Comparative Advantage USA China Mexic Brasil

8/12/2019 Comparative Advantage USA China Mexic Brasil

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Comparative advantage: Chinese boom hasn't come at the expense of U.S. economy - Julia F. o!ell "#$$%&http:!!!.thefreelibrary.comComparative(advantage:(Chinese(boom(hasn't(come(at(the(expense(of...-a$)*$$+,***

C/0 and its army of lo!-!age !or1ers laboring long hours are sometimes described as a giant vacuumcleaner suc1ing up 0merican 2obs3 0merican factories3 0merican dollars and ultimately 0merican prosperity.4ut claims that U.S.-China trade is benefiting China at 0merican expense don't hold up on close examination.

5hile the 0ugust U.S. merchandise trade deficit !ith China reached a record 6)7.% billion--almost a third ofthe total U.S. merchandise trade deficit--that doesn't ta1e into account cross-border trade in services3 !here U.S.surpluses !ith China are steadily increasing. 0s China continues to develop3 it !ill spend more money in areassuch as tourism3 insurance and business and financial services--all areas !here 0merican companies are highlycompetitive. n addition3 distortions in the measurement of costs associated !ith shipping3 and the treatment ofChina's trade through ong 8ong 3 systematically understate the value of U.S. exports to China and overstatethe value of U.S. imports from China. 9a1ing these t!o factors into account3 some economists calculate that thetrue U.S.-China merchandise trade deficit is slightly less than % percent of the official U.S. estimates.

Some concerns about U.S.-China trade are legitimate3 and the U.S. government uses a variety of measures todeal !ith them. 9hese include safeguards against disruptive import surges3 restrictions on exports of militarily

sensitive items and enforcement actions against illegal trade practices. For example3 !or1ing through the 5orld9rade ;rganiprocessed> goods assembled from imported parts andcomponents. 9he financial capital3 e?uipment and technological 1no!-ho! needed to produce these exports aremostly supplied by companies head?uartered in the United States3 Japan3 South 8orea3 @urope3 ong 8ong and9ai!an. =any of these companies moved their manufacturing operations to China from locations else!here in0sia in order to ta1e advantage of lo!-cost Chinese labor.

4ecause a high percentage of the value of Chinese exports derives from imported parts and components3 muchof the benefit from sale of these exports does not accrue to Chinese investors or !or1ers. @ven in cases !hereimport content is lo!3 high levels of foreign o!nership and investment in Chinese export industries mean thatmany of the profits are repatriated abroad.

0ll this suggests that trade bet!een the t!o countries represents a classic example of comparative advantage3!ith China speciali threatening 5estern civili


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o! China is eating =exico's lunch: the =a?uiladora system's comparative advantage is being challenged head onhttp:findarticles.comparticlesmiDm#,EEisD#D)aiD)$$%*%E$)pgDEtagGcontentHcol)

=exico's =a?uiladora system3 a darling of the )++$s and sometimes referred to as a template for specialeconomic Clustering> of the right industries doesn't al!ays ta1e place3 and demonstration effects from vibrant ne!industries are too fe!3 despite successes. =a?uiladoras !ere a strategy for maximi


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=exico& is not alone going to rescue many =a?uiladora plants. igh-!eight items more expensive to ship maybe more important3 although Chinese multinationals li1e aier have set up manufacturing in /orth 0mericaprecisely to compete in segments "such as refrigerators& !here long-distance shipping is too costly. 5ith thephase-out of global textile and apparel constraints over this decade3 as much as 7% percent of globalmanufacturing in that sector may end up in China3 according to U.S. government estimates: for the # percentof =a?uiladoras and ##,3$$$ !or1ers still in that sector3 there is serious trouble ahead.

=exico is flush !ith initiatives to counter the competitiveness trends. Slight tax reductions enacted thus far are

trivial in light of the evolving economics. =exican politics !ill not easily permit bolder business-friendly steps.nvestments in infrastructure and human development3 especially health and education3 are !ell conceived butta1e time to pay off. =exican officials tal1 of needing to get one step ahead of China on the value-addedspectrum3 as 9ai!an has sought to do3 but that is no small feat and must be built on a higher s1ills humanresource profile that ta1es years of broader social reform to achieve. 0nd besides3 China is becoming the nextsemi-conductor boomto!n--this is no longer a challenger 2ust in plastic toys and cheap under!ear.

