Policy Research Institute - PRI Bangladesh

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China opportunity beckons but not for long

Published: Wednesday, Dec 22, 2010

Economic Analysis

China opportunity beckons but not for long

Zaidi Sattar
December 22, 2010

In the competitive world of globalization it is smart to stay ahead of the game; to be proactive rather than reactive. Some opportunities in global trade come once in a

lifetime. Lost opportunities seldom return. The Multi-Fiber Arrangement (MFA) presented one such opportunity for Bangladesh. Our entrepreneurs seized it. The rest is history.

Such a once-in-a-lifetime opportunity for Bangladesh is again captivating the minds of global analysts and observers of the global shifts in comparative advantage. The new window of opportunity that beckons Bangladesh has its roots in what is going on in China, known to the world as the export powerhouse, as the biggest source of cheap exports of all manner of goods, from clothing and toys to consumer electronics and durable goods like air conditioners and refrigerators.

Internal developments in China are now revealing the limits of producing cheaply. Abundant, cheap, and productive labour was the primary source of China's global competitive advantage. As a natural phenomenon of industrial success, that advantage is fast eroding.

Wages are rising in China, not by a few cents per month, but by a hundred dollars over the past year. Average wages of factory workers in industrial zones, up 20% over last year, have already reached $150 a month, and are still rising. Yet, that is not the principal problem. In special economic zones like Guangzhou, with heavy concentration of manufacturing industries, labour shortages have become acute to the point that on a particular afternoon, at a government employment office, reporters found more employers seeking workers than there were job hunters. Global recovery has fueled so much demand for Chinese exports that a worker could literally walk into a factory and get a job right away. Gone is the notion of vast reserves of unemployed rural workers storming into the urban centers in search of work. Labour shortages are creating wage pressure in industrial centers. Wage-push inflation in China means that competitive advantage is no longer assured, at least not for the labour intensive commodities whose fabrication is less complex and demands relatively low-skilled workers. Examples of these Chinese products include readymade garments, shoes, electrical goods, car parts, toys, kitchenware, and multifarious consumer goods. In these sorts of products, China's competitive edge stemming from low labour costs is fast eroding.

That is not all. The emergence of bulging and sustained trade deficits in the US and other developed economies has given rise to a common refrain that grows louder by the day, for China to participate in a strategic understanding to rebalance global trade - by helping to lower trade deficits in US and other deficit economies while lowering its own trade surplus by raising its own consumption and imports from the rest of the world. The fulcrum of this strategy happens to be the Chinese Yuan and its alleged under-valuation. Since the breakout of the Great Recession of 2008-09, Western pressure, spearheaded by the US, has been relentless and focused on one issue above all else - an accusation that China has gained undue competitive advantage from what is being described as "currency manipulation". The accusation is directed at China's policy of sticking to a largely pegged Yuan to the US dollar - a virtual fixed exchange rate in the face of persistent trade surpluses that would have appreciated the Yuan under a flexible exchange rate system. That, claim the critics of Chinese exchange rate policy, is tantamount to under-valuation of the Yuan which helps to lower costs of Chinese exports on the world market making them more competitive. The case for a Yuan revaluation has been linked to restoring balance in global savings and consumption (high savers like China being required to raise consumption and high consumers like US being required to save more). The imbalance between savings and consumption on either side of the Pacific was blamed as one of the root causes of the global economic crisis. The bottom line is that the mounting pressure for China to revalue the Yuan - which will make its exports dearer and therefore less competitive - remains and though China has not wilted under this pressure, there is a perceptible but slow movement in the direction of modest Yuan appreciation in the past months. Analysts believe there is more Yuan appreciation in the offing in the coming months. This adds the third element in the erosion of Chinese cost competitiveness, apart from rising wages and labour shortages.

It is important to note that global trade is characterized by shiftingcompetitive advantage of nations. The Heckscer-Ohlin model of trade provides the rationale for comparative advantage based on factor endowments, such as the abundant supply of low-skilled labour. But there is nothing static about this notion. The Chinese experience shows that robust export growth in labour-intensive products eventually raises labour costs enough to undermine competitiveness which then shifts to other countries. That is, the loss in competitive advantage for one country becomes a gain for one or more countries. Those ready to gain from China's falling competitive edge in labour-intensive products are countries like Bangladesh, Vietnam, Cambodia, Indonesia, Philippines, and even India.

What is notable is that developments in China have set in motion some dynamic adjustments round the globe. Investors are scurrying for the next best location for manufacturing garments, shoes, toys and other labour-intensive manufactures. Why not Bangladesh? Labour costs, investment climate, and trade policy will be the critical factors determining location and success of the next export powerhouses. In the coming export regimes of the world, there is no need for raw materials and intermediate inputs to be sourced domestically. It is the trade regime in general, and the import regime in particular, that must be made dynamic in order to move imported inputs and export cargo seamlessly across the globe and across borders. Bangladesh needs to position itself for a solid berth in the new alignment of exporters. Other countries like Vietnam and Indonesia are vying to take a bigger chunk of the Chinese pie which is up for grabs. This once-in-a-lifetime opportunity may not last - two to three years at best. Missing the bus this time around could cost Bangladesh its valid claim to middle income status within a decade.

(Dr. Sattar is Chairman, Policy Research Institute. He can be reached at e-mail: zaidisattar@gmail.com)

Published : Financial Express