Abstract: Deglobalization, local military conflicts and rising tensions with the United States have made the global environment more complicated and challenging for China. However, the country also faces new opportunities amid digital and green transformation, and the only way out for Chinese companies amid fierce competition is to accelerate industrial upgrade. To this end, China should work to turn challenges into opportunities, improve domestic business environment, boost technological innovation, and cultivate more transnational companies with global influence to secure a better position along the global supply chain.
I. CHINA SHOULD GRASP THE OPPORTUNITIES AMID DIGITAL AND GREEN TRANSFORMATION
China faces an increasingly complicated and challenging international environment. But there are also new opportunities to explore.
China’s reform and opening-up took place at the height of economic globalization, and the country has participated in, contributed to and benefitted from this process. However, globalization has entered a new phase since 2008 as anti-globalization and deglobalization sentiments grow in some of the countries which were accompanied by protectionist trade and investment policies. In recent years, security of supply chains has become a key concern for countries amid shocks from the COVID-19 pandemic and the Ukraine crisis, representing a fundamental change in global environment where the emphasis has shifted from efficiency to security and resilience of supply chains.
At the same time, China also faces rigorous competition. The US has taken a rising China as the biggest challenge to its global hegemony and introduced policies to contain China’s growth. The key to that, from the US point of view, is to widen the gap between the two countries especially in technology. According to Antony Blinken’s recent speech on the Biden administration’s China policy, the US seeks to, first, invest in itself and step up R&D and technological advances to secure its leading position; and second, contain China both bilaterally and together with its allies to drag China’s technological upgrade. In other words, the US is taking a “small yard, high fence” approach toward China to disable its technological catch-up. For established Chinese technology companies, the US is containing them in a targeted manner via its entity list and long-arm jurisdiction among other means. China thus finds itself in an increasingly complicated and challenging global environment in its pursuit of development.
However, amid the ongoing green and digital transformation globally, China also faces strategic opportunities. All late-coming powers over the past centuries have managed to catch up and dominate the global order by taking advantage of opportunities brought by technological advances. That’s also where the possibility for China to outpace its competitors lies.
II. ACCELERATING INDUSTRIAL UPGRADE IS THE ONLY SOLUTION
In the international marKet, China's industries are facing a competitive landscape where they are pressured at both ends. Accelerating industrial upgrade and increasing competitiveness is the only solution for further development.
In the era of globalization, countries rely on their comparative advantages to participate in the global division of labor. For a long time in the past, low-cost labor was the advantage for China. The low labor cost and a series of opening-up policies have attracted numerous labor-intensive industries, and China has rapidly risen as a major country for labor-intensive manufactured goods. China is the largest exporter of manufactured goods in terms of total volume, thus forming the world's largest and most complete manufacturing system and playing an important role in global supply chains and value chains. China is a country of systemic importance in the global industrial system if we borrow a concept of the financial sector.
In fact, global value chains have been under constant adjustments. After World War II, labor-intensive industries have moved from high-cost countries to low-cost countries, that is from Japan to the Four Asian Tigers and then to China. The low-end labor-intensive industries have begun to shift outside China since 2010, which is an inevitable phenomenon.
If anything different from adjustments in the history, today China is facing new opportunities for smart manufacturing. Seizing this opportunity, China can transform some labor-intensive industries into capital-intensive ones, and keep some in the country.
In the past two decades, labor costs in China have risen rapidly, a result of economic development. I believe this is a good thing. However, this will also reduce the competitiveness of labor-intensive industries. Combined with factors such as the China-US trade conflict and the additional tariffs imposed by the US on Chinese products, some industries will be transferred to lower-cost countries such as Vietnam and India. As said above, this is inevitable. Affected by the covid-19 pandemic, some have come up with proposals such as the "China + N" strategy to increase the resilience of the value chain out of consideration for security, and taken measures such as diversifying suppliers, shortening or agglomerating value chains, and transferring supply chains between countries. Some governments took the opportunity to hype and promote shifting of value chains out of China, which undoubtedly poses a challenge for China.
