By Long Guoqiang, Research Team on "China's Comparative Advantage Changes and Their Implications" of DRC

Research Report No 88, 2013 (Total 4337)

I. Introduction

Comparative advantage refers to the fact that a country can produce a product with lower opportunity cost than another product and thus can focus on products and export products with even lower opportunity cost to participate in the international division of labor. This country will enjoy the absolute advantage for this product with comparative advantage, if it can produce it with lower cost than its trade partners. According to traditional trade theories, a country's comparative advantage is determined by its resource endowment. However, when we observe changes in trade structures of various countries, it is simply clear that most of them have evolving comparative advantages. Therefore, the Japanese academic circle put forward the theory of dynamic comparative cost in the 1950s, and the theory of dynamic comparative advantage has developed on the basis.

The so-called dynamic comparative advantage means that the comparative advantages are readjusted due to technological progress and industrial structure change. The theory of dynamic comparative advantage integrates into trade theories the supply-demand relationship of production factors, governmental policies, and introduction of all available resources as well as opening to the outside world. It regards each country's economic development as a dynamic process, where all economic factors including production factor endowment would change and thereby renew a country's relative position in the world economy. Government's intervention plays an important role in changing comparative advantages. Therefore, when a country participates in the international division of labor in light of its existing comparative advantages, it needs to support and promote domestic key industries with national resources and to strengthen its international competitiveness and constantly develop new comparative advantages. Japan and the “Four Asian Tigers” have made huge success because their governments purposefully guided the upgrading of industrial structure and export structure in accordance with the theory of dynamic comparative advantage.

China has initiated the opening-up policy since the 1970s and risen as the global largest exporter by seizing the historical opportunity of the cross-border transfer of labor-intensive industries to fully use its advantage of low-cost labor. China has seen constant changes of its comparative advantages in this process, as it mainly exports finished products today instead of primary products in early opening-up days. Labor-intensive finished products are internationally competitive, and in recent years some products with higher technological content have gradually gained international competitiveness, such as mobile communications equipment and complete sets of electrical equipment.

It should be noted that basic factors sustaining the competitiveness of labor-intensive products are undergoing significant changes. The infinite labor supply has turned into basic balance of aggregate supply and demand, but with emerging structural contradictions manifested by shortage of ordinary workers and the soaring wage. The wage level of ordinary workers in China is already far beyond that in many developing countries. It will rise faster in future due to combined effects of various factors. This will have a huge impact on the international competitiveness of China's labor-intensive industries. Meanwhile, some new advantages are appearing, evidenced by fast expansion, domestic market with quick upgrading of demand structure, abundant capital, human resources with substantially improved education attainment, complete industrial support capacities, constantly bettered capacity for technological innovation, perfect infrastructure and increasingly strengthened capacity for overseas investment, etc.

Under such new circumstances, China needs to shift its export strategy based on static comparative advantages to one based on dynamic comparative advantages. It should actively build a favorable environment for upgrading export structure so as to make capital-intensive exports more competitive.

II. Evolution of China's Comparative Advantages and Reasons

1. Evolution of China's comparative advantages

China's export structure has significantly changed in the past three decades. In 1985, exported primary products accounted for 51% of the total export volume, but it has been reduced to only 5% now, with the other 95% being finished products. The exported finished products are mainly labor-intensive, despite the over 60% share for machinery and electric products and the over 30% share for high-tech products. However, analyses from the perspective of the value chain of global division of labor evidently show that most of such products' value-added activities are labor-intensive with low added value. Of course, in recent ten years, the technological content has obviously increased in products exported by China. Some medium-tech products begin to have export competitiveness and a few high-tech products also become globally competitive.

On the whole, China's comparative advantages of labor-intensive products should be attributed to the government's export-oriented strategy In face of the strategic opportunity brought about by the cross-border transfer of export-oriented labor-intensive industries in East Asia, the Chinese government has formulated strategies to participate in international business cycle and vigorously attracted foreign direct investment. In this way, China has formed the strong export competitiveness of labor-intensive industries by combining its advantage of low-cost labor with advanced technology, management, brand and international marketing channels of enterprises in leading economies of this region. It must be pointed out that China's comparative advantages of export are still concentrated on the labor-intensive link with low added value so far, despite the government's advocacy for export transformation and upgrading for years.

2. Factors influencing China's comparative advantages are undergoing significant changes

This paper analyzes the changing process and the prospect of factors influencing China's comparative advantages in three ways. The first is statistical analysis, which analyzes the changing process and tendency of labor cost with relevant statistical and survey data. The second is international comparison between China and typical countries to reveal the conditions of factors influencing its comparative advantages. The third is questionnaire survey, which analyzes the changing tendency of factors influencing China's comparative advantages based on subjective scoring of surveyed enterprises.

The following judgments can be made according to above-mentioned analyses.

First, China's low-cost advantage labor is weakening. After 2004, the cost of ordinary labor in export sectors has been increasing at a double-digit speed. The enterprises have made efforts to offset the impact from higher wage cost and maintain the international competitiveness of labor-intensive products by enhancing labor productivity. However, the share of some traditional labor-intensive products has become smaller in the international market.

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