries in Singapore. But almost all the higher-tech Chinese output depends on Taiwanese and other foreign know-how, and on tax breaks.

More broadly, China has critical shortages of engineering and management skills. The government is acutely conscious of how ill-prepared much manufacturing industry is to face the challenges of the WTO. If the mainland's domestic producers were not so well protected, Japanese and Korean cars, steel and consumer electronics would soon debunk "competitiveness."

Outside the coastal area, transport costs make a huge dent in China's competitiveness. Political pressure to invest more in interior provinces is likely to grow. Foreign interest in investing in China is being generated by the lure of an expanding and protected local market rather than by belief in the efficiency of the work force and commercial infrastructure. It has been much less profitable than similar investment in Southeast Asia.

China's steady economic performance at a time when much of the rest of the world is facing much slower growth, if not outright contraction, is more due to its size than to its competitive strength. India is in much the same state, albeit at a lower level. .

China's priorities will remain those of a continental economy even as it increases its weight in the global economy. Its achievements in restructuring and attracting foreign capital have enabled domestic growth to flourish, but export competitiveness remains concentrated in labor-intensive products of foreign-owned factories.

Singapore, Taiwan, Malaysia etc. have lessons to learn from the current downturn. Those include the danger of excessive reliance on Western investment and consumers, or Japan-style failure to clean up the financial sector and submit domestic enterprises to competition. China's perceived success may provide an occasion for changes in policies elsewhere in Asia. But exaggerating the challenge of China could become an excuse for failing to address domestic constraints to growth.



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