The New Trend of Global Industrial Division of Labor and China’s Responses (Research Series on the Chinese Dream and China’s Development Path) 9811956731, 9789811956737

Table of contents :
Contents
1 Historical Evolution of the Pattern of International Division of Labor
1.1 Connotations and Types of International Division of Labor
1.2 Historical Review on the Development of International Division of Labor
1.3 Characteristics of International Division of Labor Before the Global Economic Crisis
References
2 Motive Mechanism of the Evolution of the Pattern of International Division of Labor
2.1 Analytical Perspectives of International Division of Labor
2.2 Forces Affecting the Evolution of the Pattern of Division of Labor
2.3 Motive Mechanism of the Evolution of the Pattern of International Division of Labor
References
3 Status and Roles of Participants of International Division of Labor
3.1 Status and Roles of Major Participants of Global Merchandise Trade
3.2 Status and Roles of Major Participants of International Trade in Services
3.3 Status and Roles of Multinational Enterprises
4 Evolution of the Structure of World Product Space
4.1 The Structure of Global Product Space
4.2 National Differences of the Evolution of Product Space
4.3 Changes of the Connectivity of Product Space
4.4 Basic Conclusions from the Analysis on the Structure of Product Space
References
5 Reindustrialization of Developed Countries and the Impact of the New Industrial Revolution on the Pattern of International Division of Labor
5.1 The Constant Dominant Role of Developed Countries in International Division of Labor
5.2 Changes of the Pattern of Labor Division of Technology-Intensive and Labor-Intensive Industries
5.3 Impacts of Developed Countries’ Efforts in Quickly Deploying Emerging Industries on the Industrial Upgrading of Developing Countries
5.4 Impacts of the New Industrial Revolution on International Division of Labor
5.5 Policy Priorities Dealing with Reindustrialization and the Third Industrial Revolution
6 The Industrial Competitiveness of the Next Wave of Emerging Economies
6.1 The Economic Development Status of the Next Wave of Emerging Economies
6.2 Characteristics of the Industrial Structure of the Next Wave of Emerging Economies
6.3 The Industrial Competitiveness Comparison Between the Next Wave of Emerging Economies and China
6.4 Conclusions
References
7 Impacts of Trade Protectionism on the Pattern of International Division of Labor
7.1 Trade Protection Will Not Alter the Overall Trend of the Pattern of International Division of Labor
7.2 Adverse Impacts of Trade Protection on the Deepening of the Pattern of International Division of Labor
7.3 Policy Suggestions on Tackling Trade Protection and on Optimizing the Status of International Division of Labor
8 Low Carbon Economy and the Global Industrial Division of Labor
8.1 Low Carbon Economy and Major Polices and Measures on Carbon Emission Reductions
8.2 Impacts of Low Carbonization on Competitiveness
8.3 Impacts of Low Carbonization on Industrial Development
8.4 Low Carbon Transformation and China’s Industrial Competitiveness
References
9 Profound Adjustments of the Global Economy and the Transformation of Industrial Competitive Advantages
9.1 Trend for the Profound Adjustments of the Global Economy
9.2 New Trend of Global Industrial Development
9.3 Development Opportunities Confronting China’s Industries
9.4 Tough Challenges Confronting China’s Industrial Development
9.5 Industrial Development Strategies Based on Important Opportunities
References
10 Accelerating Core Competence Cultivation for the Development of the New Economy
10.1 The Concept of New Economy and Measurements on Its Development
10.2 The Urgency for the Acceleration of New Economic Development
10.3 Basic Logic of the New Economy
10.4 Keys for Promotion of Core Competence for the Development of the New Economy
References

Citation preview

Research Series on the Chinese Dream and China’s Development Path

Bei Jin Qizi Zhang   Editors

The New Trend of Global Industrial Division of Labor and China’s Responses

Research Series on the Chinese Dream and China’s Development Path Series Editors Yang Li, Chinese Academy of Social Sciences, Beijing, China Peilin Li, Chinese Academy of Social Sciences, Beijing, China

Drawing on a large body of empirical studies done over the last two decades, this Series provides its readers with in-depth analyses of the past and present and forecasts for the future course of China’s development. It contains the latest research results made by members of the Chinese Academy of Social Sciences. This series is an invaluable companion to every researcher who is trying to gain a deeper understanding of the development model, path and experience unique to China. Thanks to the adoption of Socialism with Chinese characteristics, and the implementation of comprehensive reform and opening-up, China has made tremendous achievements in areas such as political reform, economic development, and social construction, and is making great strides towards the realization of the Chinese dream of national rejuvenation. In addition to presenting a detailed account of many of these achievements, the authors also discuss what lessons other countries can learn from China’s experience. Project Director Shouguang Xie, President, Social Sciences Academic Press Academic Advisors Fang Cai, Peiyong Gao, Lin Li, Qiang Li, Huaide Ma, Jiahua Pan, Changhong Pei, Ye Qi, Lei Wang, Ming Wang, Yuyan Zhang, Yongnian Zheng, Hong Zhou

Bei Jin · Qizi Zhang Editors

The New Trend of Global Industrial Division of Labor and China’s Responses

Editors Bei Jin Chinese Academy of Social Sciences Beijing, China

Qizi Zhang Chinese Academy of Social Sciences Beijing, China

Translated by Jianshe Zha

This book is published with the financial support of the Chinese Fund for the Humanities and Social Sciences. ISSN 2363-6866 ISSN 2363-6874 (electronic) Research Series on the Chinese Dream and China’s Development Path ISBN 978-981-19-5673-7 ISBN 978-981-19-5674-4 (eBook) https://doi.org/10.1007/978-981-19-5674-4 Jointly published with Social Sciences Academic Press The print edition is not for sale in China (Mainland). Customers from China (Mainland) please order the print book from: Social Sciences Academic Press. © Social Sciences Academic Press 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Contents

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2

3

Historical Evolution of the Pattern of International Division of Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weifu Zhou

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Motive Mechanism of the Evolution of the Pattern of International Division of Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chengping Sun

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Status and Roles of Participants of International Division of Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weiwei Yang

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Evolution of the Structure of World Product Space . . . . . . . . . . . . . . . 125 Hao Li and Qizi Zhang

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Reindustrialization of Developed Countries and the Impact of the New Industrial Revolution on the Pattern of International Division of Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Zhou Deng

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The Industrial Competitiveness of the Next Wave of Emerging Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 Lixue Wu and Zhongzheng Jia

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Impacts of Trade Protectionism on the Pattern of International Division of Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 Zhou Deng

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Low Carbon Economy and the Global Industrial Division of Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 Xiaohua Li

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Contents

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Profound Adjustments of the Global Economy and the Transformation of Industrial Competitive Advantages . . . . 239 Bei Jin and Xiang Dai

10 Accelerating Core Competence Cultivation for the Development of the New Economy . . . . . . . . . . . . . . . . . . . . . . . 273 Qizi Zhang

Chapter 1

Historical Evolution of the Pattern of International Division of Labor Weifu Zhou

International division of labor is not a static state but a dynamic process with constant development and changes. It reflects not only the development level of productivity, but also relations between countries. The pattern of international division of labor, besides being a static system of labor division, can also determine relations between countries taking part in the division of labor as well as benefits they obtain during the process. With time going by, it will experience more complex changes and alternation. Large-scale international trade, which started after the opening of new sea-routes in 15th century, is the prerequisite for creating the pattern of international division of labor. The initial international trade happened between Europe, South America and Africa. However, the pattern of international division of labor changed correspondingly with the beginning of the Industrial Revolution in 18th century. England, the birthplace of the Industrial Revolution, was the major beneficiary. In the period with a rapid development of productivity, British economists represented by Adam Smith and David Ricardo proposed theories of liberalistic economics that were completely different from Mercantilism. In the 18th century, the liberalistic economics occupied a dominant position in theories related to the international division of labor. According to the Theory of Comparative Advantage, first-mover industrial countries have plentiful reasons to develop their industries and export manufactured products to other countries, while late-mover countries must produce agricultural products and industrial raw materials. As a result, first-mover capitalist countries represented by England became leaders of the international division of labor in 19th century. After that, the Second Industrial Revolution occurring mainly in Germany and the USA ushered in a profound change of the pattern of international division of labor. In the second revolution of science and technology, the development of new technologies such as electric power, chemistry and internal combustion engine changed W. Zhou (B) Institute of Industrial Economics of Chinese Academy of Social Sciences, Beijing, China © Social Sciences Academic Press 2022 B. Jin and Q. Zhang (eds.), The New Trend of Global Industrial Division of Labor and China’s Responses, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-5674-4_1

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the pattern of productivity, and posed certain impacts on the pattern of international division of labor. New emerging countries such as the USA and Germany occupied monopoly positions in the new pattern, replacing England’s dominant position in the old one. The new pattern taking in shape under the condition of the new technological revolution had its distinct characteristics, one of which was the involvement of almost all countries in the world. After the end of the 2nd World War, especially after the Cold War, almost all countries in the world involved in the pattern of international division of labor, which was an unprecedented phenomenon. With more countries participating in the international division of labor, new changes occurred in the pattern. One of the significant changes was the emerging of new industrialized countries dominated by East Asian countries. Such change drove the gradual disintegration of the traditional international system of vertical inter-industry division of labor. Thus, the pattern in which the intra-industry and intra-product international division of labor take the dominant position was gradually established. Since 2008, the global economy has been running under the background of the deepening financial crisis. In this context, trade frictions and industrial policies between countries have profoundly changed the existing pattern of international division of labor. Countries in the world have established stimulus policies and supportive policies for emerging industries to get rid of the crisis. As a result, the international economic situation has been changed progressively, which deserves our further attention.

1.1 Connotations and Types of International Division of Labor Research on the history and reality of the pattern of international division of labor is based on how to view its formative reasons. Most scholars have agreed productivity as the major driver pushing forward the change of the pattern of international division of labor. Meanwhile, the deepening of economic globalization has played a key role in the changes of the pattern. Zhang (2003) argued that Ricardo’s Comparative Cost Theory marks the establishment of the general system of international trade theory. This theory is also called the “unshakable basis of international trade”. However, with the deepening of international division of labor, these theories were also questioned during their development. For example, Nobuo Minabe (1989) pointed out that if considering from the perspective of effects of scale economies, the international division of labor based on the Heckscher-Ohlin Theory couldn’t definitely guarantee the best allocation of resources, while the division of labor based on mutual agreements is the best choice. Due to different relative development levels of productivity, the international division of labor has presented various forms, among which, the vertical division of labor has always been an important one. The vertical division of labor is the one led by

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developed countries while developing countries are in a subordinate position (Gu 2003). On one hand, this type of division of labor can bring about some benefits to developing countries. Taking China as an example, Guo et al. (2011), through their empirical research, argued that the vertical specialization plays a greater role in driving economic growth than that of a common trade model. Furthermore, it can better promote a long-term economic growth. Meanwhile, it can also increase the average level of salary. That is, the degree of the vertical specialization in manufacturing and per capita labor productivity all play active roles in promoting industrial income, while the former has a larger positive role in increasing industrial income in capital-intensive industry than that in labor-intensive industry (Yin 2012). On the other hand, it is possible that this type of division of labor may result in a crisis in developing countries as developing countries are positioned at a lower level of the vertical specialization and in a disadvantage in factor returns (Feng 2004). Hu (1990) pointed out in his research on the relationship between the vertical specialization and the economic crisis occurring in Southeast Asia that the vertical specialization may make countries in this region heavily rely on foreign capital. Under this circumstance, national capital of developing countries has no way for a healthy development. Another important type is the horizontal division of labor. Yang (2001) elaborated the concrete form of realizing the horizontal division of labor. He argued that this type of division of labor usually happens among countries with comparatively similar economic development levels, and multinational enterprises are the major forces in realizing this type of division of labor while equity merge and acquisition is the major method. The horizontal division of labor is comparatively equal to all countries, and will help all participants develop their economies. From another direction, the international division of labor can be categorized into inter-industry, inter-product and intra-product division of labor. In the current era with a rapid development of productivity, the intra-product labor division has become one of the major forms. The phenomenon of intra-product international division of labor can be described as “slicing up the value chain”, which refers to the form of different countries in a same value chain participating in the division of labor. With regard to the reasons for the occurrence of the intra-product international division of labor, Zhang (2007) thought that it is still the comparative advantage of a specific working procedure and process possessed by different countries that determines the division of labor in different working procedures and processes. Meanwhile, the decrease of transaction cost is also a condition for the emergence of intra-product international division of labor. With regard to its effect, Hu (2007), through her empirical research, argued that the intra-product international division of labor will improve a country’s labor productivity, and the active role will be more significant in capital-intensive industry and export-intensive industry. As for its impact on income distribution, Sun and Pei (2012) argued that the impact in a short term tends to be gradually expanded, but from a long-term point of view, it will tend to be contracted. When reaching a critical value, the intra-product international division of labor will slow down the worsening of income distribution. The current pattern of international division of labor with the intra-product vertical specialization as its main form has been confronted with changes. With the deepening