So China is eating =exico's lunch3 but more due to the =exican inability to capitali


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0ssemblyrepair of tools3 machinery ,) ),3*#0ssembly of electrical articles ),7 7,3#E$@lectric3 electronic parts3 materials %EE #E,37*,0ssembly of toys3 sports items *+ )$3*E7Services ##+ E,3E$$;ther %$# )#737#,9otal E3#77 )3$,$3*7)

Source: 0fter @conomist ntelligence Unit3 4usiness3 atin 0merica3 based on nstituto /acional de@stadistica3 Ieografia e nformatica3 #$$#.

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=a?uiladoras: =anufacturing Luring a ecession=ay #+3 #$$+ http:portalfornorthamerica.orgspotlight#$$+$%ma?uiladoras-manufacturing-during-recession

=a?uiladoras have long been a contentious issue in /orth 0merican trade politics. 9hese factories3 !hichlargely operate in the =exican border cities3 such as =exicali3 9i2uana3 Juare


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China - Comparative 0dvantage /ot Cause of 9rade Surplus. 9here are several reasons for the current hugeforeign trade surplus http:!!!.b2revie!.com.cn?andatxt#$$-$7)EcontentD#*,7D#.htm

Since adoptingP the reform and opening-up policy in the late )+$s3 China has constantly expanded its foreigntrade by giving full play to its comparative advantage in production cost. o!ever3 no!adays3 problemspreviously camouflaged by high ILB gro!th have begun to emerge from the !ood!or1. @xternally3 China isfaced !ith pressure on the yuan's appreciation resulting from the trade surplus3 as !ell as trade frictions !ith the

United States and the @U. nternally3 the problem is excess li?uidity due to over 6) trillion in foreign exchangereserves3 coupled !ith a si to China3 responds to the many doubts people have about thetheory. @xcerpts:

#)st Century 4usiness erald: 9he >comparative advantage> strategy is credited !ith driving China's economyover the past #$ years after the reform and opening-up policy !as initiated3 but no!adays3 more and more

people are beginning to feel suspicious of this strategy3 believing that China's export-oriented developmentmode is responsible for the imbalance in economic structure and increasing trade surplus. 0re these inevitableresults of the >comparative advantage> strategy

Justin Ai-fu in: 0ccording to the >comparative advantage> theory3 products short of comparative advantagesmust be imported3 !hile industries !ith comparative advantages can attract more capital and other resourcesand thus can develop ?uic1ly. 9he export process is much easier for these products. 9his is the case in China3since reform and opening up. o!ever3 to import or export is decided by the factor endo!ment structure3 andnever intentionally increased by anyone. 0lthough nations follo!ing the >comparative advantage> strategy canexport more than countries adopting the >catch-up> strategy3 it's not !ise to confuse a >comparative advantage>strategy !ith an export-led strategy.

0ctually3 comparative advantages come from comparison. 5ithout government interference3 industries !ithand !ithout comparative advantages !ill respectively account for half of the foreign trade sector. 9herefore3 if anation develops its economy by strictly 1eeping to the >comparative advantage> strategy3 although it !ill moredepend on trade than countries follo!ing the >catch-up> strategy3 its exports and imports must be in a balanceand3 if not3 the imbalance must be a temporary phenomenon resulting from industrial structure ad2ustment.

n accordance !ith the >comparative advantage> strategy3 a country's imports and exports !ill reach a balance.5hy does China have such a large surplus in foreign trade s it because of the export-oriented strategy

9here are several reasons for the current huge foreign trade surplus. First3 it is the overheated investment3 !hich

has led to overcapacity.

Second3 the big trade surplus also has something to do !ith the United States. 0s !e 1no!3 0mericans have alo! savings rate and there is a fiscal deficit. t indicates that the U.S. mar1et has a large demand3 !hich !illinevitably lead to a rise in the trade deficit. 9he United States is the !orld's largest economy3 accounting for onethird of the !orld total. n the mid-)++$s3 trade deficit only made up ) percent of the U.S. gross domesticproduct3 but no! it has risen to more than , percent. 9hus3 inevitably3 a trade surplus !ill result in some othercountries. 0ctually3 during this period of time3 Japan and Iermany also sa! a sharp increase in trade surplus.

