Thursday, March 28, 2013

The main exporter of the world and its increasing labor costs: China

The main exporter of the world and its increasing labor costs: China 

by Varga Anita

I think it is not surprising that in 2011 China was again the biggest exporter of the word. Some of the main advantages of the country are the low labor and transportation costs. However the former is getting higher and higher.

Comparing countries by their exports in 2011 China was followed by the European Union, Germany and the United States. The reason why this country could become the biggest manufacturer of the world is that the country has some comparative advantages. As well known the country is not just labor abundant, but also the cost of labor are quite low. On the other hand, this cannot be the only reason as there are many other countries and areas where the wages and other costs are also relatively low. Additionally in many cases these other countries are much nearer to the importer. So there have to be other explanations.

According to economic geography the firms’ decisions are strongly influenced by transport costs. This principle can be also used in this case, so to explain why China is the biggest exporter of the world. So an other significant advantage of China is its geographical location (its first nature), as it has a coastal part. This means low transport costs. These two comparative advantages, so the low labor cost and low transportation cost can explain why China specialized in exporting mainly those labor intensive goods which are also easy to transport.

As a result most of the foreign investments, according to some estimate from 1980 the 90% of them, arrived in coastal areas. The cities where the most significant economic growth took place are situated on the seaside, such as Shenzhen, Hong Kong, Shanghai and Dalian.

However China can lose one of its main comparative advantages, as labor costs getting higher and higher which means a real challenge for many companies. Not surprisingly this progress started in the coastal areas, where most of the firms are situated. It can be explained by the Heckscher-Ohlin model which says: if a country has a comparative advantage, but there is free trade then the factor prices equalize. Thus nowadays the coastal areas of China are not as attractive as they used to be. As a result some companies have already moved to other parts of China and to other attractive countries, for example to India and Vietnam, where the labor cost are still lower. And as they also have coastal parts their first nature is similar to China.

Perhaps now some people think that because of these changes most of the companies will leave the coastal part of China. However it is not so simple because there are other things that should be considered, as China still has some advantages. Even though the labor costs are really lower in inland China, the transport costs are much higher. In addition China has already a reasonable supply chain, and it has also advantages considering its second nature: for example the transporting infrastructure is better than in India or in Vietnam. It is also important to mention that the Chinese workers’ productivity is also better which can partly explain the higher wages. So the main advantage of India and Vietnam are their lower labor costs. This can explain why mainly those companies left China which were related to labor intensive industries. However it is not a big problem for China as now its aim is to develop advanced technologies so as to attract more high tech enterprises.

So in spite of the increasing labor costs of China, which was a significant advantage of the country, it still has some other advantages. But of course the changes have some effects. As China and the other countries with lower labor cost have in some extent different factor abundance, some kind of specialization can be observed among them: mainly labor intensive companies are moving to India and Vietnam, while China started to attract companies with high technology.


Post a Comment

Twitter Delicious Facebook Digg Stumbleupon Favorites More