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of the financial crisis, the East Asian model that heavily relies on external demand has also been confronted with a certain degree of crisis. As a result, many studies agree that China shall adjust the export mix of its processing trade, promote industrial upgrading and actively participate in international competition in upstream value chains. (Hou 2009). This kind of industrial upgrading is also regarded as a task which needs a dual support from country and market for its completion. I. Connotations of International Division of Labor Tracing the development history of international division of labor, it is found that when productivity has been developed enough to support human’s oceangoing voyage, trade will break through boundaries of continents and lands, and become international trade between countries. However, as it is impossible for every country to produce every kind of products, trading with other countries must be carried out to realize complementary advantages. Amid such pattern of international division of labor, each participant is economically connected with others while having different division of labor. In today’s economic globalization, it is fair to say that no country can carry out economic activities alone, and all shall take part in international trade and be a component of the pattern of international division of labor. Therefore, the pattern has become more increasingly important. The international division of labor refers to labor division among countries in the world. It is the basis of international trade and economic connections among countries. Furthermore, it is also related to the international pattern. The pattern of international division of labor, as an affiliated product of international economic and political pattern, cannot exist independently. The international division of labor is the further effort of social division of labor. The development of productivity has always been a key factor impacting the change of labor division forms in history. Every frog-leap development of productivity always leads to a change of the pattern of international division of labor. In the transition history of the pattern of international division of labor, three technological revolutions have played significant roles. New-type production equipment and new modes of production brought by the technological revolutions have changed the pattern of international division of labor. Presently, the Internet of Things and 3D printing, as the representatives of the technological revolution, have been changing human’s mode of production. These new technologies as representatives of new productivity will be the technological foundation for the establishment of new pattern of international division of labor. Improving productivity is the prerequisite for the development of division of labor; on the contrary, the division of labor benefits the increase of working proficiency and the improvement of technology and labor efficiency. The two have a relation of mutual enhancement. This is the reason why the social division of labor is deepened more obviously in capitalist social formation. With the industrialization brought by the industrial revolutions and the improvement of productivity, the social division of labor has finally developed into the international division of labor. On the whole, when a country serves as a participant of international trade and international division of labor, the progress of productivity leads to a result that the

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production capacity or production process of some industries need to stride over the territorial limit of a country, and become a kind of production process in which many countries simultaneously provide raw materials and markets. In another word, when what a country already has cannot fully satisfy its need for production, it requires the production process extended from the social division of labor within the country to the international range. Meanwhile, the technological progress and the improvement of labor productivity also lead to the result that large numbers of products cannot be absorbed by its domestic markets due to the increased productivity capacity, which requires the demand from overseas markets. Thus, cheaper products need to be sold into world markets to fully satisfy the needs of markets. The international division of labor is also caused by enterprises, the micro-units in economies, in their efforts for acquiring more profits. As the result of the development of productivity, enterprises, when expanding productions for pursuing more economic benefits, do not necessarily limit themselves within national borders in searching for demand and supply. For the purpose of pursuing maximum benefits at minimum costs, an enterprise usually regards all regions worldwide as its source of markets and raw materials, which also drives the formation of the pattern of international division of labor to a certain degree. Currently, multinational enterprises, as the backbone element of economic globalization, all have regarded the whole world as their original places of raw materials and sales markets. This is also an important reason for the formation of the pattern of international division of labor. II. Types of International Division of Labor As productivity has developed and the international division of labor and social division of labor have been furthered, the pattern of international division of labor has undergone various changes. Under the condition of certain productivity and the depth of division of labor, the corresponding pattern of international division of labor will appear. Undoubtedly, the motive mechanisms for changing the pattern of international division of labor are the productivity and the depth of social division of labor. However, at the same time point, different industries at various districts will present distinct types of the pattern of international division of labor due to the discrepancy of productivity and of the depth of labor division. That is, the pattern of international division of labor in A industry is the vertical specialization, while that in B industry is the horizontal specialization. Besides, the pattern of international division of labor will have different types from different observation angles. Vertical, Horizontal and Mixed Division of Labor (1) Vertical Division of Labor The conditions for the emergence of vertical division of labor include that developing countries possess almost infinite supplies of labor and plentiful natural resources due to the existing disguised unemployment, and that developed countries monopolize production technologies of manufactured products. In this type of labor division, developed countries realize their goals of cutting production costs through

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their investment in developing countries without transferring technologies to developing countries. Simple and unskilled labor also can participate in the production of technology-intensive products, but only limited to low value-added procedures. One of reasons for that capital recipient countries are always in the position of engaging in low value-added production is the existence of man-made obstacles for technology transferring and diffusing, and the technological monopoly in technology transactions caused by non-marketized systems. After the end of the Second World War, the vertical division of labor transferred gradually from the inter-industry form to the intra-industry and intra-product ones. As a result, developed countries transformed from producing manufactured products to conducting production at the top of industrial chains. Developing countries conducted production of primary products such as agricultural and mineral products, while developed countries engaged in the production of manufactured products. Thus, the vertical labor division among different industries was formed. That is, the vertical division of labor between resource-based primary products and the industrial manufactured products. With the further development of productivity, the intra-industry vertical labor division gradually transformed to the intra-product one, which mainly manifests in that in the industrial chain of a product, developed countries mainly have engaged in technology-intensive procedures of the production while developing countries in labor-intensive procedures. Therefore, in the production procedures of a same product, a pattern of labor division in which the labor-intensive and the technologyintensive procedures of a same product have been distributed to different countries took in shape. The technology-intensive procedures have been left within developed countries such as the development of new technologies and the design of styles, while the labor-intensive procedures have been completed in developing countries. This is the current pattern of international division of labor, in which assembly procedures are in developing countries, while R&D procedures are in developed countries. It is also the new pattern of labor division of unskilled labor exchanging for technologies. As shown in Fig. 1.1, through the concrete calculations of vertical specialization indexes of various industries in China, the vertical specialization levels of most industrial manufactured products in China already exceeded 20%, and the indexes were much higher especially in capital-intensive industries. As shown in Fig. 1.2, during the process of advancing economic globalization, the average vertical specialization level of various industries in China, as an important part of the vertical division of labor, realized comparatively large improvement during the period from 1992 to 2009. To a certain degree, the vertical division of labor has driven the economic growth of developing countries. The most typical example is the well-known “East Asian Model”, in which Singapore is the most successful example. Singapore, through the chance of the vertical labor division, developed its industrial structure dominated by labor-intensive industries into the one dominated by technology-intensive and capital-intensive industries. Meanwhile, the government has insisted on budget surpluses for a long time so as to have plentiful foreign exchange reserves. At the end

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Fig. 1.1 VSS value of China’s each industry in 2009

of 1997 when the Asian Financial Crisis broke out, Singapore’s foreign exchange reserves reached up to $83.6 billion, which was equal to the GDP of that year. Besides, it has a completed financial system and regulatory mechanism, and the opening up of its financial markets started after the mid-1970s. It is the country with the earliest financial liberalization and the soundest financial regulation in Southeast Asia. The main active impacts of the vertical labor division on developing countries include three aspects: technology spillover, economy of scale and industry upgrading.

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Fig. 1.2 Changes of VSS value of China’s main industries from 1992 to 2009

Guo (2011) holds the view that the influence factor showing the impact of the proportion of international vertical specialization on technological progress is significantly positive, reaching 0.90. Meanwhile, importing can promote technological progress with the influence factor of 0.18. That is, importing has a remarkable effect of technology spillover. Additionally, domestic R&D can improve a country’s technology absorptive capacity, and the supporting level of domestic industrial technologies can create effective synergies with the vertical specialization so as to promote the technological progress of its domestic enterprises. Taking China as an example, due to its lower productivity compared with developed countries, China took part in the vertical labor division to develop its trade. As shown in Fig. 1.3, from 1980 to 2010, the ratio of primary products to all exports from China has been continuously lowered from 50.3% in 1980 to 5.2% in 2010, while the ratio of manufactured products increased from 49.7 to 94.8%. This shows that China, in the process of participating in the vertical labor division, realized the industry upgrading to a certain degree as the proportion of the export of primary products and the export of manufactured products were continuously decreased and increased respectively. Apart from this, developing countries can get direct trade gains from the vertical division of labor. According to the calculation of Wang and Liang (2011), the trade in value added of China’s industries joining in the vertical specialization had a

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Fig. 1.3 Proportion of China’s exports of primary products and industrial manufactured products in total exports (1980–2010)

prominent increase during the period from 1990 to 2007. As for specific industries, the absolute value of trade benefits of capital (technology)-intensive industries had comparatively remarkable promotion, but for industries taking part in the vertical specialization with a comparatively lower degree, the absolute value of their trade benefits had comparatively slow promotion. Furthermore, the vertical labor division can decrease the labor cost of per unit of output, and labor-intensive industries can enjoy a higher degree of such decrease (Wang 2010). The reason for this is that in the vertical labor division, the import of advanced technologies and management practices can improve the production efficiency so as to reduce the labor cost of per unit of output. As there are more skilled workers in technology-intensive industries, therefore, the decline of the labor cost is less. The vertical international division of labor has also played certain active roles in economic growth of developing countries because developing countries will involve in international trade in the vertical specialization. This is the theory proposed by Robertson that foreign trade is the “engine for growth”. He argued that foreign trade, particularly the increase of export, could facilitate economic growth domestically. The analyzing results of China’s economic data from 1981 to 2009 show that both the export of processing trade and general trade could promote China’s economic growth. Each 1% increase of processing trade and general trade will promote an economic growth by 3.89% and 1.87% respectively. The promoting effects of the two had a difference of nearly 2% (Guo et al. 2011). The reason is that the international vertical specialization has posed stronger and long-term impacts on economic growth through technology spillover, industry upgrading and the effect of scale economy. However, the vertical division of labor also has a certain degree of risks on developing countries. In this type of labor division, the production processes of products are separated apart. Developed countries carry out vertical investment in developing countries for the purpose of utilizing their cheaper labor to reduce the cost of

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technology-intensive products. Therefore, the main industries of developing countries are still limited in assembling and processing. It is hard for developing countries to master advanced technologies of developed countries as core technologies are under control of developed countries. The calculations of Wang and Liang (2011) also show that at least two-thirds of the value of China’s industrial export products was acquired by other countries in the pattern of vertical international division of labor, which means China did not get the corresponding actual benefits from its huge trade surplus. The growth rate of the proportion of China’s trade in value added was far lower than that of its trade volume and trade surplus. Furthermore, China is not the exception in developing countries. Most developing countries are in the same situation as China. They generally possess obvious comparative advantages in labor costs, so they have adopted the way of processing trade to take part in the vertical international labor division. Although they have optimized their export mix to a certain degree in the long-term development, quite large parts of products in processing trade are still the labor-intensive products with low technology, and the proportion of the export volume of high-tech products is still low. For developing countries, the vertical division of labor often leads to the fact that enterprises will pass their costs through to society. Developing countries who have participated in the vertical division of labor all are confronted with the cost pass-through which is the best choice for enterprises in developing countries when their primary factor-intensive products have joined in international price competition under the system of the vertical division of labor. Such kind of cost pass-through from enterprises to society also can increase foreign exchange earnings and trade surpluses as well as increasing the employment level (Han 2011). Therefore, most of developing countries have selected the cost pass-through to society, which results in many internal problems such as their economic growth tending to immiserization, workers’ salary keeping at a low level for a long term and the limits on the improvement of productivity. This is an important cause for the discrepancy of labor costs shown in Table 1.1. Table 1.1 Labor cost comparison between developed and developing countries The USA

Wage rate (A)

Labor productivity (B)

Comparative labor cost (A/B*100)

100

100

100

Japan

62.6

67.8

92.3

South Korea

27

43.9

61.5

Philippines

8.6

15.9

53.8

Indonesia

4.6

6.6

69.2

India

3.1

2.9

107.7

China

2.1

2.7

76.9

Data Source Li Shumei, “Industrial Upgrading of Manufacture under the Vertical Specialization” [J] Social Scientist, 2009 (12)

1 Historical Evolution of the Pattern …

11

If we consider the investment motives of enterprises in developed countries under the vertical specialization, we will find out some problems of the vertical labor division. Their motives for investing in developing countries are usually for occupying local markets. For example, Japan External Trade Organization conducted an investigation on overseas investment motives of Japanese enterprises in 1990. 35.7% of the total 384 enterprises considered their motives were “selling products at local markets and occupying local markets”, 21.4% for “occupying overseas markets for production bases” and 21.6% for “finding local places for their assembling bases of products”.1 It is thus clear that developed countries’ major motives are to occupy developing countries’ markets through the vertical labor division. In such kind of markets, the enterprises of developing countries have no way to obtain good space for development. Under the condition of narrow market space and the scarcity of core technologies, except for developing labor-intensive industries, enterprises in developing countries are only left to enter virtual industries such as capital markets and real estate markets. The only approach to develop the economy is to ensure capital yields through capital operations. The emergence and development of virtual industries under the vertical labor division is the problem worthy of special attention. Generally speaking, developing countries only possess the capacity of developing labor-intensive industries at their initial phase of industrialization. Thus, the supply elasticity of labor-intensive products is high as countries possessing the capacity of supplying labor-intensive products are quite a lot. But the demand elasticity of these products is low. As a result, the situation of oversupply and vicious competition occur easily in labor-intensive industries. Meanwhile, various products in major markets of developing countries are not strong enough for competition. Thus, the rate of profits is reduced infinitely. Under such condition, developing countries have to enter virtual industries, which may lead to bubble economies. Such kind of examples is frequently seen in developing countries. One of the major reasons for the Asian Financial Crisis in 1997–1998 is the overinflated investment in virtual industries including real estate markets and securities markets. Generally, capital with the nature of pursuing profits will not select to enter virtual industries for profits when it can get enough profits from the real economy. This explains why the capital operation of virtual economies is comparatively inactive, even in developed countries, when manufactured products are competitive and the real economy can gain a comparatively high earning rate; only when the profit rate falls to an intolerable degree due to overcapacity, and the chance for investment entering the real economy is rare, capital will begin to enter the field of virtual economies which only rely on capital operations to win profits, while having comparatively high risks. The result of this is the formation of economic bubbles to a certain degree. Although a certain degree of economic bubbles is not always a bad thing, it may develop into an important unstable factor threating a country’s economic safety when virtual economies are overdeveloped and disjointed with the development degree of the real economy. A very obvious example is the Japanese Bubble Economy. Before the 1980s, Japan had 1

Hu (1990).

