China, the world’s powerhouse in manufacturing goods like apparel, is turning its attention more and more toward high-tech exports. What does this trend mean for the region and the world? And which countries, if any, will fill void? Gordon Hanson explores these issues in a recent National Bureau of Economic Research working paper, “Who Will Fill China's Shoes? The Global Evolution of Labor-Intensive Manufacturing.”
We spoke to Hanson, who is the Peter Wertheim Professor in Urban Policy at Harvard Kennedy School, about China and the shifting global manufacturing landscape.
Q: You explain that China’s share of global exports of products like clothes and shoes may be declining. Why is this the case?
In the 2000s, China undertook an enormous expansion of its university system, which increased the number of college graduates it produces each year by more than seven times. Large scale rural-to-urban migration, which earlier had helped manufacturing factories in coastal cities grow at breakneck speed, has decelerated sharply. Together, these forces are eroding China’s comparative advantage in labor-intensive goods, including apparel, footwear, furniture, home fixtures, simple electronics, textiles, and toys and games. To be sure, China remains the world’s factory—its share of world exports in these products dwarfs that of any other nation. But its dominance in labor-intensive manufacturing is slipping.
Q: What does this mean for the emerging economies that might step in to fill this role?
The likely candidates are countries that today look something like China did in 1990. China’s low wages and rapidly growing urban labor force made it an ideal place for multinational firms to build factories specialized in assembling simple consumer goods. Bangladesh and Vietnam are probably the countries best positioned to assume some of China’s export market share. However, their combined populations are less than one-fifth of China’s. And, when you look at the next countries on the list, most are small (e.g., Cambodia, Myanmar, Sri Lanka) or specialized in commodities (e.g., Indonesia). The big exception, and the big question mark, is India. Although it has the capacity to replace China as the world’s factory, it remains a puzzlingly small player in export manufacturing.
Q: You write about a shift in China towards the production of more technologically sophisticated goods and services. What are the implications of this shift for China and the rest of the world?
Under Xi Jinping, China has set its sights on becoming a powerhouse in robotics, semiconductors, AI, and other technologically advanced sectors. By redirecting the country’s resources into these activities, the government is hastening China’s shift out of labor-intensive production. Whereas China’s post-1990 export boom was fueled by dramatic year-on-year productivity growth in privately owned factories, the current high-tech push is relying much more heavily on state-owned enterprises (SOEs), whose productivity levels are unimpressive. If the past performance of SOEs is indicative of their future potential, China may be engineering its own economic slowdown.
Q: How should the Biden administration think about trade with China in this changing environment?
I would emphasize two things. One is that the popular perception of China as an unstoppable economic juggernaut is probably overblown. The country’s impressive economic growth in the 1990s and 2000s was based on a private-sector dynamism that today is less in evidence. The United States should approach China with a firm grasp of the weaknesses in China’s economic model. The other is that, barring a manufacturing turnaround in India, as of yet there is no China to replace China in labor-intensive manufacturing. This may mean we are entering a period of flux in the global economy, in which U.S. trade policy and concerted trade actions with U.S. partners may have a larger than normal effect on the global pattern of export specialization. We should use such an opportunity wisely.