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China’s competitive performance:
A threat to East Asian manufactured exports?

Sanjaya Lall and Manuel Albaladejo1
Queen Elizabeth House, Oxford, UK

23 March 2004

SARPN acknowledges ELDIS as the source of this document.
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We examine China’s competitive threat to East Asian neighbors in the 1990s, benchmarking performance by technology and market. Market share losses are mainly in lowtechnology products; Japan is the most vulnerable market. China and its neighbors are raising high-technology exports in tandem: international production systems here are leading to complementarity rather than confrontation. In direct trade with its neighbors, China is acting as an engine of export growth, with imports outpacing exports. This may change, however, as China climbs the value chain and takes over activities that have driven East Asian export growth even within integrated production systems.


Concern about China’s competitive threat is widespread (in developed economies such as the United States as well as developing ones such as the Mexico), but is strongest in East and Southeast Asia. China’s burgeoning exports––backed by cheap and productive labor, a large stock of technical manpower, huge and diversified industrial sector, attractiveness to foreign investors, use of industrial policy, and, now, freer access to world markets under World Trade Organization (WTO)––lead to apocalyptic visions of export losses.2 China is most threatening to neighbors that rely primarily on low wages for their export advantage. As it upgrades its export structure, however the more advanced economies (Singapore, Hong Kong, Korea and Taiwan) also fear for their competitiveness. The current hollowing out of their low-end manufacturing may soon extend to complex production, design, development and related services. Domestic markets are also threatened by China, but so far most attention seems to have been on exports.

Offsetting this threat are the promise of the dynamic Chinese market (WTO accession is only one of several initiatives to liberalize regional trade) and the potential for collaborating with it to export to the rest of the world. Trade with East Asia is flourishing. China imports from the region are growing faster than its exports, not only of resources but also of manufactures. Its advanced neighbors are selling it consumer goods, intermediates and machinery and using it as a base for processing exports to the rest of the world. Less-advanced countries are being knit with it into multinational production networks. Multinational companies (MNCs) now account for around half of Chinese exports (and much more of its high technology exports, UNCTAD, 2002) and are incorporating China into global systems ("fragmentation" and "segmentation" are used to describe this phenomenon.)3 along with earlier entrants, so promoting regional trade. China’s own enterprises are specializing with respect to regional counterparts and so raising intraindustry trade in differentiated products.

It is difficult to assess whether such complementarities between China and regional economies offset its competitive threat. The dynamics and complexity of the interactions make it impossible to quantify the outcome, even to predict its broad directions.4 The main issue is not so much as direct competition between China and its neighbors––this is clearly growing––but how the latter’s specialization changes in response. If the neighbors, most with higher wages than China, can upgrade into more advanced activities enough to justify their wage premium as China moves into their present activities, they can continue with rapid export growth. If they cannot, they risk export deceleration: a shift to primary products (most of which grow slower than the manufactures that have driven their export growth recently). Or they may be forced to specialize in lower value-added segments of manufactures as China moves rapidly up the technology and quality ladder.5

The outcome depends, in other words, on the growth of technological and other capabilities in China vis .a vis its neighbors, with China having the advantages of lower wages, larger domestic scale, more industrial depth, larger pools of skills and a government willing to use its market size to bargain for greater technology transfer and local linkages. As the East Asian countries differ widely in their industrial capabilities (Lall, 2001a; Lall & Albaladejo, 2002), they face different kinds and intensity of competitive threat from China. The organization of the production system also matters: independent local firms in the region are likely to compete more directly with China than MNC affiliates belonging to an integrated system, which can allow them to adjust more gradually.

In this paper we map China’s relative export performance by technology levels and main destinations to assess where its competitive threat is most intense. We focus on the export performance of major East Asian countries6 in third markets as well as on trade with China. We focus on 1990–2000 because this is when China’s export growth accelerates and diversifies significantly and when foreign direct investment inflows become significant (China’s FDI boom dates from 1992). The global production networks that account for such a large part of its export performance are a phenomenon of the 1990s (Lall et al., 2004; Lemoine & Unal-Kesenci, 2002). We end the analysis in 2000 rather than 2001 because there was a trade recession in 2001. Global exports fell by 4% (WTO, 2002) and the decline was particularly marked in electronics, which comprise over two-thirds of East Asian exports (and which tend to lead business cycles down as well as up). As we are interested in longer term trends rather than short-term cycles, we considered that 2000 data met our purposes better. At the time of the analysis, 2002 data were not available for all the countries covered.

  1. The authors are, respectively, Professor of Development Economics at Queen Elizabeth House, Oxford University, and Research Associate, Queen Elizabeth House. This paper draws upon a study done for the East Asia department of the World Bank; we are grateful to Manjula Luthria for permission to draw on it for publication. We would like to thank the World Bank for making the Comtrade database available to us and to Ms. Jinkang Zhang for helping us process the data. The journal referees provided very helpful comments. The usual disclaimers apply. Final revision accepted: 23 March 2004.
  2. For instance, according to The Economist (2003), ‘‘[China] is already by far the biggest garment exporter in the world, with average wages in the industry of 40 cents an hour––less than a third of, say, Mexico’s. Now that China belongs to the World Trade Organization, moreover, it will benefit from an agreement to eliminate quotas completely by 2005. As a result, according to estimates by the World Bank, China’s share of world garment exports will increase from about 20% today to 50% by the end of the decade. Shoes, semiconductors and televisions are expected to follow. China already makes over half of the world’s shoes, and Malaysia frets over the exodus of electronics factories from Penang. . . to Guangdong and the Yangtze delta. . . Comparisons are made with Manchester during the Industrial Revolution. China, it is said, is becoming the ‘‘workshop of the world.’’ Andy Xie, an economist with Morgan Stanley in Hong Kong, reckons that by 2005 China’s exports could have exceeded those of Japan. He also thinks that China has a lot to do with deflation in other countries, because it causes price wars and pushes down profit margins of companies elsewhere. China’s industrialization, he says, ‘‘devalues manufacturing assets outside China.’’ The local media in the East Asian region regularly carries such dire predictions.
  3. See, for instance, Arndt and Kierzkowski (2001) and Dicken (1999). Fragmentation in East Asia is explored by Borrus, Ernst, and Haggard (2000), Ernst (2000), Ernst and Kim (2002), Lemoine and Unal-Kesenci (2002), and Ng and Yeats (1999). For a comparison of fragmentation in electronics and automobiles in East Asia and Latin America see Lall, Albaladejo, and Zhang (2004) and on clothing and apparel see Gereffi (1999).
  4. Most studies analyze the impact of China’s WTO accession on its neighbors rather than its competitive threat to their exports, but several do touch on this aspect as part of the assessment. See, for instance, Chae and Han (2002), Ianchovichina, Suthiwart-Narueput, and Zhao (2003), Ianchovichina and Martin (2001), Lall and Albaladejo (2002), Li (2002), Rasiah (2002) and Shafaeddin (2002). A few attempts have been made to quantify the effects using computable general equilibrium (CGE) models, for example by Ianchovichina et al. (2003). Their quantitative results must, however, be treated with considerable caution; they are based on several simplifying and static assumptions on demand and supply elasticities, technological change, structural shifts, factor movements, production efficiency and so on.
  5. On Malaysia see Siew-Yean (2001).
  6. "East Asia" here covers eight countries: the four mature Tiger economies (Hong Kong, Singapore, Korea and Taiwan) and the four "new Tigers" (Malaysia, Thailand, Philippines and Indonesia).

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