How China can counter revitalisation of US manufacturing

He Yafei says Beijing needs a strategy to deal with the challenges created by the revitalisation of American manufacturing and the US rebalancing towards Asia that aim to curb Chinese influence

PUBLISHED : Friday, 17 January, 2014, 12:25pm
UPDATED : Saturday, 18 January, 2014, 5:20am

As China enters 2014 with the orderly unfolding of reforms outlined at the third plenum, the external environment is brimming with challenges, including US reindustrialisation unleashed after the global financial crisis.

The 2008 crisis hit US manufacturing especially hard. It had been the backbone of the American economy, employing about 20 per cent of the workforce before 1980. But by 2009, that had dropped to 8.9 per cent. Some American elite believe that the imbalance between the real economy and finance is a root cause of the crisis.

Moreover, they are convinced that US manufacturing has to be competitive to maintain America's global military supremacy and want to see no stone left unturned in order that the US can meet the challenge from emerging economies, in particular China.

Numerous actions have followed. From 2009 to 2012, the US unveiled various initiatives to strengthen this sector, including a campaign to "buy American" and goals to double exports in five years and promote domestic employment. The re-industrialisation strategy has thus taken shape and real progress been made to fill the "hollowing out" of US manufacturing.

Restructuring has raised production and, over the past two years, two-thirds of major US manufacturers have moved their factories back either state-side or to countries in America's neighbourhood.

This has contributed to economic recovery and a boost in employment. From 2010 to the middle of 2012, some 489,000 manufacturing jobs were added, as unemployment fell from nearly 10 per cent to about 8 per cent. In 2012, US real economic growth was at 2.2 per cent while manufacturing grew by 6.2 per cent.

The renewed vigour of American manufacturing has coincided with a new trend - its digitisation - aided by large-scale shale-gas production and rising labour costs in emerging economies. How will this affect China?

China should not be distracted … Growth and reform are needed, regardless of any interference

Many believe this is about "Made in China" or "Made in America".

China's economic miracle, together with the rise of other emerging markets, has changed the global economic and political landscape. As a result, the US global market share has declined. In 2010, for the first time, China overtook the US as the biggest manufacturing economy. Moreover, China has surpassed the US as the country with the most patent applications. That year also marked China's ascendency to global No 2 in terms of gross domestic product.

Anxiety and a sense of crisis permeate the US government and society, such that many Americans worry about the US losing "the great power rivalry" with China. Hence the constant pressure on China about renminbi appreciation, opening its financial sector and intellectual property protection, for example.

Another thrust of the US reindustrialisation strategy is its rebalancing towards Asia and for "like-minded countries" to form mega free-trade agreements like the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership, to create new trade rules with higher standards. China and other emerging economies are the targets.

Both sets of trade negotiations are tools for the US and other Western nations to reshape the global governance system and rules that have been supposedly under attack from emerging economies. These new rules will involve international trade, investment and finance, technology, green energy and agriculture.

It is not a big stretch to imagine that, should these attempts succeed, China will be confronted with an international trade, investment and economic order that is dominated by the US, Europe and Japan. China will be put in a strategically defensive and awkward position with no easy options.

At the same time, the US government has taken protectionist measures, including setting up an office for trade law enforcement and beefing up its supervision and screening of Chinese exports and investments into the US, with a view to curbing them to protect its domestic manufacturing.

It is true that the fast rise of emerging economies has geopolitical and geoeconomic consequences.

America's reindustrialisation must be seen in that context. What, then, should China do to cope with such complicated developments?

First, China should not be distracted from what it needs to do to advance. Growth and reform are needed, regardless of any external interference. Generally, for sustainable economic development, any country must have a quality workforce, make technological breakthroughs and have adequate capital input. China needs to do more in all three areas, no matter what America's reindustrialisation brings.

Second, China must keep its low-end manufacturing jobs for now, despite the trend of manufacturing going digital, termed the "third industrial revolution" by some. This is characterised by the internet, new materials, new sources of energy and smart production like 3D printing.

Digitisation is the backdrop for the revitalisation of US manufacturing. However, it is inadvisable for China to abandon low-end jobs in the global manufacturing chain now, given that its huge population still contains many low-skilled labourers.

Third, a real industrial revolution will start with a revolution in energy and information dissemination. China, with the advantage of being a late-comer, could jump in by focusing more on research and development, especially in these fields.

It is imperative for China to enable innovation by providing a sound framework for science and technology. It should boost both education and financial services, in order to raise productivity.

Fourth, economic competition is, in the final analysis, a competition of talent, of people. China needs to pay particular attention to the education and cultivation of all kinds of talent.

Moreover, it should not only be able to retain its own talent, but also attract others from advanced nations by creating an environment that is ideal for economic growth and industrial management.

Finally, China has no option but to confront attempts to exclude it from any new international trade system. In this vein, it should continue to push for an early conclusion of the Doha Round of World Trade Organisation talks; make greater efforts to move negotiations on the Regional Comprehensive Economic Partnership to a fruitful end, while trying to upgrade the free-trade agreement between China and the Association of Southeast Asian Nations; and realise the government's proposal to build an economic belt along the Silk Road and a "maritime Silk Road".

Beijing must also make a careful study of the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership, and adopt an open mind to any arrangement that will facilitate global trade. Whatever the conclusion, it's always better to be "in" early on; it's the only way to get relatively favourable outcomes.

China's economic stability and growth is not just good for itself but also a blessing for the world.

He Yafei is vice-minister of the Overseas Chinese Affairs Office of the State Council