From ancient temples surrounded by glimmering skyscrapers to a hyperactive tech sector, China encapsulates many ideas. Arguably, China is most renowned for exerting significant control over global production, with the West leashed to its efficient manufacturing powerhouse. How has China established and maintained such dominance? What is the reason for the ubiquity of Chinese goods? Why doesn’t China produce everything? What are the implications of this? These questions are explored below.
In essence, China has a comparative advantage in manufacturing due to its lower labour costs, extensive infrastructure, and large – scale production capabilities. Comparative advantage means that countries can produce goods at a lower opportunity cost than another country. In simple terms, China should do what it is relatively best at doing.
The Dragon Nation has a population of 1.5 billion people, making it the most populous country in the world. This abundance in people results in a large labour force - through the law of supply and demand, we know that when the supply of workers is greater than the demand of low wage workers, wages remain low. Hence, firms benefit from a lower cost of production per unit and are thus incentivised to supply more for the same price. Furthermore, whilst suppliers in the West are expected to comply with regulations on child labour, health norms and wage laws, restrictions in China are more loose meaning firms do not have to worry about additional costs.
Furthermore, currency devaluation is one method China has utilised to help increase export quantity. China has been accused of undervaluing its exchange rate by selling Yuan and buying foreign currencies to keep its products artificially cheap against the competing US products. Not only would this encourage foreigners to buy Chinese products, but it would also help exporters accumulate more capital and hire more workers.
However, if China is pretty much better at producing and exporting everything than most countries, wouldn’t China simply infiltrate every single market with its products? David Ricardo argued in 1817 that if China was more productive at everything, it could not possibly sell everything, because then the buyer country would sell nothing and would have no money to buy anything from China or anywhere else. International trade would collapse. Through this argument, we could infer that China could win in any single market but not win in every single market.
Samuelson developed this idea even further. Some goods require relatively more labour than capital to produce. Therefore, a labour rich country, like China, will have a comparative advantage in producing it. Some goods require more capital, so a capital - abundant country, like the US, should produce it. When both countries trade, demand for capital increases in the US, price of capital increase, and wages decrease. Conversely, in China demand for labour increases, price of labour increases and thus wages increase. Therefore, opening up trade, although increasing GDP in both countries, would supposedly reduce inequality in labour - abundant countries (China) and increase inequality in capital - abundant countries (USA). This is known as the Stolper - Samuelson theorem.
In the future, it is uncertain the extent to which China will maintain its current competitive edge due to rising powers like India or even Nigeria potentially displacing its position as the leading producer. Perhaps, advancements in sustainability and environmental practices could influence the choices of China seeking to establish total manufacturing dominance, especially due to the rise in foreign offshoring.
Abhiraj is a Year 12 student at Wilson’s School, studying Maths, Further Maths, Economics, Geography and German. With a particular interest in behavioural economics and the stock market, he aspires to study Economics at university.
Sources: Banerjee, A. V., & Duflo, E. (2019). Good economics for hard times. Allen Lane. "Interprovincial Competitiveness and Economic Growth: Evidence from Chinese Provincial Data (1992–2008)," Pacific Economic Review, Wiley Blackwell, vol. 20(3), pages 388-414, August Jarreau, Joachim & Poncet, Sandra, 2012. "Export sophistication and economic growth: Evidence from China," Journal of Development Economics, Elsevier, vol. 97(2), pages 281-292
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