12

W. Zhou

always been the most important manufacturing factory in the world with an advanced real economy. In this period, various commodities manufactured in Japan were sold well. Its domestic capital obtained enough profits through investment in the real economy, therefore there were little capital selecting to enter securities markets and real estate markets. However, after the 1980s, Japan’s manufacturing experienced the surplus of capital and lost its capacity to develop new products. Meanwhile, the signing of the Plaza Accord between the USA and Japan led to the rise of the exchange rate of yen, which made Japanese products losing competitiveness in international markets. Furthermore, the USA frequently aimed at Japan to initiate trade frictions and disputes. Under the joint action of these factors, Japanese capital, after being unable to acquire the same profits as before, began to enter the virtual economies and pushed the prices of virtual assets to a high level, which ended up with a tremendous economic bubble and the “lost ten years” of Japan’s economy in the 1990s. In the case of Asia Financial Crisis in the 1990s, the economic bubbles of virtual economies which led to serious problems in economic operations are the results of insufficient impetus for the development of real economies of countries in Southeast Asia. As countries in Southeast Asia were situated in a subordinate position in the vertical international division of labor which was dominated by developed countries, their main industries and economic growth heavily relied on investment from developed countries and vertical technology transfers, which limited economic development space as well as the stability and the further increase of the profit rate of real economies. As a result, domestic capital of these countries had to enter virtual asset markets for pursuing a higher profit rate. Another negative impact the vertical labor division could possibly bring about is the widening of income gap. As in the vertical labor division, all countries, both developed and developing, have reduced their non-technology and labor-intensive production activities, thus the earning rate of skilled workers has increased compared with unskilled workers, which means that the income gap is widened. The result of the econometric analysis on China’s industries conducted by Guo (2011) shows that the improvement of the degree of vertical international specialization surely widened the income gap between skilled and unskilled workers in China’s industries. The influence factor reached a very obvious level of 1.412. Thus, although China’s industries took part in the international vertical specialization with the comparative advantage of labor, the income gap could be increasingly widened. (2) Horizontal Division of Labor The horizontal division of labor is another type different from the vertical division of labor. It is the labor division in the production of manufactured products among countries with an equal or similar economic development level (such as developed countries and a part of newly industrialized countries), while the vertical division of labor usually happens among countries with quite different economic development levels. Mutual trade among contemporary advanced countries is mainly established on the basis of the horizontal division of labor. It can be divided into the intraindustry and inter-industry division of labor. The former is also called as the “division of labor of differentiated products”, which means that although products within a

1 Historical Evolution of the Pattern …

13

same industry manufactured by different manufactures have an equal or similar technological level, the appearance design, internal quality, specifications, types, brands, grades or prices are different so that the labor division and mutual exchanges are generated. It reflects the competition among oligopoly enterprises, and various and subdivided requirements of consumer preferences. With the development of science, technology and economy, the degree of specialized production within an industry has become increasingly high. Economy of scale is viewed as the main reason for the formation of the horizontal division of labor which leads to the intra-industry trade. The so-called internal economy of scale refers to the inverse relation between per unit of output and per unit cost of individual manufacturers. A manufacturer’s average cost curve is a U-shaped line which goes down firstly and then goes up. When its cost is reduced along with its output, what the manufacturer realized is the internal economy of scale; when its cost is increased with its output, it means the internal diseconomy of scale of the manufacturer. The output corresponding to the lowest point of the average cost curve is called the effective scale. In imperfectly competitive markets, there exists differentiation among the same type of products. If different enterprises in different countries are arranged to produce products what they are good at, then the returns to scale can be better realized. Even if there is no differentiation between products, manufacturers’ production scale can be effectively improved through connecting different countries in a way of labor division and trading so as to reduce the average cost of products. Take the manufacturing industry of electronic products as an example. Under the condition of no intra-industry horizontal division of labor, the USA and European countries all produce notebooks and tablet PCs to meet different needs of domestic consumers. As limited by the quantity of demand in domestic markets, the quantities of notebooks and tablet PCs produced by manufacturers in both areas are possibly in the internal economy of scale, but not reaching the effective scale. If the two sides conduct the intra-industry horizontal division of labor, in which European factories produce tablet PCs and export to the USA, while American factories specifically produce notebooks and export to Japan, then the quantity of demand is increased for factories in both areas and the average cost will stand at the lowest point of the curve where is the effective scale. In the horizontal division of labor, unlike the vertical labor division, every country has the similar industrial structure and technological level. The reason for their participations in the horizontal labor division lies in that they can realize specialized production according to each procedure or product they are good at so as to save costs and improve profits. The comparatively typical example of the horizontal labor division is the specialized coordination among developed countries when producing products of certain industries, especially in high-tech industries, such as the aircraft manufacturing industry. No matter which developed country holds the brand of aircrafts, all parts and components are possibly produced by dozens of countries in the world. Developing countries also can realize this type of labor division, which benefits developing countries in mutually utilizing each other’s advantageous industries and

14

W. Zhou

resources as well as helping them get rid of the vertical division of labor which is mainly led by developed countries. The vertical division of labor pursues the comparative cost and comparative profit. The resulting international trade of commodities, production factors and labor services are the initial stage of economic connections among countries. The flow of international capital without the involvement of ownership changes just realizes the international division of labor on a superficial level, while only international direct investment led by multinational enterprises with the characteristic of controlling ownership further deepens the international division of labor. The horizontal one is mainly realized through two forms which are equity merger & acquisition (M&A) and non-equity multinational strategic alliance. Through this kind of approaches, developed countries and multinational enterprises can improve their international competitiveness, and put themselves in a comparatively advantageous position so as to realize the equity M&A and non-equity multinational strategic alliance.2 This is a further development of the horizontal division of labor in the pattern of international division of labor. Commonly speaking, the horizontal division of labor takes in shape in competition and frictions. The reason for its emergence does not lie in whether economic factors are plentiful or not, or the level of productivity is high or low, but in the result of competition of enterprises with a certain market power in the international division of labor. As every enterprise has products with a certain degree of differentiation in monopolistic competition markets, so every enterprise has the power to determine market demand. Multinational enterprises are the important forces in realizing the horizontal division of labor. The horizontal division of labor has already been realized in worldwide distributed multinational enterprises. Thus, the original international trade and international division of labor become the internal labor division of a multinational enterprise. The internalization of transactions reduces the cost of enterprises and realizes the division of labor within enterprises. Although the majority of vertical division of labor is the result of direct investment, the direct investment also possibly leads to the horizontal division of labor. Developed countries invest not only in developing countries, but also in developed countries to realize the horizontal division of labor with complementary advantages. Such horizontal division of labor will take specialized production and coordination as the core part, and is not under the precondition that a country dominates another one. In the horizontal division of labor, all countries have a relationship of dependency, not the dominance and dominated relationship in production. They accomplish economic cooperation and collaboration based on the division of labor. Therefore, their status is equal. (3) Mixed Division of Labor Mixed division of labor is a blend of the vertical and horizontal division of labor. From the individual country perspective, it refers to the situation in which a country 2

Yang (2001).

1 Historical Evolution of the Pattern …

15

both takes part in the vertical and the horizontal division of international labor. For example, Germany is a representative of this type as for developing countries, it is the vertical type, while for developed countries, it is the horizontal type. Due to the unbalanced development of productivity and the level of labor division, a country can possibly take part in both the two types. Generally, developing countries will take part in the vertical type with developed countries and be in a subordinate position. Meanwhile, they will also take part in the horizontal type with other developing countries that have the similar economic development level; developed countries, in addition to take part in the vertical type with developing countries, will also take part in the horizontal type with other developed countries. Differences in the relative economic development level of a country usually lead to a mixed division of labor. When the relative economic development level of a country is lower or higher compared with other countries, it is possible for the country to select the vertical division of labor as its form of participating in international division of labor. When the relative economic development level is similar with other countries, the country tends to take part in the horizontal division of labor. As a country’s relative economic development level is uncertain, therefore, both developed and developing countries have a chance to participate in the vertical and horizontal division of labor. Actually, most countries in the world are participating in the mixed type, not pure vertical or horizontal type. 2. Inter-industry, Intra-industry and Intra-product Division of Labor (1) Inter-industry Division of Labor It refers to the specialized division of labor among sectors of different industries, or can be further understood as the labor division among the labor-intensive industry, the capital-intensive heavy chemical industry and the technology-intensive industry. Commonly, the inter-industry economic division of labor refers to the phenomenon in which products of the same industrial sector in a country or district during a certain period of time are only for export or import. In the pattern of such labor division, the direction of product flow in a same industry is basically unidirectional. The inter-industry division of labor is established on three important bases: first, products in markets are homogeneous without differences in specification, model and quality; second, under the condition of the product homogeneity, there is no difference in consumer preferences; third, the economy of scale does not exist in every industry that takes part in the inter-industry labor division. It is suitable for adopting the most traditional theories of international division of labor for its explanation. The inter-industry division of labor is generally the vertical labor division. Due to the different development level of productivity, different countries possess comparative advantages in different industries. The economic theories guiding the interindustry division of labor developed from the Theory of Absolute Advantage of Adam Smith to the Theory of Comparative Advantage of Ricardo, then to the Factor Endowment Theory further developed by the neoclassical economists—Heckscher and Ohlin. The Heckscher-Ohlin theory explains whether the production factors each country possesses are abundant or meagre. Factor endowment refers to the situation

16

W. Zhou

of production factors possessed by each country. When the production factors of a country are abundant, then the prices of these factors will be lower. On the contrary, the prices will be higher if these factors are meagre. When different factor endowment ratios exist, the comparative cost of different industries in a country will be varied. Then the country shall export products with a comparatively low cost as these products are mainly produced with the use of comparatively abundant factors; on the other side, the country shall import foreign products with a comparatively low cost as these products are mainly produced with the use of comparative meagre factors of the country. Both Ricardo’s theory and the Heckscher-Ohlin theory essentially support the formation of the inter-industry division of labor in the international division of labor. However, as the economic development level and labor productivity are various in different countries due to the existence of first-mover advantage, a certain degree of inequality exists in the inter-industry division of labor. Commonly, developed countries can obtain more profits from this type of labor division while developing countries could fall into the so-called “trap of comparative advantage”. Countries in Latin America, as their earlier entries into the pattern of international division of labor, are the worst-hit regions of the “trap of comparative advantage”. The so-called “trap of comparative advantage” means that countries mainly exporting the labor-intensive and natural resources-intensive products are always in disadvantage in the trade of labor-intensive and technology-intensive products. The trap can be divided into two types-the comparative advantage trap of primary products and of manufactured products. The former refers to the situation in which developing countries, considering their comparative advantages in plentiful labor and natural resources, only use these advantages to join in the international division of labor. However, they are generally in a dominated position and obtain less profit from international trade. This is because the added value of labor-intensive and natural resource-intensive products is comparatively low, while the finished products manufactured by developed countries are highly value-added. The price scissors of added value between industrial and agricultural products have placed developing countries in disadvantages. Furthermore, major exported primary products from developing countries have low demand elasticity and are easy to be affected by various changes in international markets, which result in the reduction of national revenues. As is shown in Fig. 1.4, from 2000 to 2006, countries in Latin America recorded a certain degree of increase in the amount of the export of major primary products, and the increase of crude oil, mineral ore and copper was sped up. After two centuries of joining in the international division of labor, the industrial structure and commodity export mix of countries in Latin America were not improved, but further enhanced. The comparative advantage trap of manufactured products refers to the situation in which developing countries adopt the import substitution strategy and substitute the import of manufactured products in the past by establishing and developing their own manufacturing and other industries so as to promote their economic growth and national revenues, and realize domestic industrialization and the upgrading of industrial structures with the expectation of balancing their international accounts. But as core technologies are under the control of developed countries, they have to

