- Koshy Mathai, Geoff Gottlieb, Gee Hee Hong, Sung Eun Jung, Jochen M. Schmittmann, and Jiangyan Yu
- Published Date:
- September 2016
China has become the world’s largest trading nation and the center of the global supply chain. A negligible player in global trade just a few decades ago, China now accounts for more than 12 percent of world exports and 10 percent of world imports, more than any other single country. Nominal exports grew by 17 percent on average each year from 1990 to 2012, receiving a particular boost after China’s accession to the World Trade Organization in 2001. Imports—particularly of input parts, materials, and energy—rose in tandem, and China is now the world’s largest importer of intermediate goods and the anchor of the global supply chain trade. The number of China’s major trading partners rose several-fold over the same period (World Trade Report 2014), and as trade grew, so also did foreign direct investment, of which China is now the world’s largest recipient (as well as an increasingly important source).
Figure 1.Global Export Market Share
Sources: UN Comtrade; and IMF staff calculations.
Figure 2.Share of World’s Intermediate Exports by Destination
Sources: UN Comtrade; and IMF staff calculations.
Abundant labor has long been a key factor behind China’s export success. Chinese exporters have enjoyed considerable advantages, including a currency that was undervalued for many years as well as low interest rates, but the country’s abundant supply of cheap labor was perhaps the most important factor of all. It has been estimated that there are 270 million migrant workers in the 10 coastal provinces that account for 90 percent of China’s exports, and millions more remain in Chinese inland provinces and rural areas.
The era of cheap labor, however, may be ending, and China may be losing competitiveness in labor-intensive production. The working-age population has already started declining and is projected to shrink rapidly in the years to come, with the country expected to reach the Lewis turning point by 2025 (Das and N’Diaye 2013). Over the past decade, private sector wages across the country have risen by close to 15 percent per year. In 2005, some inland provinces had wage levels comparable to those in neighboring low-income countries (LICs) such as Cambodia, Lao P.D.R., Myanmar, and Vietnam (the CLMV), but now China’s wages are higher by nearly 50 percent. Wages in the coastal provinces are higher still—more than double those in the interior. While productivity has been rising, it has not kept up with wages; unit labor costs have risen sharply, and patterns of manufacturing and trade have thus started to adapt.
Figure 3.China’s Working-Age Population Growth
Sources: CEIC Data Company Ltd.; and UN Population Division
Figure 4.Unit Labor Cost
Source: Haver Analytics.
The country faces other challenges as well, as the economy rebalances to a more sustainable growth model. China’s growth was long driven by exports, with the current account surplus peaking at over 10 percent of GDP in 2008. But as consumption in advanced economies has moderated in the wake of the global financial crisis, China has increasingly had to turn to domestic demand. In 2008–09, the authorities introduced a large package of government stimulus to bolster short-term growth. An investment boom resulted, and the current account surplus fell sharply, declining to 2 percent of GDP in 2014, supported by substantial real appreciation of the yuan. China’s substantial progress on external imbalances, however, came at the cost of creating a large domestic imbalance—that is, excessive investment fueled by credit. A more sustainable growth model will involve both a shift within domestic demand, from investment to consumption, and a productivity-driven move in the external sector, from lower-value-added labor-intensive exports to higher-value-added, and often more capital-intensive, exports. Both shifts are underway but are still in early stages.
These trends could have profound implications for other countries. This holds both for those countries collaborating with China in global supply chains and those competing with it. If increasing labor costs are pushing China out of labor-intensive light manufacturing and assembly, this should open up space that could be exploited by LICs in Asia and beyond. At the same time, moves up the value chain to more sophisticated products—including onshore production of the input components China currently imports—could offer competition to the richer countries that currently dominate these sectors.1 Finally, commodity and machinery exporters may see reduced demand as China rebalances away from investment, while those capable of producing consumption goods likely to be demanded in China could benefit.
Earlier export powerhouses successfully managed transformations away from labor-intensive exports. Japan first, followed next by Taiwan Province of China and Korea, and then by several ASEAN countries, have experienced rapid trade and GDP growth for decades. As these economies matured, light manufacturing shifted to less advanced peers. In this “flying geese” model (Akamatsu 1961, 1962; Okita 1985), countries averted sharp contractions in growth by keeping research and development and knowledge-intensive production onshore while moving lower-value-added tasks—like assembly and processing—abroad. Over time, more and more emerging and developing economies were integrated into the regional trade system in this manner, leading to a proliferation of competence in manufacturing and assembly. Such shifts occurred both as lower-wage producers were able to out-compete their predecessors in labor-intensive work, and as firms from the more advanced economies chose to set up subsidiaries overseas to take advantage of cost differentials. It is worth noting that China is now at an income level around where its predecessors saw such shifts occurring.
