China and advanced economies – a win-win relationship
- By John Ross
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E-mail China.org.cn, August 23, 2015
Advanced economies cannot compete in industries which require wages lower than their prevailing levels, while equally, despite enormous achievements, China cannot "jump over" stages of its own development.
This creates a long term and stable basis for mutually beneficial partnership. The basis for this is that no economy today can develop individual branches of production in a self-contained way. Modern economies involve extremely complex production chains with multiple divisions of labor. For example a single car assembly factory is a huge investment, but nevertheless only 15 percent of a car's value is added in it – the rest comes from outside with components and other inputs contributing 85 percent.
Efficiency depends on availability of skilled labor, stable power and IT inputs, R&D to meet specific localized needs, developed logistics and innumerable other factors known as "productivity multipliers."
This is why countries, such as very rich oil producers, inevitably failed when they thought they could match the efficiency of advanced economies by importing whole factories – they possessed one part of the production chain, but this could not function efficiently without the others. China itself could only match the overall efficiency of developed economies in the most advanced fields of production if all parts of its economy were as productive as theirs – that is if it were a developed and not a developing economy!
While China has great advantages compared to advanced economies in medium level technology production, major parts of the value chain for a prolonged period will be most efficiently supplied by developed economies. Li Keqiang's speech gave a classic example: "During my recent visit to Latin America, I got on-board a China-made ferry that is powered by a diesel electric system purchased from a developed country, instead of a conventional diesel engine, making it largely pollution-free."
These interrelationships remain powerful because they correspond to some of the oldest but most powerful laws of economics – Adam Smith's analysis that division of labor was the greatest force in raising productivity and Ricardo's that all countries benefit if each specializes in areas in which they have the greatest comparative advantage.
No country can escape such fundamental economic realities. This ensures that trade blocs excluding the world's largest developing economy, China, such as the Trans Pacific Partnership, will not maximize benefits for participants. China's proposals for partnership with the advanced economies create the greatest benefits for both sides.
The writer is a columnist with China.org.cn. For more information please visit:
http://www.keyanhelp.cn/opinion/johnross.htm
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