1 Historical Evolution of the Pattern …

17

Fig. 1.4 Volumes of main exports of Latin American countries (hundred million US dollars)

rely on imitating technologies to improve their positions in the international division of labor. Generally, the import substitution strategy has no way to reverse their subordinated positions, but only let them heavily rely on technology imports. Thus, their independent innovative capabilities remain the same as before and they are unable to bring the late-mover advantage into play. This is the so-called comparative advantage trap of manufactured products. Although having plentiful theory bases, the inter-industry division of labor is generally beneficial to developed countries, not developing countries. This fact shall be considered by any developing country before joining in the inter-industry division of labor. (2) Intra-Industry Division of Labor In the inter-industry division of labor, the direction of product flow in the same industry of a country is basically unidirectional, and a country imports or exports products of an industry; in the intra-industry type, it is bidirectional. That is, a country both imports and exports products of the same industry. The intra-industry division of labor usually happens among different products of a same industry. The traditional inter-industry division of labor is completed through the labor division of enterprises located in different countries, while the necessary exchanges in the intra-industry division of labor are completed through the internal and external markets. The internal markets refer to markets inside an enterprise while the external markets are markets outside an enterprise. As multinational enterprises have played increasingly important roles, the main manifestation of the internal markets is the internal transaction mechanism of multinational enterprises. Correspondingly, the

18

W. Zhou

markets in which buyer and sellers independently conduct transactions are the external markets. Take the intra-industry vertical division of labor as an example for a specific analysis. When the vertical labor division exists, every participating factory will select its corresponding effective scale on the average cost curve, or the lowest point on the curve, to conduct production, thus the production cost of the whole product will reach the lowest level, and the scale economy effect of each procedure of the product is fully embodied. If a factory in a country is responsible for accomplishing all production procedures, then the factory only can select the efficient scale of a procedure to organize production. Thus, other production procedures will deviate from the efficient scale and subsequently the production cost will be increased. If it is possible for conducting the intra-industry vertical division of labor, then the factory will obtain potential profits. Products made through the intra-industry division of labor have various characteristics. Among these products, some are labor-intensive products, some are capitalintensive ones; some are standard technology products, and some are high-tech products. But these products have to satisfy two conditions. One is that these products have certain substitutability in utility. The other is that the input of comparatively similar factors of production is necessary when producing these products. Such products can realize the international division of labor through the form of intra-industry division of labor. (3) Intra-product Division of Labor The intra-product division of labor results from the vertical specialization. The emergence of the vertical specialization is the result of advanced science and technology which provides the possibility for its emergence and reduces its cost. As technologies and processes of a specific product have a certain degree of separability, technology progress makes production processes of a product more segmented. A part or a procedure of a product can achieve standard production at the same time, no matter where the production place is. As a result, for the purpose of reducing the production cost, the procedures of products will be allotted to different countries according to their different factors endowment. The outstanding characteristic of the vertical specialization is that a country imports intermediate products from another country as the inputs of its own products, then processes the imported intermediate products and exports to a third country; the third country takes the imported products again as its inputs; such process will last constantly till final products are exported to destinations. The intra-product division of labor makes “different procedures of production processes of a specific product are extended through spatial decentralization into cross-regional or cross-country production chains or systems” so that more enterprises in different countries and regions can integrate into the system of international division of labor and further go deep into the process of economic globalization. Compared with the inter-industry and the intra-industry division of labor,

1 Historical Evolution of the Pattern …

19

the intra-product division of labor has a deep effort, which will be beneficial for different countries in using their comparative advantages. It is a special process of economic internationalization or a structure of labor division. Its core contents lie in that different procedures and blocks of production processes of specific products are spatially dispersed and allocated to different regions. Every country is specialized in a specific segment of the value chains of product production, so a cross-regional or cross-country system of production chains is finally formed. Its complexity degree is also related to product technologies. The more complex the production procedure of a product is, the more likely the intra-product division of labor appears. The intra-product division of labor itself is the product of the Comparative Advantage Theory and economy of scale. In the intra-product international division of labor, developed and developing countries’ roles in the value chain of international division of labor are different. The comparative advantage of capital and technologies enable developed countries to occupy favorable positions in the integration of global resources. Meanwhile, they have transferred major manufacturing processes to developing countries. This is the reason that developing countries have taken the processing trade as their major form in the intra-product division of labor. The geographical concentrations of production procedures helps enterprises in different places of value chains create economic profits of large-scale production. This is the driving force of economic laws to the intra-product division of labor. The intraproduct division of labor is very popular in Asia. Based on the data of 1992, the total amount of parts and components exported in 2006 within the area increased by 6.91 times.3 The rise of trade within Asia mainly benefited from the trade of parts and components between developed countries and developing countries. The intra-product division of labor has become an important form for developing countries joining in the international division of labor. In the process of the transfer of global industrial chains, China’s mainland has already undertaken the transfer of labor-intensive procedures. In order to minimize the cost, foreign direct investment has been increasingly concentrated in China, which has placed China in a situation of a long-term trade surplus. The results of empirical analyses also prove that it has an active impact on China’s trade surplus. The degree that China participates in the intra-product division of labor increases by 1%, then China’s foreign trade surplus will increase by 1.478%” (Song 2011). The intra-product division of labor also has an active impact on the overall productivity level of China’s industries, but the active impact on different industries is different. For example, for the capital-intensive industry, the influence factor is 4.94 and it is 3.48 for the labor-intensive industry.4 This elaborates that under the condition of international division of labor, developing countries can improve the productivity of their capital-intensive industry through intra-product of labor. Thus, it is not the case that developing countries have no chance to improve their productivity through the intra-product division of labor of value chains, and then further realize their industrial upgrading. 3 4

Liu et al. (2009). Hu (2007).

20

W. Zhou

However, different countries’ positions in the intra-product division of labor are different. Although they are in a same industrial chain, they are specialized in different procedures, the added value they can obtain from the division of labor is different. The concept of the Smiling Curve tries to elaborate that different procedures in the intra-product division of labor are confronted with different value added of products and profit space. As enterprises in the upstream industrial chain can obtain higher value added, therefore, economies with advanced technologies, a strong innovative capability and a comparatively large scale have a relatively low level of the vertical division of labor (Wen 2011). On the other hand, countries participating in the intra-product division of labor will also increase their dependence on international raw materials and markets of parts and components as well as their international competitiveness. As for countries (regions) and industries with higher levels of the intra-product division of labor, although their export scales may be huge, it does not definitely mean that they can obtain correspondingly profits from the international division of labor. The export scales of developing countries’ high-tech manufacturing are expanded rapidly, but most are exports of parts and components and processing products. The scarcity of technologies and capital causes developing countries heavily relying on foreign demand and technologies, which also results in some problems in their exports. Some characteristics of the intra-product division of labor can be observed from the example of the intra-product trade of electrical and electronic products between China and Japan. As shown in Table 1.2, China, as a developing country, had a lower competitive level of parts and components compared with Japan, which was the result of China’s advantage in assembling in Sino-Japan trade. In the specific structure of intra-product trade, China, as situated in the downstream industrial value chain, only had an advantage in assembling. However, in the industrial value chain, as Japanese enterprises have occupied the upstream R&D and production processes of core parts and components, they could make best use of their own positions and comparative advantages to increase the price of their products. Chinese enterprises in the downstream industrial chain had to accept the unequal transaction as they only possessed the comparative advantage in assembling. Generally, in the profit distribution system of the intra-product division of labor, the added value of a country’s products has a positive correlation with the quantity of high-quality and high-level factors the country possesses. Countries with high-quality factors can obtain more profits from this system. But developing countries such as China have taken part in the division of labor with their advantages in assembling and served as suppliers of low valued-added products, therefore, what they could obtain was very limited. As a result, the intra-product division of labor is also a double-edged sword for China. Although the participation of China’s high-tech manufacturing in the intraproduct international division of labor has increased China’s economic connections with the world, the resulting reasons for China’s position in the industrial chain with the lowest value added should attribute to the current less inputs in R&D, a weak independent innovative capability, its scientific and technological backwardness and the scarcity of human capital. Therefore, the way of China’s participation in the intraproduct division of labor led to China’s extensive model of economic growth. As the

764.93

764.92

764.91

1.261

17.873

Advantage in assembling

Advantage in production

1.035

2.916

Advantage in assembling

Advantage in production

0.243

0.015

Advantage in assembling

Advantage in production

19.552

Advantage in production

0.082

Advantage in assembling

762.22

0.163

Advantage in production

762.11

1997

Type of advantages

Classification no

1.168

10.548

2.581

1.672

0.346

0.013

32.235

0.02

0.248

1998

0.854

13.385

1.633

1.842

0.273

0.065

11.064

0.077

0.126

1999

0.872

12.955

0.696

1.472

0.241

0.002

14.232

0.005

0.436

2000

2.086

15.04

0.798

1.83

0.341

0.003

11.137

0.024

0.696

2001

1.541

8.544

1.123

1.068

1.277

0.004

5.083

0.079

0.857

2002

0.985

7.163

1.009

1.184

0.969

0.049

7.987

0.223

1.464

2003

0.878

6.053

0.56

1.072

1.432

0.007

7.042

0.203

2.197

2004

0.807

6.987

1.122

1.04

0.952

0

27.268

0.106

2.128

2005

0.906

6.946

0.828

1.001

0.583

0.001

12.819

0.055

5.674

2006

Table 1.2 Advantages in production and assembling of China-made electrical and electronic parts and components in Japanese markets

1.082

5.503

1.838

–

–

0.004

8.436

0.016

19.77

2007

(continued)

1.295

6.348

2.371

–

–

0.007

12.12

0.035

35.19

2008

1 Historical Evolution of the Pattern … 21

775.79

775.49

773

772

771.29

764.99

Classification no

Table 1.2 (continued)

20.61

1.35

Advantage in assembling

Advantage in production

0.213

2.441

Advantage in assembling

Advantage in production

1.01

6.223

Advantage in assembling

Advantage in production

0.301

Advantage in production

16.136

Advantage in assembling

13.632

Advantage in assembling

1.236

3.125

Advantage in production

Advantage in production

5.318

1997

Advantage in assembling

Type of advantages

22.559

0.505

0.277

1.932

1.337

6.316

0.347

14.849

2.263

9.302

3.938

6.768

1998

8.163

1.26

0.449

2.092

1.315

6.379

0.359

9.778

2.134

8.619

4.007

6.913

1999

2.79

3.743

0.283

2.104

1.23

6.501

0.294

8.361

1.459

7.81

3.586

6.045

2000

3.707

3.026

0.312

1.76

1.247

7.034

0.348

8.609

1.448

7.868

3.719

3.763

2001

4.751

3.495

0.871

1.45

2.075

5.909

0.362

6.47

1.549

6.398

6.126

3.294

2002

4.107

3.693

0.425

1.111

2.217

4.775

0.376

5.343

1.522

4.574

6.312

4.106

2003

7.647

3.211

0.266

1.022

2.21

4.68

0.408

5.482

1.264

3.783

4.559

4.218

2004

10.44

4.226

0.521

1.114

2.137

5.622

0.454

4.278

1.341

3.856

2.75

3.244

2005

14.019

4.083

0.632

1.083

3.083

5.856

0.537

4.673

1.405

4.614

1.877

3.055

2006

21.71

3.959

0.98

0.84

4.382

4.924

0.78

3.182

1.646

1.873

2.99

2.613

2007

(continued)

24.98

5.084

0.732

0.93

4.106

5.171

0.822

2.809

1.241

1.565

3.274

2.9

2008

22 W. Zhou

813

778

776

775.89

775.88

775.81

Classification no

Table 1.2 (continued)

3.591

4.52

Advantage in assembling

Advantage in production

0.246

2.785

Advantage in assembling

Advantage in production

0.109

5.096

Advantage in assembling

Advantage in production

2.052

Advantage in production

0.56

Advantage in assembling

1.785

Advantage in assembling

0.435

17.912

Advantage in production

Advantage in production

1.597

1997

Advantage in assembling

Type of advantages

3.392

4.713

0.253

3.327

0.118

5.126

2.668

0.397

0.45

1.285

15.743

2.036

1998

3.488

5.337

0.241

3.822

0.119

4.007

2.22

0.831

0.216

0.616

15.857

1.744

1999

5.693

4.622

0.2

3.365

0.163

3.526

2.556

1.14

0.248

0.138

20.158

3.215

2000

7.04

4.863

0.219

4.102

0.154

2.46

3

1.029

0.384

0.17

12.717

1.661

2001

8.584

4.914

0.277

4.487

0.153

1.722

4.085

0.779

0.638

0.155

17.513

1.075

2002

8.317

4.803

0.28

4.271

0.162

1.271

4.865

0.715

0.625

0.051

26.182

1.042

2003

8.484

5.213

0.302

3.723

0.211

1.344

6.103

0.972

0.714

0.104

18.363

0.543

2004

10.945

5.741

0.338

3.906

0.243

1.985

8.211

2

0.794

0.077

24.74

0.49

2005

10.435

5.906

0.349

3.898

0.286

1.292

10.121

2.552

0.779

0.093

21.561

0.382

2006

12.88

5.349

0.482

3.565

0.364

0.805

16.12

2.028

1.956

0.079

25.77

0.263

2007

(continued)

13.13

5.89

0.552

3.84

0.354

0.716

16.18

1.909

2.677

0.067

27.34

0.579

2008

1 Historical Evolution of the Pattern … 23

0.332

0.35

3.846

Advantage in production

Advantage in assembling

1997

Advantage in assembling

Type of advantages

3.999

0.414

0.486

1998

4.305

0.381

0.273

1999

3.82

0.348

0.152

2000

4.187

0.447

0.089

2001

4.151

0.523

0.099

2002

3.949

0.494

0.092

2003

3.71

0.486

0.246

2004

3.836

0.493

0.235

2005

3.861

0.558

0.181

2006

3.433

0.736

0.145

2007

3.672

0.787

0.208

2008

Data Source Zhang Naili, Liu Xingkun, Li Hongyan: “Analysis on Intra-product Trade Index of Sino-Japan Electrical and Electronic Products” [J], Contemporary Economy of Japan, 2010 (03)

Intermediate product

Classification no

Table 1.2 (continued)

24 W. Zhou

1 Historical Evolution of the Pattern …

25

scarcity of core technologies, China must rely on technologies from international markets in its production and assembling. From this angel, China’s economic growth model of consuming a lot of manpower and material resources has a certain relation with the system of the intra-product division of labor.

