Concluding remarks

The evidence harnessed in this chapter supports the view that, in a context in which international fragmentation of production is becoming the symbol of economic globalisation, the standard trade-flow analysis leads to misleading inferences about the sophistication of China's emerging export patterns. Although China has displayed a rapid increase in exports of high-tech products in recent years, the real value added in China is generally not in high-tech activities. When components are netted out, it becomes clear that China is specialising in labour-intensive niches within otherwise skill-intensive sectors. China's general patterns of trade are much in line with its underlying comparative advantage in labour-intensive production.

In the contemporary international economy, in which global production sharing is expanding rapidly, the real story behind the US-China trade gap is much more complicated than what is revealed by the standard trade-flow analysis undertaken with data coming from a data-reporting system developed at a time when countries were trading predominantly (if not solely) in final goods. The widely held view that China's rapid market penetration of the US economy is driven by unfair trade practices needs to be re-examined in light of the fact that the two economies are deeply interconnected and interdependent within global production networks. The growing trade deficit between the two countries has been underpinned by China's emergence as the main point of final assembly in Asian production networks based on its ample supply of labour and moves by US firms to supply high-end parts and components from their Asian bases. In sum, the deficit is to a large extent a structural deficit driven by the process of global production sharing. It is akin to the substantial structural surplus in the oil-exporting countries (based on their specific resource endowment), which the rest of the world has become accustomed to living with.

Given the current state of China's factor-market conditions (as surveyed in a number of recent studies, including Cooper 2006; Meng and Bai 2007; Naughton 2007), one can speculate that China's trade patterns are unlikely to change dramatically in the short to medium term. China still has about half of its labour force employed in agriculture, where its productivity is, on average, barely one-eighth of that in industry and about one-quarter that in the service sector. Agriculture still accounts for more than 45 per cent of total employment in the country even though agriculture's share in GDP is only 13 per cent. GDP per worker in the economy as a whole is three times the value added per worker in agriculture. The country still remains very rural, with an urbanisation rate of about 40 per cent of the total population—much lower than the 'normal' level of 60 per cent consistent with China's income level. These features, coupled with the high skilled-unskilled wage differential (which, according to some estimates, has risen from 1.3 to 2.1 in the past decade), suggest that China still has much potential for moving unskilled workers out of agriculture and into manufacturing and other productive urban-sector activities. For this to happen, the global trading environment needs to remain accommodative and Chinese policies need to be receptive to gains from specialisation on the basis of comparative advantage.

Given the current state of data, in this chapter, we have focused solely on US-China trade in goods. The inferences therefore need to be qualified for the fact that the difference between merchandise trade and services trade has become increasingly blurred because of the continuing process of production fragmentation. US firms that have shifted components production/assembly and final assembly activities and that manage 'service links' involved in the global production networks from their home bases undertake knowledge-based or information technology-enabled services (Brown and Linden 2005). In other words, as part of the continuing process of global production sharing, the related services—particularly knowledge-based or information technology-enabled services that are beyond the traditional notion of internationally traded services, such as transportation, travel and tourism—have become increasingly tradable. There is evidence that exports of these new production-related services (and the related employment opportunities) have significantly expanded in recent years (Mann 2006). The surplus in US services trade (which has persisted since the late 1970s) has expanded rapidly in recent years, reaching US$75 billion in 2006. The largest subcategory—the export growth of which has far outpaced growth in all other services—in the services account is 'other private services' trade, which captures many of the information technology-related services, management and consultancy services and business, professional and technical services, all of which are central to the process of global production sharing.12 An analysis that overlooks these exports could overstate the magnitude of the US-China trade imbalance, presumably by a wide margin.

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