Figure 5.Exports of Apparel and Footwear
Sources: UN Comtrade; and IMF staff calculations.
Figure 6.PPP GDP per Capita at the Start of Taper
Sources: IMF, World Economic Outlook; and IMF staff estimates.
China’s very large scale and regional heterogeneity, however, may mean that things will unfold differently. In particular, even as China moves into higher-value-added activities, it may be able to retain existing activities, perhaps by transferring these inland, where wages are considerably lower. Such a pattern was simply not possible in Korea or Taiwan Province of China, given their much smaller size and factor endowments. If different areas within China capture markets all along the supply chain, then the next wave of “geese” may not see traditionally expected opportunities opening up. And similarly, even as China succeeds in rebalancing toward consumption, it could be that this increased demand is satisfied by production from within China, and not from other countries. Finally, the “geese” may not fly at all—low-value-added activities could conceivably remain in coastal China on account of network effects (agglomeration of suppliers), extremely efficient logistics, increasing automation, or other factors.
Figure 7.Per Capita Income in China’s Provinces and the CLMV
Sources: National Bureau of Statistics of China; IMF, World Economic Outlook; and IMF staff calculations.
This paper seeks to document the evolution of China’s trade, investment, and consumption patterns and analyze the implications for the Mekong region. In terms of trade, several recent IMF papers have looked in detail at China, including through analysis of value-added trade data.2 While this paper does make use of value-added data, it also seeks insights on China’s evolving trade by digging deeper into the gross trade data, which are available at higher frequency and in greater detail. As far as the focus on the CLMV, this paper seeks to expand the broader work on China’s outward spillovers to a group of lower-income economies on China’s border. While not a homogeneous group, they provide examples of a broad suite of issues facing commodity and manufacturing exporters that hope to compete in China’s orbit.
The structure of the paper is as follows: Chapter 1 takes a detailed look at the basic trade and other data to understand how exactly China is changing. Fundamental transformations in the world’s second-largest economy will naturally have global implications, and the IMF’s spillover reports and other policy research explore some of these broader themes. This report, however, focuses on the impact likely to be felt by the LICs of the Mekong region—Cambodia, Lao P.D.R., Myanmar, and Vietnam. As documented in Chapter 2, the CLMV are highly open, already well-integrated with China, and thus form a natural cluster of countries to study.3 Chapter 3 offers policy recommendations to help the CLMV to exploit most effectively the opportunities arising from China’s transformation, and to deal with new challenges.
The paper shows that China’s trading patterns have already started to change:
First, there is a clear move up the value chain by onshoring more sophisticated production, and this has been happening for a number of years.
Second, China appears to be at an inflection point with respect to lower-value-added labor-intensive products. After a three-and-a-half-decade rise, market shares have started to plateau and even decline in some key sectors like garments, footwear, toys, and furniture. Labor-intensive goods had already been falling as a share of total exports for some time, on account of China’s boom in capital- and research-intensive sectors. But China’s global market shares in these goods had remained resilient until only recently. Many argue that this resilience was a function of an increase in production inland, where wages are lower, but the data suggest that exports are still produced almost exclusively on the coast.
Third, there is mixed evidence on rebalancing. Imports of certain commodities, like coal and copper, are clearly declining, but others, like oil, food, and agricultural commodities remain strong.4 While Chinese consumption is on an upswing, imports of consumption goods and services remain modest except for tourism (which is not a focus of this report).
The CLMV stand to be affected by these changes in important ways and cannot rely on low wages alone to succeed in global trade. As China continues to exit labor-intensive light manufacturing, there may be opportunities for the Mekong countries to enter. Vietnam and Cambodia are already established manufacturing countries and could benefit, as could Myanmar which is still at the beginning of its economic opening but is blessed with a large labor force. These countries may also find opportunities in exporting consumption items to China (and in marketing their tourism offerings to Chinese visitors). On the other hand, as China’s commodity demand slows, Lao P.D.R. and Myanmar, in particular, may see their energy and materials exports declining. The CLMV countries all benefit from low wages, but the earlier literature and our own econometric analysis suggest that success in trade depends on many structural factors as well. In particular, improvements in education, infrastructure, governance, the business climate, and trade openness are important priorities for these countries.