1.2 Historical Review on the Development of International Division of Labor The pattern of international division of labor refers to the structure and type of labor division formed in the process of production specialization and collaboration between countries. During its evolution in the past two centuries from the Industrial Revolutions and the establishment of mass production of machines till now, the international division of labor has experienced three major forms transforming from the inter-industry division of labor between traditional manufactured products and agricultural and mineral products (primary products) to the intra-industry division of labor among different sectors of products within an industry, and further deepening to the intra-product division of labor among different value-added segments in value chains of a same product. The whole process has been increasingly deepened with a spiral rise. 1. Periods of Traditionally Vertical International Division of Labor (From 1760 to 1945) The initial international trade was conducted between western European countries and their colonist countries. It was a vertical division of labor led by western European countries and subordinated positions for colonist countries. Before the beginning of the 2nd World War, although this international system of vertical division of labor was challenged by late-mover countries such as the USA, Germany and Japan to some extent, it did not collapse and became the way of labor division governing international trade for hundreds of years. The traditional vertical international division of labor was over after the end of the 2nd World War when the colonial system collapsed. Main Contents and Characteristics of this Form of Labor Division (1) The international division of labor was conducted between different industries with developing countries engaging in the production of resource-based primary products and developed countries engaging in the production of manufactured products. According to the Comparative Advantage Theory, labor and natural resources are considered to be the comparative advantages of developing countries. Thus, developing countries engaged in labor-intensive and resource-intensive industries, while developed countries in capital-intensive and technology-intensive industries.

26

W. Zhou

(2) Industrial boundaries were clear. Commonly, as it was the inter-industry division of labor, so its industrial boundaries were quite clear. Different industries were the boundaries of the division of labor. (3) The vertical division of labor was in a dominant position. As this pattern of international division of labor was dominated by developed countries from the beginning with the participation of colonist countries, so the pattern of division of labor possessed various characteristics of the vertical division of labor. (4) It was an unequal and unfair international division of labor. The deterioration of trade conditions and the ossification of industrial structures in developing countries were the outcomes of this international division of labor. As it was dominated by developed countries, profits that developing countries could obtain from this pattern were comparatively few. The worse situation was that developing countries could fall into a certain trap and could not realize a benign development. In such system of labor division, developed countries, relying on their advantages in pricing rights, monopoly positions and rights to formulate rules, conducted unequal trade and obtained exorbitant profits from inequivalent exchanges by monopolizing prices. Developing countries could make use of their natural advantages of primary products to conduct trade with developed countries and obtain certain incomes. Meanwhile, they could import advanced technologies and equipment needed to promote their domestic economic growth with an identity as the markets of developed countries’ manufactured products. As a result, some developing countries have adopted the strategy of import substitution to develop their national economies by substituting some imported products. They tried to get rid of unitary economic situation and reduce their dependence on developed countries by adopting this method. However, in general, the dominant force during these periods is still developed country. 2. Periods of Intra-industry (Inter-product) Division of Labor (After the End of the 2nd World War to the End of the 1980s) The development of productivity drove the inter-industry division of labor towards the intra-industry division of labor. The distinction between the intra-industry and inter-industry division of labor lies in that the former is the result of the further deepening of the pattern of international division of labor. (1) The international division of labor was transitioned to the intra-industry or inter-product division of labor. That is, the division of labor and trade contacts appeared in a same industry due to the differentiation of products and product specialization was formed. The intra-industry division of labor was mainly divided into the intra-industry division of labor in homogeneous products and in non-homogeneous products. The former refers to the occurrence of division of labor of homogeneous products with complete substitutability between two countries, mainly between developed countries; the latter refers to a vertical division of labor within an industry, mainly between developed and developing

1 Historical Evolution of the Pattern …

27

countries (with developed countries engaging in the production of capital-andtechnology-intensive products while developing countries in labor-intensive products). (2) Industrial boundaries were still clear. Compared with the inter-industry division of labor, industrial boundaries of the intra-industry division of labor were vaguer, but certain marks of industrial boundaries still could be found in the division of labor. There was no way for the intra-industry division of labor to eliminate all boundaries. (3) The horizontal division of labor was in a dominant position, but the vertical type still occupied an important status. With the development of productivity, the horizontal division of labor between countries with similar economic development levels became more and more important in the pattern of international division of labor because the intra-industry division of labor required that participants of labor division must possess a similar productivity so that their products have similar competitiveness in international markets. However, the vertical division of labor still had its own status and did not disappear completely. 3. Periods of New International Division of Labor Based on the Division of Industrial Chains and Modularized Division of Labor (Since the 1990s) With the further development of productivity and the improvement of the level of social division of labor, the division of industrial chains and modularized division of labor has become the mainstream of the current pattern of international division of labor. The intra-product division of labor, replacing the intra-industry division of labor, has already been the main form. 1. The international division of labor has presented multilevel and diversified forms with the coexistence of the inter-industry, the intra-industry and the intra-product division of labor as well as the division of industrial chains. The division of industrial chains and modularized division of labor has been the important ways of the international division of labor. 2. The vertical division of labor has coexisted with the horizontal division of labor. The intra-product division of labor is in a need of the emergence of the horizontal division of labor as in a same industrial chain, the horizontal division of labor can make products more perfect than the vertical one, therefore, the vertical and horizontal division of labor can coexist together. 3. The depth and width of the international division of labor have been largely expanded. Subcontracting activities have become so popular that more and more independent manufacturers have been involved into the network system of the international division of labor dominated by multinational enterprises. Multinational enterprises, as the main forces of production-based international direct investment, have gradually established their internal systems of international division of labor and formed their own internal markets. Meanwhile, as the leading power of economic globalization, they have also established an external system of labor division guided by them. By taking advantage of this system, they can realize the pattern of intra-product division of labor in a better way.

28

W. Zhou

4. Under the pattern of labor division, countries with advantages in knowledgeintensive areas such as design, R&D, management and service, marketing and brand management can rely on their control on patents, standards and brands to realize monopolized interest distribution through their layouts in industrial chains in the production process, not the circulation process. The capability of allocating global factors beyond the limitation of country boundaries has become the pivotal condition for ensuring the benefits of international division of labor. Developed countries have still dominated the pattern of international division of labor and gained profits from this pattern. Developing countries have been in a dominated position although they also can obtain certain development in this pattern. 4. Comments With the further development of international division of labor, new theories of the Liberalistic Economics concerning the international division of labor increasingly appeared. Ricardo of the Classical School argued that international trade is the result of differences in comparative costs, while Heckscher and Olin of the Neoclassical School argued that the differences in factor endowments lead to international trade. The Comparative Cost Theory holds that as different countries have different labor productivities (or different costs) in producing different products, therefore, each country shall produce products with the comparative advantage (that is, a higher labor productivity or a lower cost) it possesses. The Factor Endowment Theory holds that countries’ factor endowments are varied as some are heavily endowed in labor resource, some in natural resources, while others in capital resource, therefore, each country shall specialize in producing the product with its most plentiful production factors. As that, every country can obtain benefits that they deserve in this pattern of international division of labor. Obviously, international trade is a kind of economic activity that every country shall join in. That is, every country needs to join in the pattern of international division of labor. However, what is the benefit for that? Whether developing countries can obtain benefits that are in line with their positions in the pattern of international division of labor? These questions were well supported by theories of the Liberalistic Economics which hold that as the existence of comparative advantage, no matter developed or developing countries, all can obtain certain benefits from the pattern of international division of labor. Meanwhile, there also existed the flying-goose strategy which holds that developing countries can realize their leapfrogging development by joining in the international division of labor. In sum, these theories hold that developing countries can participate in the international division of labor through an “export-oriented” developing mode, then gain profits through their advantages in resources, and finally realize the improvement of their economic developing levels. The specific reasons can be concluded as follows: Through participating in internal trade, developing countries can better get in touch with various production factors which are circulating with an unprecedented speed and scale. For example, in current pattern of international division of labor,

1 Historical Evolution of the Pattern …

29

developing countries can get enough capital. This is the reason that most developing countries have joined in the pattern of national division of labor. The scale of developed countries’ investment in developing countries has been increasingly expanded to a quite high level. This is the main form of production factors circulating between different countries, which will accelerate the circulation of production factors towards countries with the highest earning rates to realize the maximization of economic benefits. The international pattern of labor division has pushed forward the upgrading and adjustment of the international industrial structure. Every participant in this pattern must adjust and upgrade its domestic industrial structure. The nature of capital for pursuing profits also determines that every country will select its most suitable industries to be its most reasonable industries. More importantly, science and technologies will spread quickly through the pattern of international division of labor, which will drive the development of the productivity in developing countries at the same time. Science and technologies, as the first productive force, will spread over to developing countries along with multinational enterprises. Developing countries can learn from advanced science and technologies of developed countries and of multinational enterprises based on their own needs. Although classical and neoclassical economists set forth the legitimacy of existing systems of international division of labor in various ways, there still exist certain problems under such theoretical framework which should lead to a pattern without any deficiency. Above all, it is the problem of the relation between first-mover and late-mover countries. Although classical economists claimed that the international division of labor and international trade based on their theories should benefit every participant, the fact is that only western first-mover countries, especially the birthplace of classical theories—England, were the most benefited countries in the international division of labor. When late-mover countries entered the system after the unification of their domestic markets, their angles for observing this system were totally different. Although they can obtain certain profits from joining in the international division of labor, it is still a double-edged sword for them. As the criticism in the Dependency Theory and the World System Theory on the system of international division of labor mentioned above, developing countries may fall into the “trap of comparative advantage” in joining in globalization and could always stay in an embarrassing situation of less developed. This is the negative impact that globalization brings about to them. With the establishment of market economic systems worldwide, the inherent deficiencies of a market economy such as hysteresis, blindness and spontaneity have become more obvious under the background of increasingly expanded globalization. Instability of a country’s markets will result in the volatility of markets worldwide, especially a developed capitalist country like the USA. Economic stabilities of developing countries are under the threat of instabilities of other countries in the world. Multinational capital and enterprises that have played pivotal roles in globalization are only for pursuing economic profits. As a result, when developing countries take

30

W. Zhou

part in the vertical division of labor, this capital could possibly lead to social problems and eco-environmental problems due to its nature of profit-pursuit. Additionally, according to the views of the World System Theory and the Dependency Theory, the pattern of international division of labor has a structure of “core—semi-periphery—periphery”. The unequal exchanges existing in the pattern of international division of labor in capitalist countries are one of the important reasons for the existence of the pattern. Such structure is like that: the top is the core countries engaging in producing various high-tech products with high profits, and enjoying high salaries; the bottom is the periphery countries mainly producing low-profit and low-technology products with fewer types, and having lower salaries; the middle is the semi-periphery countries which are positioned between the core and periphery countries with a dual role acting as exploiters and the exploited. The tertiary structure of the world system avoids possible sharp conflicts caused by polarization. However, every country’s position in the system is not solid. Core countries may decline to semi-periphery countries and semi-periphery countries to periphery countries, and vice versa. If maintaining the establishment of the world system, countries shall play the roles of core, semiperiphery and periphery countries. It is impossible for all countries to be the wealthy core ones. The theory does not hold that all countries can benefit from international trade. The driving force for the development of this system is the unequal exchanges and exploitation between core countries and periphery countries. Major developed countries are at the core of the system with double advantages in production and exchanges, and conduct economic exploitation both to semi-periphery and periphery countries to maintain their favorable positions; some moderately developed countries belong to the semi-periphery countries of the system and developing countries the periphery ones. The former is both the exploiter and the exploited, while the latter suffers dual exploitations. Under this structure, developing countries are unable to obtain a long-term development and the gap with developed countries becomes increasingly huge. They have no way to become developed countries in the pattern of international division of labor dominated by developed countries. They only provide cheaper labors, originals and primary products (mainly including agricultural products, mineral products and labor-intensive products) for developed countries and suffer the exploitation from developed countries in this vertical division of labor.

