Why is China so competitive? Measuring and explaining China's competitiveness

Résumé du document

In the first part of our paper we will present the theoretical background of the international trade. We will begin with the description of the evolution of the comparative advantage theories, and then continue with the competitive advantage theory. We will continue with the discussion of some important factors, responsible for China's competitiveness. We will briefly understand Balassa's comparative advantages, which is an ex-post measure, to analyze where China has comparative advantages. The international trade had been an important issue several centuries before the classical theory of economics even took off with Adam Smith's Wealth of nations in the 1776. The philosophy dealing with this issue was mercantilism, a philosophy guided by European thinking in the 15th, 16th and 17th centuries. Mercantilists believed that if a country wants to become richer, its exports have to exceed its imports. This is because in those days, the measure of country's power was the quantity of gold and silver it had.

Extraits

[...] That is why, according to Ricardo's theory, the USA will specialise in producing wheat while the rest of the world will specialise in producing cloth. The international price of wheat will therefore rise above the American price but will still be lower than the price of 6 the rest of the world (in case of no international trade). In contrast, the international price of cloth will be above the rest of the world's level and below the American level THE HECKSCHER-OHLIN THEORY OF FACTOR PROPORTIONS In his theory, Ricardo managed to prove the principle of comparative advantage but in his approach he assumed that the opportunity costs of switching from the production of one product to another one are constant. [...]

[...] In his opinion, the factor endowment theories of Heckscher and Ohlin are too simplistic to determine a nation's competitive advantage. According to Porter, the only logical concept of competitiveness on the country level is productivity, which can be measured as an added value of the goods and services produced by the unit of capital and human resources (Porter 1990, p.84). In his opinion, a country is responsible for providing a high and growing life standard to its inhabitants. In the long run, this standard depends on the ability of the firms to raise their productivity through the increasing quality of their products, technological improvements and increasing effectiveness of the production processes. [...]

[...] He backed the theory with the real-world observation and explained it by intuition. Ohlin's explanation of the H-O theory of trade patterns is the following: “Commodities requiring for their production much of [abundant factors of production] and little of [scarce factors] are exported in exchange for goods that call for factors in the opposite proportions. Thus indirectly, factors in abundant supply are exported and factors in scanty supply are imported.” (Ohlin p.92 in Pugel and Lindert p.56) In other words, the theory says that a country will export products that use its relatively abundant factors relatively intensively and import those products that use its relatively scarce factors relatively intensively. [...]

[...] Another important driver of economic fragmentation was imposed: regional import substitution strategies” (Huang, p.13) which aimed at the development of import-replacing infant industries in the domestic market through trade and capital export restrictions. This lead to a fragmented and undersized industrial structure. These trade restraints are comparable to trade protectionism at a national level which is shown by a study of Wedemann (Wedemann p. 227). As a result, all regions push into similar industries and do not specialize according to their comparative advantage. Besides, economic fragmentation also reduces one of China's biggest advantages which is created by the diverse demand conditions due to its vast geographic expand. [...]

[...] The important thing about the monopolistic competition is that not all the products are necessarily exported as an inter-industry trade. Some of them can also be sold to the other markets on the basis of the comparative advantage Scale economies and global monopolies Economies of scale exist if increasing expenditures on all inputs (with input prices constant) increase the output quantity by a larger percentage, so that the average cost of producing each unit of output declines. Scale economies can be either internal (the expansion of the firm is a basis for the decline in its average costs) or external (relating to the whole industry on a certain geographical area. [...]