Exaggerating China's Competitiveness
IHT August 30
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.
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
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.
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.
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.
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.
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.
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.
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."
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.
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. .
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.
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.