1.3 Characteristics of International Division of Labor Before the Global Economic Crisis Since the 1990s, the pattern of international division of labor has shown some distinctive characteristics different from the original pattern along with the gradual establishment of global networks of multinational enterprises. The most outstanding one is that the intra-product division of labor has been the main form of division of

1 Historical Evolution of the Pattern …

31

labor, while the vertical division of labor has coexisted with the horizontal division of labor. With the development of intra-product division of labor, the contemporary international division of labor has been distributed in different countries according to different segments, blocks or procedures they are positioned in value chains. Thus, the modularized production has been formed, and then the combination of these standard modules has been carried out according to specific requirements of product production to finish the production. Developing countries have mainly engaged in low value-added, low technology content, labor-intensive segments, blocks or procedures, while developed countries in high-end (high value-added, high technology content and knowledge-intensive) segments, blocks or procedures. Thus, global production networks have been established in the system of international division of labor of industrial chains and value chains. The entities participating in global production networks are still national states. In this new kind of production networks, the dual pattern of international division of labor composed of agricultural countries and industrial countries has transformed into the trio-pattern composed of developed countries, newly industrialized countries and other developing countries, which is similar to the structure of “core—semiperiphery—periphery”. Countries with different positions in production networks have undertaken totally different responsibilities, and supported the running of global production networks together. The establishment of the global production networks is also the outcome of gradually intensified functions of knowledge factors such as technologies, information, talents and innovative mechanisms. These factors are accumulated in different industries and finally lead to the establishment of different procedures which constitute global value chains of production and global production networks. Additionally, the emergence and development of intra-product division of labor is also another reason for the formation of global production networks as the traditional mode with a single factory conducting production has been completely unsuitable for competition. Huge market pressures force enterprises to gradually evolve production and operations into worldwide activities which have been establishing a huge network of production and sales capable of penetrating into every corner of the world. As the pattern of international division of labor has been further deepened, the trade relations among different countries have undergone some certain changes. As shown in Fig. 1.5, from 1996 to 2011, the proportion of total foreign trade volumes of developed countries declined continuously, while that of newly industrialized countries went up increasingly. Newly industrialized countries have become a critically important part of the global production networks. The foreign trade volumes of other developing countries also increased continuously. It is the status quo of the current pattern of international division of labor, which cannot be ignored. However, as the technology content of exports of different countries is varied, the profits every country gains from the pattern of international division of labor are also different. As shown in Fig. 1.6, exports from developed countries had higher technology contents. Although the technology content of exports from developing countries was improved to a certain degree during the period from 1996 to 2009, the

32

W. Zhou

Fig. 1.5 Proportion of foreign trade volumes of different typed countries in world total volumes (%)

Fig. 1.6 Comparison of technology contents in exports of different countries (unit million US dollars)

certain gap with developed countries still existed. It is the problem of current global production networks, which is worthy of attention. The statistics also show that the technology content of exports from developing countries already realized a certain degree of increase despite the fact that their total volumes were still in disadvantage. For example, the technology content of exports from China increased by 85.7%, and that from India by 106.2% and South Africa by 89%, while the USA only recorded an increase of 52.7% and Japan 45.6%. It elaborated that in the dynamic system of the pattern of international division of labor, the positions of different countries are constantly changing. Therefore, developing

1 Historical Evolution of the Pattern …

33

countries have improved their export mixes and positions in the division of labor through participating in the global production networks. Table 1.3 also reflects this change. Newly industrialized countries have possessed comparatively high trade competitive indexes, while the major competitiveness of other developing countries has been still in primary products. The trade advantages of developed countries over developing countries have been gradually narrowed down, but the development in developing countries has been unbalanced with the positions of newly industrialized countries in the pattern of international division of labor superior to that of other developing countries. Newly industrialized countries have already moved out of the stage of mainly exporting primary products, but other developing countries still need to rely on exporting primary products to participate in the international division of labor. It embodies the so-called trio-pattern of the international division of labor. Developed countries’ advantageous positions in current global production networks are challenged to some extent, especially from newly industrialized countries. Newly industrialized countries have absorbed parts of advanced technologies from developed countries relying on the vertical specialization, changed their trade modes of relying on exports of primary products and further transformed towards the direction of occupying advantageous positions in the international division of labor. Generally, developed countries still have occupied absolute advantages in the international division of labor by relying on their capabilities of controlling core technologies and practicing monopoly. Newly industrialized countries only have advantages in assembly production of low valued-added and labor-intensive final consumer goods, and they are still in disadvantage in producing parts and components with high value-added and high technology content.5 In the global production networks, newly industrialized countries, as developing countries, have still relied on processing trade to participate in the international division of labor. Although their trade conditions can be improved, it is still possible for them getting stuck in such labor division without further improvements. Other developing countries, as still positioned in exporting primary products, are in more obvious disadvantages in the pattern of international division of labor. 1. Establishment of the System of International Labor Division of Value Chains and the Continuously Strengthened Outsourcing In the contemporary international division of labor, the nature of outsourcing has become the offshore outsourcing. Developed countries are increasingly outsourcing their production procedures to other countries. Western European countries outsourced their business to former Soviet Union countries in Eastern Europe because workers in these countries have good quality but comparatively low salary. In order to deal with the competition from world markets, Japan also started to outsource business to other countries. India, as a developing country, has become the major and the most successful service outsourcing host country in the world with the total amount 5

Li and Wang (2010).

0.32

−0.08

Consumer goods

Data Source Data sorting based on United Nations Commodity Trade Statistics Database

−0.09

−0.09

0.09

−0.46

0.12

0.05

Capital goods

Finished products

0.06

−0.25

−0.05

0.05

Parts and components

0.01

−0.1

0

Semi-finished products

Intermediate products 0

−0.18

−0.37

Primary products

−0.3

Developed countries

0.55

2010

Developed countries

Other developing countries

Newly industrialized countries

2000

Table 1.3 Trade competitive (TC) indexes of products in different production stages in different types of countries

0.3

0.15

0

0.02

−0.1

Newly industrialized countries

−0.04

−0.53

−0.28

−0.09

0.62

Other developing countries

34 W. Zhou

1 Historical Evolution of the Pattern …

35

Fig. 1.7 Market scale and growth rate of global service outsourcing from 2006 to 2009

occupying 46% of the global outsourcing markets. Data from the National Association of Software and Services Companies (NASSCOM) show that in the 2008– 2009 fiscal year, the sales revenues of Indian IT-BPO (business process outsourcing) reached $58.8 billion, among which, the exports reached $46.3 billion and the domestic sales revenues of IT-BPO reached $12.5 billion. India ranked the No. 1 in the world in term of the scale of undertaking outsourcing in IT-BPO. Although China is a latecomer of service outsourcing business with the occupancy of only 5% share of global markets, China’s service outsourcing markets will maintain an annual growth rate of 26% in future 5 years, based on the prediction of KPMG. As shown in Fig. 1.7, the total volumes of global service outsourcing were $809.91 billion up until 2009, among which, service expenditures on IT were $588.5 billion and business service expenditures were $221.4 billion, which were equal to 1.2 times of that in 2006 respectively.6 The total market scale of global offshore outsourcing of IT services reached $60.3 billion and it will maintain a growth rate of over 15% in coming years. It is predicted that in 2013, the market scale will reach $418.54 billion. Developing countries will undertake more and more service outsourcing from developed countries. This is another industrial transfer after the transfer of laborintensive procedures of manufacturing to developing countries. In 2010, 25% of traditional work in developed countries has been transferred to India, China and Russia-the three countries in BRICS. But among the world top 1000 enterprises, two-thirds of them have not engaged in service outsourcing business. Therefore, this is another broad market for developing countries. Besides the rapid development of service outsourcing, another characteristic of the development of outsourcing is that in recent decade, trade in parts and components has recorded an increase that exceeded the average growth level of world trade by 6

Wang (2011).

36

W. Zhou

a big margin. From 1992 to 2003, the export volumes of parts and components increased from $410 billion to $1040 billion, an average annual increase rate of 14%, while at the same period the average increase rate of world export volumes was only 9%. Statistics on trade in parts and components conducted by Yeats (1998) shows that the scale of global outsourcing of manufactured products exceeded $800 billion in 1995. In the category of machinery and transport equipment, the amount of parts and components produced and exported by developing countries exceeded $100 billion, about 20% of the total amount of international outsourcing business. Molnar et al. (2007), based on the standards of Broad Economic Categories (BEC), measured the scale of international outsourcing in OECD countries. The results show that from 1992 to 2004, the scale of international outsourcing measured by the import volume of intermediate product increased by about 20%. The proportion of outsourcing business undertaken by developing countries rose from 15 to 25%. China and countries in ASEAN and in CEEC are the major outsourcing host countries in developing countries. It is known from these data that multinational enterprises based on developed countries are outsourcing non-core production, marketing, logistics and R&D, even activities out of the main design framework to enterprises in developing countries or specialized companies due to their lower costs. Through such outsourcing activities, an obvious industrial chain structure is formed in the pattern of international division of labor, which will help multinational enterprises cut the cost of fixed inputs. Meanwhile, such outsourcing activities also embody the optimum use of resources as relatively cheap labor resources in developing countries have been used. From the perspective of the value chain of products, the outsourcing process is the one in which multinational enterprises have concentrated their controlled value-added procedures in a few core businesses with comparative competitive advantages, while having outsourced low value-added production and processing to suppliers in less developed countries. A well-known example of outsourcing is the production of parts and components of IT industry. Parts and components manufacturers in global IT industry are mostly concentrated in Asia, especially in East Asia and Southeast Asia. Chips are designed in Japan, manufactured in South Korea and Taiwan (China); common parts and components are produced in Thailand or Malaysia, then all are concentrated in China’s mainland to be assembled into final products and distributed to markets all over the world. For multinational enterprises, such layout is the most reasonable because of the highest production efficiency and the lowest total costs (including logistics cost). As a result, Japan, South Korea and China (including China’s mainland and Taiwan) adding some countries in ASEAN have formed a geo-economy with tighter internal relations. In this value chain, the USA and Japan are responsible for technology R&D, Taiwan (China), Thailand and South Korea are responsible for providing raw materials, parts and components for the value chain, while China and some ASEAN countries are responsible for processing and assembling parts and components into final products and for exporting these products to developed countries. This also explains why China’s exports to developed countries mostly belong to processing trade.

1 Historical Evolution of the Pattern …

37

Outsourcing trade is an embodiment of the intra-product international division of labor which has become the major form of the international division of labor in today’s world. The labor division of the same product in the industrial chains constitutes the main relation of production and division of labor, and starts to affect the ways of most developing countries taking part in the international division of labor. Developing countries are no longer places of origin of raw materials for developed countries like before, but assembling sites for developed countries. The main relation of the division of labor between developed countries and developing countries has been transferred to the division of labor in the same industry chain instead of any preexisting relation. We shall pay enough attention to such relation, and adopt a new perspective to observe the relation between developed and developing countries. 2. Multinational Enterprises Being the Main Body of Contemporary Division of Labor Multinational enterprises occupy a dominant position in the international division of labor and trade. As the leader and organizer of labor division, these enterprises, in consideration of the realization of optimized allocation of resources, search for the optimum location worldwide to conduct production stationing of relevant processes of product value chain according to the characteristics of factor intensity at different production segments. Undoubtedly, these multinational enterprises are different from national governments, but they are able to push forward the further development of the international division of labor, organize and coordinate the international division of labor. Sometimes they even can do something beyond the capacity of a country. With the international division of labor transferring from the inter-industry to the intra-product labor division, multinational enterprises, through their global production networks, integrate global resources into the system of international division of labor, and form a common interest based on the network of labor division. The product value chain is disintegrated in the process of the traditional inter-industry and intra-industry labor division transferring to the intra-product division of labor on different procedures, blocks, segments and processes. Advantages between countries are embodied more on the advantages of a specific process in the value chain. The reason that multinational enterprises can become an important force in the international division of labor lies in the decrease of transaction cost and the resistance posed by the cost on the coordination and labor division. Multinational enterprise is the outcome of a process in which the internalization of an enterprise crosses over a country’s boundary. It makes the international labor division and coordination transforming into the intra-enterprise labor division and coordination to some extent. Thus, the market obstacles and barriers impeding the international division of labor are overcome by multinational enterprises. They make it possible for some inseparable synthetic resources to be found in their value worldwide, and reduce the value losses of invisible assets in the process of market diversion. As multinational enterprises’ roles in the international division of labor become more and more important, the establishment of the intra-enterprise system of international labor division and the development of the intra-enterprise international trade

38

W. Zhou

has become the pivotal characteristics of the current pattern of international division of labor. Multinational enterprises, for avoiding self-competition between their subsidiaries in different countries and building a group of international enterprises with functional complementation, must ask their subsidiaries in different countries to conduct specialized labor division in production and sales. The establishment of the intra-enterprise system of international labor division creates conditions necessary for the development of the intra-enterprise international trade that is the embodiment of the functional complementation between subsidiaries. Through the intra-enterprise international trade, benefits from the discrepancy of economic policies of different countries can be obtained through the means of transfer pricing. Multinational enterprises actually become the core of current international economic activities and the real leading role in the international division of labor. In 2011, the global foreign direct investment of multinational enterprises created added value of $70,000, a tenth of the $69.66 trillion of the total global GDP. Meanwhile, their global sales amount reached up to $28 trillion and their cash reserves were estimated at $4–5 trillion. Their foreign subsidiaries hired a total of 69 million of employees worldwide.7 Multinational enterprises pose a strong impact on the FDI in the pattern of international division of labor. The quantity of M&A with huge amount (transaction values reached over $3 billion) between them went up from 44 in 2010 to 62 in 2011. The rise in quantity also stimulated the value of M&A up by 53% or reaching $526 billion in 2011, which drove the increase of global FDI flows in 2011. In some industries, the global integrated production system leads to more enhanced control of core multinational enterprises or multinational monopoly giants, which enables the current international division of labor to transcend boundaries of industries and countries, and transfer to the intra-enterprise and intra-product division of labor. For example, in the global automobile industry, the market shares of the top 6 vehicle manufacturers were 60%, while the sales amount of the top 16 parts and components manufacturers occupied 40% of that of global markets.8 It is clear that a global system of the automobile industry is under the direct control of these multinational enterprises and is pushed forward according to their wills. For different countries, the international division of labor occurs between final products, while the international trade is the only approach to realize the international division of labor. In the current pattern of international division of labor, when multinational enterprises enter the operational phase of regional integration, or even globalization, their subbranches and subsidiaries will maintain a highly unified connection in their internal systems. According to the comparative advantages of different regions established on the factor intensity, multinational enterprises carry out finer specialization of production and other functional activities. But sales in global markets are still carried out in their systems. Their production and sales systems will form a complete global system.