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9hird3 capital-intensive products from some developed economies3 especially the United States3 should targetthe Chinese mar1et3 but apart from airplanes3 these countries bloc1 the export of such products to China. 0s aresult3 !e can't get !hat !e hope to import. 9his situation is not created by China.

Fourth3 the speculation on yuan appreciation results in an absurdly high trade surplus. 0ctually3 since #$$E3there has been mounting pressure on the revaluation of the Chinese currency. Speculators believe that the yuan!ill be appreciated by #$-E$ percent. Since the yuan is not convertible under the capital account3 somebusinesses have exaggerated export value !hile underreporting import value3 hoping to increase their foreign

currency reserves in order to profit from the supposed appreciation. 5hen the exchange rate begins to risesharply3 this !ill happen in any country !here the capital account is restricted. 4et!een )+7% and )+73 Japangreatly appreciated its yen3 !ith the rapid gro!th of current account surplus and foreign exchange reserves.

0n inevitable assumption for the >comparative advantage> theory is the free flo! of commodities amongdifferent countries3 but this is not the case in reality. 9he impact of China's ever increasing export volume ismuch bigger than the reaction caused by the export-oriented strategies of the Four 0sian 9igers. s it possiblefor China to copy the model of the Four 0sian 9igers

oo1ing bac1 at the #7 years since China adopted the reform and opening-up policy3 in )++3 China's exportvolume !as 6)E.,, billion and the import volume !as 6)%., billion. 9he numbers respectively 2umped to

6%+E.E# billion and 6%,).#E billion in #$$*. 9he gro!th rates of import and export volumes are almost thesame. t !as only in #$$% that trade statistics began to lose their accuracy because of expanding speculativecapital.

0lthough China's rising exports are providing competition for other countries3 the rising imports are alsoopening a big mar1et for the rest of the !orld. 9here is some difference3 ho!ever. 5hile !e are exportinglabor-intensive products3 !hat !e import are capital-intensive products3 that is to say3 China's exported productscan offer relatively more employment opportunities than imported products.

;n one hand3 China has a large domestic mar1etH on the other hand3 China is facing increasing trade frictions.o! should China deal !ith the relationship bet!een the domestic mar1et and international trade

5hen an economy ta1es the >comparative advantage> strategy3 it !ill base its development on fully tapping intothe international mar1et. 0s long as its products have comparative advantages3 they !ill be competitive in bothdomestic and international mar1ets.

=oreover3 from the perspective of domestic demand3 comparatively spea1ing3 to develop the economy inaccordance !ith comparative advantage3 the domestic demand !ill also rise. f China ta1es the >catch-up>strategy3 the !ealthy !ill invest in the capital-intensive industries and these industries !ill provide relativelylimited 2obs3 !hich ma1es it impossible for many poor people3 !ho ma1e money by !or1ing as laborers3 toparticipate in the economy and en2oy the fruits of economic development. 0s !e 1no!3 the rich are not muchinclined to spend money3 so !hen the !ealth is controlled by a small number of rich people3 the !hole society

!ill tend to spend little.

n line !ith the >comparative advantage> strategy3 the Chinese economy !ill become very competitive3 !hich!ill of course be very stable. n a stable economy3 people tend to be more confident about future earnings andspend more. f !e try to overta1e other countries3 the economic circle !ill change sharply. 0s a result3 thegovernment does not need to protect and subsidi


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ndustries that rely on the advantage of labor costs and resources usually fall into the lo!-threshold categoryand thus !ill attract the attention of more businesses3 regions and countries. 5ill China's comparativeadvantage decline or even disappear in this scenario

Comparative advantages are felt through comparison. 0s long as there is the possibility of comparison3 theadvantage !ill remain indefinitely. For example3 the labor force in Qiet /am is cheaper than that in China3 andsome are afraid that China's advantage of cheap labor force !ill be overshado!ed by Qiet /am. 9he ?uestion isthat since !e have more capital than Qiet /am3 should !e still continue labor-intensive industries f !e

continue to do so3 !e have to offer subsidies3 but !hy do !e subsidi

Comparative Advantage USA China Mexic Brasil

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