China’s export machine is wreaking havoc in Asia

China’s manufacturing-focused stimulus measures have accelerated its domestic supply chain and caused a surge of exports into world markets. These trends challenge industrial economies all over the world. 

The effects are felt especially strongly in Asia’s developing, middle-income economies.

In addition to geographic proximity, these countries are closely connected to China as suppliers of intermediates and competitors in world markets for final products. 

Two other sets of policies have created changes in the competitiveness of manufacturers and exporters in middle-income Asia. 

These are the dramatic increase in the share of highly-educated workers in China’s labor force and the high-tech and skill-intensive industrial policies known as “Made in China 2025.”

The number of young Chinese obtaining university degrees has increased for many reasons. But the rise was most dramatic in the decade following a 1999 policy change that relaxed university admission quotas. 

University graduates

A growing population of skilled workers has greatly reduced the skill premium – the ratio of wages for university graduates to those of lower qualifications – driving down labor costs in skill-intensive industries in manufacturing.

Alongside this change, Made in China 2025 uses subsidies to target high-tech industries. 

Competition among Chinese companies has ensured that the benefits of the policy are passed down the domestic supply chain, reducing costs and raising international competitiveness across a broad range of sectors.

China’s prominence in global trade and the size of these changes ensure that no economy is unaffected. Industrializing middle-income economies will see Made in China 2025 policies alter their existing pattern of production and trade.

This will affect their future growth and development prospects.

The surge in China’s manufactured exports has reduced competitiveness across the board for nations that produce similar goods. In middle-income countries, this could force them to pivot back to primary sectors such as agriculture, forestry and mineral extraction. 

The direction of change is opposite to that targeted by policymakers and prescribed by economists for sustained, dynamic growth.

Data has shown how China’s educational development and industrial policy measures have offset other sources of growth. 

The model has predicted that due to these measures, China’s exports of electronics and electrical equipment will increase by 12.7% and 53.9% respectively during the decade between 2015 and 2025. 

Overseas markets

At the same time, Thailand’s exports of those goods are predicted to decline by 22.67% and 12.69%, while agricultural products for overseas markets will rise by 27.21%. Other middle-income nations are likely to face a similar challenge. 

Indeed, the longer-term implications of these changes are equally serious. 

Having increased the skill intensity of its own workforce and product mix, China is exporting the decline in its skill premium to global labor markets.

This affects countries whose skill-intensive industries are most vulnerable to Chinese competition such as costs and output prices. 

As their skill-intensive industries decline – in a relative, if not absolute sense – demand grows less quickly than that for blue-collar workers. Model predictions for Thailand indicate a 0.54 percentage point drop, about 6% of the typical returns to education in developing countries.

Why does this matter? 

The skill premium not only measures relative labor costs but also indicates expected gross returns to educational investments beyond compulsory schooling. A lower skill premium can discourage young people from pursuing further education.

In Thailand, a one percentage point decline in the country’s skill premium contributes to a 1.9% drop in the educational enrolment rate of 15- to 23-year-olds. 

Any trend away from greater investment in human capital is also at odds with policy goals for successful development. This will also exacerbate existing gaps in educational attainment and intergenerational economic mobility.

While the world’s attention is focused on China’s trade relations with the United States and other advanced economies, it is perhaps middle-income nations that are most at risk. 

Fragmented system

Picking winners among skill-intensive industries is a futile approach for small economies without global market power. 

But fostering across-the-board productivity growth and competitiveness will maximise their chances of finding niches within a fragmented global manufacturing system.

Ian Coxhead is a Senior Research Fellow at the Institute of Developing Economies for the Japan External Trade Organization (IDE-JETRO).

Varan Kitayaporn is a Visiting Clinical Assistant Professor at New York University.

This edited article is republished from East Asia Forum under a Creative Commons license. Read the original article here.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.