7 8

UNCATD WORLD INVESTMENT REPORT 2012. UNCATD. WORLD INVESTMENT REPORT 2012.

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As many subsidiaries of multinational enterprises are located in developing countries, multinational enterprises have been the performers of developed countries’ direct investment in developing countries. Their selection will pose an important impact on the economies of developing countries. In China, they are playing an everincreasingly important role. In 2006, China became the third largest recipient of FDI, ranking the first in developing countries. Among the world top 500 enterprises, 470 have already invested in China with major fields concentrated in finance, electronics, communication, computer, and automobile and daily necessities. By the end of 2010, the accumulated amount of foreign investment exceeded $1 trillion. 27,712 foreign-invested enterprises were newly approved for establishment. The actual use of foreign capital in that year was $116.011 billion, a 9.72% increase year-to-year.9 Multinational enterprises have developed their investment strategy in China from the labor-intensive industry in the early 1980s to the mid-1990s to a significant increase of large-scale capital investment. Based on their global strategies, they have mainly invested in the relatively weak capital and technology-intensive industry and possessed obvious competitive advantages in a bid to occupy international and Chinese markets in a long term. 3. Agreed Mechanism of Division of Labor The so-called mechanism of division of labor based on mutual agreements refers to the transformation of contemporary international division of labor from spontaneous type to the type based on mutual agreements. The international division of labor needs not only an international coordination, but also the international coordination which plays frequent and institutionalized role. Since the 1990s, motivated by the in-depth economic globalization, countries have been more reliant on each other and the coordination of national economic policies has been inevitable. The practice of determining domestic pattern of division of labor and trade pattern as well as the opening degree of domestic markets through entering into international agreements has been more and more universal. Various international treaties and agreements have increasingly affected the international division of labor and international trade. The comparatively important international trade agreements include Chiang Mai Initiative, North America Free Trade Agreement (NAFTA) and Marrakesh Agreement Establishing the World Trade Organization. These agreements in a form of legal documents define the pattern of international division of labor in a clearer framework, and promoting the in-depth development of this pattern. It promotes the transformation from a spontaneous international division of labor to a mutually agreed international division of labor. The spontaneous international division of labor refers to a pattern that is formed by relying on the free competitive mechanism between countries and the inherent laws of economic activities to accomplish spontaneous adjustment, while the mutually agreed international division of labor refers to a pattern in which the flow, route and structure of imported and exported commodities between countries are determined in line with bilateral or multilateral agreements signed by governments. The latter pattern is universal in the 9

Wei et al. (2012).

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current international markets.10 The perfectly competitive markets are not available in the world. Countries and governments play vital roles in the pattern of international division of labor. The spontaneous international division of labor is the outcome of free markets, while the participations of countries and governments in adjusting the pattern of labor division will lead to the agreed international division of labor. It is the inevitable result of the in-depth development of the pattern of international division of labor. The mechanism of an agreed division of labor mainly manifests in the emerging of international economic organizations emerged in the process of international division of labor and the world economic development. The development of productivity and labor division need a coordinated mechanism adaptive to productivity as a guarantee for market effective running. In the theories of Classical Liberalism, the market is the most effective mechanism to coordinate the division of labor. But in reality, the market is not enough to play the whole role, therefore, certain agreements are needed to ensure the efficiency of market running. In the pattern of international division of labor, participants usually distinguish each other from sovereignty and state border. When the development of labor division calls for economic activities surpassing the range of domestic markets, suitable rules to regulate market participants in global range are also needed. This is the major important reason for the emergence of bilateral or multilateral agreements. These agreements are also an important part of economic globalization. 4. Emergence of Regional Economic Group The development of productivity and the deepening of social labor division have led to the development of economic groups of states. Member states of regional economic groups have mutually opened markets and realized trade liberalization. The result of the development of regional economic groups is the emergence of comparatively independent regionalized international markets and the establishment of international division of labor system within the region. The emergence of regional economic groups of states makes every member state join in the more specialized pattern of labor division. Regional groups of states, as integration, can take part in the pattern of international division of labor to achieve the optimized allocation of production factors not only inside the groups of states, but also in bigger international markets. The important reason for the emergence of the regional economic groups of states lies in that under the condition of contemporary international division of labor, the regional mobility of factors shall be enhanced for the purpose of improving the efficiency of resources allocation. Certain factors within certain regions shall be allowed to flow freely. Although the mobility of production factors in the world range is much less limited, international markets are divided to some extent due to the existence of national boundaries. Moreover, policy differences among countries still block factors circulating in the world range. However, regional integration can solve the problem to unify markets step by step. Regional integration provides sufficient 10

Wen (2001).

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Fig. 1.8 FDI input of major countries and EU (unit billion US dollars)

conditions for the flow of factors, realizing the scale economy within the region and releasing those factors constrained by specific purposes into broader and open circulating spaces. Thus, costs occurring in international trade are cut. Meanwhile, the emergence of regional economic groups of states is also related to trade barriers and trade frictions. In order to fight against trade barriers and trade frictions of other countries, countries with close geographic position or complementary industrial structure will form a group engaging in international trade to strengthen their economic connections and fight together against other countries’ trade policies. Internally, the tariff level is comparatively low so that trade liberalization can be realized; externally, national power can be united for the maximization of interest. European Union (EU) is a typical example of the regional economic group of states. It has played an increasingly important role in the system of international division of labor. Measured by the FDI inflow, EU has become the largest economy in the world. As shown in Fig. 1.8, the annual average value of global FDI outflow was $1.2955 trillion, and for European countries and European Union, it was $737.2 billion and $666.4 billion respectively, which means that the outflow of European Union occupied 51.44% of the world amount and 90.4% of the amount of the whole European countries.11 EU has been a vital part in the world economic system. Economic groups of states formed by countries with complementary or similar industrial structure are beneficial both for participants and the global division of labor, but problems such as unfair benefits distribution within the regional economic groups of states still exist. Research on some regional economic groups of states in Africa conducted by Yang and Zhang (2011) proves that as the liberalization level of trade and investment among member states of South-to-South regional economic groups of states is quite low, the institutional arrangement for economic integration has not promoted the economic growth of member states. Developing countries shall consider it when joining in regional economic groups of states. 11

Yao (2011).

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5. In-Depth Development from Production of Tangible Products to Intangible Products With the continuous development of productivity, the tertiary industry has played an ever-increasingly important role in every country and economy. Produced products in previous international division of labor were all tangible products. But the international trade in intangible products has already been a pivotal link in the pattern of international division of labor as service trade and technology trade have developed rapidly. After signing the General Agreement on Trade in Services (GATs), countries in the world, particularly developed countries, have paid more attention to the service trade and technology trade. The rapid development of the service industry has become the current trend of the international economic development. The tertiary industry will replace the secondary industry to become the pillar industry. The international competition among intangible commodities and services will become increasingly fierce. In the pattern of international division of labor, intangible products and services will gradually become the major circulating commodities. The emergence and rapid development of the international division of labor in the service industry is the outcome of the upgrading of world industrial structure. The international trade has facilitated the cross-border provision of services, and also promoted the development of local service industry, and then an international division of labor in service industry has been gradually formed. Thanks to the industrial upgrading driven by the economic growth of each nation, the world industrial structure has undergone large-scale adjustments, resulting in larger demand for the service industry. Therefore, the global trade volumes of the service industry have the potential for a rapid growth. The service industry is composed of three parts, including transportation industry, tourist industry and other kinds of trade. Before the 2nd World War, the main item of the service industry was the export of labor. After the 2nd World War, with the completion of the third Industrial Revolution, telecommunications, finance, transportation, tourism and various information industries as well as knowledge technology have undergone rapid development. As a result, the service industry has quickened its step to expand towards these fields. The service trade has enjoyed an ever-higher degree of liberalization with continuously expanded range, as well as ever-higher status in world trade since the 1970s. The volumes of world trade service totaled $71 billion in 1970, while the volumes soared up to $383 billion in 1980, over 5 times increase in 10 years. As shown in Fig. 1.9, since 1980, the international trade in service has maintained an average annual growth rate of about 5%, which was twice the average growth rate of trade in goods during the same period. The volumes of international trade in service reached $1.9016 trillion in 1993, occupying over one-fourth of the total volumes of world trade. The volumes of international trade in service reached $7.2037 trillion in 2010. In the labor division of intangible trade, the intangible capital such as brand and reputation has played a bigger role. The trade in services and in goods has essential differences. The trade in goods is mainly the change of ownership, while the trade in services is a promise and an implementation of an economic contract or social

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Fig. 1.9 Import and Export Volumes of World Service from 1980 to 2010 (unit hundred million US dollars)

contract. The degree of customer satisfaction is a decisive factor for the competitiveness of the service trade. Services are also a kind of goods, the intangible ones, while physical goods can give direct sensory stimulation. In the context of economic globalization, cross-border banks and companies in telecommunications, consultation, transportation and logistics in developed countries are far more competitive than those of the same industries in developing countries, thus they have occupied dominant positions in the labor division of international service industry. Although developing countries have had a smaller scale of the service trade than that of developed countries, they have recorded a significant increase in the scale of their service trade since the 1990s. Asia, especially East Asia, has seen an extraordinary growth in service trade. Recently, the field of export in developing countries has been expanded. For example, Singapore has comparatively strong competitiveness in medical care, data transaction and financial service, while South Korea has already been one of the leading exporters of construction project contracting services in the world. Under the trend of rapid development of national engineering projects and the acceleration of technology revolution, developing countries have taken advantage of their cheaper but skilled labor forces and joined in the competition. Developing countries have also actively been taking part in the import of services. As shown in Fig. 1.10, China’s service trade has achieved rapid growth since 2000, and only recorded a certain degree of declining in 2008 due to the financial crisis. Up until 2010, the total trade volumes reached $362.4 billion. Although China’s share in world service trade is still low, the service trade, or the trade in intangible goods has already been an important form for China to participate in the international division of labor. Although developing countries have found their places in the international division of labor of intangible products, developed countries are still the main traders of intangible products. As shown in Fig. 1.11, according to the statistics of the total volumes of service trade in 2010, the USA became the largest country in service trade

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Fig. 1.10 Service import and export volumes of China from 1982 to 2010 (unit hundred million US dollars)

Fig. 1.11 Total volumes of service trade of major countries in 2010 (unit hundred million US dollars)

with nearly $900 billion of total volumes, while China ranked the fourth. Developed countries are still the main exporters of service trade. Developing countries have made progress in the service trade, but they are still in disadvantage compared with developed countries.

References Feng, Yanli. 2004. On the status of developing countries in the contemporary international division of labor [J]. Productivity Research (01). Gao, Yue, and Feng Gao. 2005. Vertical specialization and China’s trade status [J]. Journal of International Trade (03).