For China, labor-intensive industries are encountered with growing competition from lower-cost countries in the international market. Taking the textile and apparel industry as an example, Vietnam has seen a rapidly growing share in the US market in recent years, while China's share has declined. It is the same situation with other labor-intensive products.
In addition, the experience of Japan and the Four Asian Tigers shows that with the development of a country or region, it will have to transform from labor-intensive industries to capital- and technology-intensive industries to facilitate industrial upgrade. In this process, there will be competitive pressure from countries that have finished industrialization before. That is to say, China is pressured at both ends in the global market, and is encountered with a competitive landscape where there are obstacles in the front and chasing troops behind. To get out of this predicament, China has to accelerate its industrial upgrade and improve competitiveness.
III. FOSTERING NEW ADVANTAGES IN GLOBAL COMPETITION AND COOPERATION
China should work on both internal and external improvement and speed up fostering new advantages in global competition and cooperation.
What does “internal and external improvement” mean?
Externally, globalization is in a period of readjustment, which brings many new changes and challenges. In particular, the US-China rivalry makes the external environment for China even more complicated and severe. China thus needs to step up efforts to foster a favorable external environment. China has grown from a small economy into an economic powerhouse. For a small economy, its ability tends to be identifying and seizing opportunities in the international environment. For an economic powerhouse, it could leverage its influence to shape the external environment. As both an economic and political power, China is capable of shaping the external environment. We should find ways to stabilize relations among major powers, participate in and foster an open global economy, and deepen regional industrial division of labor and cooperation
When it comes to industrial relocation towards countries like Vietnam and India, we seem to regard these latecomers as competitors, which misses the larger picture. More importantly, the development of these countries provides critical opportunities for China’s industrial upgrade, especially the upgrade of the division of labor in the regional industrial and value chains. Nowadays, Vietnam has become an increasingly important export destination for China. This is because after the labor-intensive end-product assembly work is relocated to Vietnam, relevant companies continue to purchase upstream components from China.
In fact, home countries of industrial relocation will encounter either of the two scenarios: one is the hollowing out of domestic industries, the other is an upgrade of export structure forced by relocation of low-end industries and the formation of a vertical industrial division of labor with host countries of relocation.
A typical example of the second scenario is South Korea. Over the past 2 decades, South Korea has moved considerable manufacturing and processing activities in the downstream to China, and meanwhile stimulated export of its upstream industries to China. In 2016, South Korea's cumulative direct investment in China was around 100 billion US dollars, while its trade surplus with China was close to 100 billion US dollars.
Therefore, in future regional cooperation, China should focus more on enhancing industrial cooperation with the host countries of relocation through regional trade agreements or other types of bilateral partnership. In doing so, China can gain competitiveness in producing capital- and technology-intensive intermediate products so as to build a vertical system of division of labor.
Internally, China needs to improve the following three areas:
1. Enhancing the business environment to attract more high-end industries. From the perspective of economic fundamentals, as China has the world’s second largest market and comprehensive low-cost manufacturing capacity, it is attractive to investors from both the supply and demand sides. China should thus fully leverage its advantage and e pay particular attention to improving the soft environment for investment, such as strengthening IP protection and ensuring a level-playing field for domestic and foreign-funded enterprises so as to increase policy transparency and predictability and ultimately attract more high-end industries. In the short term, the government should strike a better balance between economic development and pandemic control by adopting a more targeted- and science-based method to reduce the impacts on the economy. In the medium to long term, more efforts should be put on improving the institutional environment.
2. Seizing the opportunities brought by digitalization and green transition by strengthening technological innovation so as to create new areas for industrial development. China has become a competitive global player in industries engaged in both digitalization and green transition, including new energy vehicles and photovoltaic devices, and still has huge potential to grow. This offers a strategic opportunity for China to catch up.
3. Fostering more Chinese multinationals with global competitiveness. We should enable Chinese companies to better allocate resources domestically and internationally, and fully utilize both the domestic and global markets and resources, in order to support and enhance China’s critical status in the global industrial and supply chains.