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Guo, Bingnan. 2011. The research on the economic effects of China’s participation in international vertical specialization [J]. (Shanghai, East China Normal University Business School). Guo, Bingnan, Jiwen Liu, and Chunlin Cheng. 2011. Vertical specialization and economic growth of China—based on the comparison of general trade pattern [J]. Journal of Yunnan Finance and Trade Institute (02). Gu, Shugui. 2003. Vertical specialization and developing countries’ economic globalization—also on limitations of the East Asia model [J]. Journal Nanjing of University (Philosophy, Humanities and Social Sciences) (02). Hu, Chunli. 1990. Vertical specialization and Southeast Asian financial crisis. [J]. Macroeconomics (01). Hu, Chunli. 1990. Vertical specialization and Southeast Asian financial crisis [J]. Macroeconomics (01) Hu, Shaoling. 2007. Analysis on the impact of the intra-product specialization on productivity of china’s industry [J]. China Industrial Economics (06). Han, Zhongliang. 2011. Cost Transfer and Tragedy of International Trade [J]. Economic Science (04). Hou, Zengyan. 2009. Decisive factors of the intra-product specialization and trade—based on analysis on the combination of trade theories with the imperfect contract theory [D]. Tianjin: School of Economics, Nankai University. Li, Shengming, and Yueping Wang. 2010. Positions of different types of countries under the new pattern of international division of labor [J]. International Economics and Trade Research (06). Liu, Zhongli, Jing Chen, Sen Somnath, and Xuefei Bai. 2009. Research on the vertical division of labor and technological gradient in East Asia [J]. World Economy Studies (6). Song, Hongjun. 2011. Analysis on the impact of intra-product specialization towards trade surplus in China [J]. Journal of Capital University of Economics and Business (02). Sun, Wenyuan, and Yu Pei. 2012. Analysis on the effects of international intra-product specialization on income inequality [J]. East China Economic Management (01). Wang, Kun. 2010. Vertical specialization, cost advantage and the competitiveness of chinese industry [J]. Journal of Lanzhou Commercial College (05). Wang, Xiaohong. 2011. Development status and new trend of global service outsourcing [J]. International Trade (09). Wang, Zhonghua, and Junwei Lian. 2011. Vertical specialization, trade increasing and welfare effects—a study based on China’s Industrial Data [J]. Journal of Capital University of Economics and Business (04). Wei, Zili, Yue Qi, and Yuan Feng. 2012. The development of multinational companies in china and the prediction of development trend [J]. Foreign Investment in China, (8). Wen, Taipu. 2001. Changes of contemporary international division of labor and sources of competitive advantages [J]. Economists (07). Wen, Dongwei. 2011. Economic scale, technological innovation and vertical specialization [J]. The Journal of Quantitative and Technical Economics (08). Yang, Xiyu. 2001. On the international vertical and horizontal division of labor in the process of economic globalization [J]. China Economist (02). Yao, Xiao. (2011). Analysis on foreign trade development states of EU countries [J]. Heilongjiang Foreign Economic Relations and Trade (11). Yang, Yong, and Bin Zhang. 2011. Growth effects of south-south RTA—evidence from Africa and implications to China [J]. Journal of International Trade, 2011 (11). Yin, Baoqing. 2012. On wage effect of vertical specialization-based on the empirical analysis on the data of manufactures in Zhejiang province. Enterprise Economy, (04). Zhang, Erzhen. 2003. Commentary on the development of the division of labor theory in international trade [J]. Journal Nanjing of University (Philosophy, Humanities and Social Sciences) (01).

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Zhang, Ji. 2007. Research on the intrinsic cause of intra-product specification—theoretical model and empirical research based on panel data of Chinese Provinces [J]. The Journal of Quantitative and Technical Economics (12).

Chapter 2

Motive Mechanism of the Evolution of the Pattern of International Division of Labor Chengping Sun

2.1 Analytical Perspectives of International Division of Labor During its evolution in the past two centuries from the Industrial Revolution and the establishment of mass production of machines till now, the international division of labor has experienced four major forms, transforming from the inter-industry division of labor between conventional manufactured products and agricultural and mineral products (primary products) to the intra-industry division of labor among different product sectors within an industry, and further deepening to the intra-product division of labor among different value-added segments in value chains of a same product, and finally shifting to the deepening and spiraling-up process (as shown in Fig. 2.1) of labor division in modern industry between the service and manufacturing industry. In total, the four forms include the conventional inter- and intra-industry labor division, the labor division of value chains and the labor division of modern industries. Based on the formative motives (bases) of different types of international division of labor, different theories on the international division of labor have been formed according to different analytical perspectives. 1. Theory of International Division of Labor under the World-System Perspective “World-system perspective” refers to the practice that regards world production systems as a whole to observe in a bid to find out the changing laws of the system when analyzing the pattern of international division of labor. The World-System Theory was developed on the basis of the Dependence Theory. In the 1970s, Immanuel put

C. Sun (B) Institute of Industrial Economics of Chinese Academy of Social Sciences, Beijing, China © Social Sciences Academic Press 2022 B. Jin and Q. Zhang (eds.), The New Trend of Global Industrial Division of Labor and China’s Responses, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-5674-4_2

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Fig. 2.1 Evolution process of contemporary international division of labor

forward the “World-System” Theory which takes the world systems as an analytical unit and the “core-semi-periphery-periphery” as the basic structure, and developed the Dependence Theory (Immanuel 1999). From the views of scholars of the World-System Theory, the capitalist world system formed in the sixteenth century was the first system with fully developed market trade and everything dominated by economic forces. In this system, different districts performed different economic functions. Thus, a tertiary structure of the world system was formed. The top is the core countries engaging in producing various high-tech products with high profits, and enjoying high salaries; the bottom is the periphery countries mainly producing low-profit and low-technology products with fewer types, and having lower salaries; the middle is the semi-periphery countries which are positioned between the core and periphery countries with a duel role acting as exploiters and the exploited. The tertiary structure of the world system avoids possible sharp conflicts caused by polarization and consolidates the world system. The position of every country in the world system may be changed. Core country may decline to the semi-periphery countries, while the periphery countries could level up to the semi-periphery ones and the semiperiphery ones to the core ones. The structure of the capitalist system always changes with ups and downs, but not all countries can develop at the same time into the core countries with strong national strength and people in wealth. Unlike the view that trade is beneficial to both parties of exchange argued claimed by Free Trade Theory, the World-System Theory argues that the fundamental motive for the development of the capitalist world system lies in the existence of inequivalent exchange and exploration. 2. Theory of International Division of Labor under the Market Perspective “Market perspective” means that the logic starting point for analyzing the international division of labor is to recognize the existence of cross-border “free market”

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and the benefits of labor division brought about by absolute cost variances, comparative cost variances, resources endowment and factors endowment between countries can be realized through the “market mechanism”. Important representatives of this school of theory related to the international division of labor include Quesnay, Say, Smith, Ricardo, Heckscher, Ohlin and Dixit. Quesnay (1694–1774) (1979), the first to propose the concept of “general free trade” (List 1997), argued that merchants of all countries belonged to one commercial republic, which is the vital basis for the necessity of the international division of labor. Say (1767–1832) (1963) further elaborated this concept in his Practical Political Economy. Smith and Ricardo further explained the theoretical basis for the implementation of labor division and trade in different countries. Smith’s contributions included the Absolute Advantage Theory and the proof of “the division of labor is limited by the extent of market” (Smith 1972). Targeting at Smith’s Absolute Advantage Theory, Ricardo (1772– 1823) pointed out that the international division of labor and international trade are not only determined by countries’ absolute difference in production costs, but also by the comparative difference in production costs (Ricardo 1976). Heckscher and Ohlin deepened and expanded Ricardo’s theory to a larger extent and proposed the H–O Theory/HOS Theory, the important conclusion of which is the Factor-price Equalization Theory which argues that with the development of international trade, the comparative prices of factors each country possesses will tend to be equal. But Neo-Ricardians economists proposed a return to the traditional Ricardo Theory. They proposed using Ricardo’s Comparative Advantage Theory to explain international trade and the international division of labor. The new trade theory of Dixit-Stiglitz (Dixit and Stiglitz 1977) also belongs to this school of theory of international division of labor. The new trade theory focuses on the discussion about the impacts on the international division of labor and trade formed in the conflict process of the dilemma between economies of scale and diversified consumption. 3. Theory of International Division of Labor under the Country Perspective “Country perspective” means that when analyzing the international division of labor, the core concept is “national interest” and the fundamental content is how to take advantage of national sovereignty to affect a country’s way, degree and tactics of participating in the international division of labor. List (1789–1846), the important representative of this school, argued that “Smith’s Theory described self-interest and world interest, but failed to mention national states. In fact, it took advantage of individual to destroy countries and let England control the world.” He thought that Smith’s Theory wrote off the principle of state and national interest, even completely denied the existence of state and national interest. “A mediator or coordinator exists between self-interest and world interest. It is the national state”. “Individuals mainly rely on states and acquire culture, productivity, safety and prosperity within the range of a state. Similarly, it is imaginable and possible for human beings’ civilizations only on the basis of every country’s civilization and development.” (List 1841, Ch15). He claimed that states must play a leading role in participating in the international division of labor. He divided the national development into five periods: primitive uncivilized period, animal husbandry period, agricultural period, agricultural and

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industrial period and agricultural, industrial and commercial period, while dividing the order of participation in the international division of labor into three stages. The first stage: participating into international industry-agriculture trade with agriculture. “A country shifts from the primitive uncivilized period into animal husbandry and agricultural periods, and further into the primary developing period of industry and maritime business”, “the quickest and beneficial way to realize this shift is to conduct free trade with advanced cities and countries”, “exports of agricultural products and imports of industrial products” can make a country breaking away from the uncivilized condition and acquire the development of agriculture. The second stage: protecting domestic trade. List argued that when a country is fully developed in agriculture, industry, society, politics and internal affairs while still exchanging with foreign countries for industrial products using its agricultural products and raw materials, then its higher level of development in these areas, the less benefits gained through the international trade and used in the improvement of domestic social conditions, and the more damages they will suffer in the competition with advanced countries with comparative advantages. It needs to adopt policies to limit international trade to promote development of domestic industry. The third stage: backing to international trade, which means that when a country is increasingly improved in national spirits, material capital, technical skills and pioneering spirits, then the country is already strong in industry and has no reasons of being afraid of competition with foreign countries, so it shall back to the pattern of international division of labor. 4. Theory of International Division of Labor under the Enterprise Perspective “Enterprise perspective” refers to the focus of observing the impact of “intraenterprise division of labor” and “enterprise mechanism” on the international division of labor. Hymer is an important pioneer of this school of theory. In his paper with pioneering spirits, Hymer inquired into the conditions for multinational enterprises to strike a balance between their domestic and foreign investment risks, to shift from participation in domestic labor division to international labor division, and realize the “firm specific advantages” (Hymer 1960). Hymer’s demonstration method is called the “incomplete market analysis”. Vernon put forward the Product Life Cycle Model and used the approach of incomplete market analysis to expound how multinational enterprises adjust their strategies of international division of labor according to the nature of product market (Vernon 1966). The views of Hymer and of Vernon were criticized by Kiyoshi Kojima. He argued that Hymer’s Monopolistic Advantage Theory and Verson’s Product Life Cycle Theory were established on the basis of monopolistic advantages and only suitable for explaining the foreign investment behaviors of the USA-type multinational enterprises without general significance. He pointed out that the existing theories related to multinational enterprises neglected the analysis on macroeconomic factors, especially the effects of the principle of international division of labor. By applying Heckscher-Olin’s resources endowment theory, he analyzed the foreign direct investment in Japan and put forward the Theory of Marginal Production Expansion which argues that foreign direct investment shall be carried out

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successively starting from the marginal industries—industries already or wouldbe in comparative disadvantage in the investing country. The capital-intensive and technology-intensive industries, due to their high technology content, shall be organized production within the country. Thus, the foreign direct investment can expand the comparative cost gap between the investing and invested country, and create new comparative cost advantages for the investing country to expand the exports of intermediate products with comparative advantages as well as the foreign trade of the investing country. The less the technology gap between the investing and invested country is, the easier for the implantation, popularity and consolidation of technology transfer as a result of the foreign direct investment. The potential advantage of the investing country is explored, and the gap of comparative cost between the two countries is widened, therefore, more international trade chances are created. Dunning is an important thinker of this school of theory. The Eclectic Paradigm he proposed is an integration of all existing theories of international division of labor under enterprise perspective, involving main branch theories such as the Monopolistic Advantage Theory (Hymer 1960), the Internalization Theory (Buckly and Casson 1976, 1988; Rugman 1980), Location Theory, Theory of Investment Development Path (Dunning 1981). Dunning laid special stress on analyzing the impact of three advantages of multinational enterprise on the international division of labor. They are ownership specific advantage, internalization incentive Advantage and location specific advantage respectively. 5. Theory of International Division of Labor under the Perspective of Individual Division of Labor The New Classical Microeconomics created by Yang Xiaokai and Huang Youguang innovated Marshall’s formalized Classic Economics (1920) by using “individuals both consumers and producers” to replace “pure consumers and producers”. This kind of replacement went through their theory of labor division. From this point, we categorize the New Classical Economics into the theories under individual perspective. This conclusion also can be reached from the frameworks of other theories of division of labor. The first tier: the analysis on individual skills, preferences, initial distribution of endowments and game rules; the second tier: individual decision of labor division under the condition of the first tier; the third tier: a balanced result formed under the interaction of individual decision of labor division; the fourth tier: the welfare significance of this balance. The above four tiers are all based on the individual perspective. This theory tried to provide an integrated explanation for the domestic and international division of labor (and trade) from the angle of transaction efficiency, and demonstrated how the improvement of labor division level led to the emergence of endogenous comparative advantages, then to the income disparity; in this process, the international trade conditions of less developed countries may become worsen, but their benefits from the division of labor and actual average income per person will go up (Cheng et al. 2000). Based on the combing of theories of international division of labor, it is known that the main forces pushing forward the pattern of division of labor embody in five aspects: the decomposability of products; the difference of factor input intensity at

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different processes; the improvement of transaction efficiency and the decline of transaction costs brought by technologies in communication and transportation and trade liberalization; the effects of a scale economy; and the effective organization and implementation of multinational enterprises worldwide.

2.2 Forces Affecting the Evolution of the Pattern of Division of Labor 1. Forces Pushing Forward the Evolution of the Pattern of Division of Labor (1) The Decomposability of Products. From the perspective of the product architecture, products can be divided into two types: modular architecture and integral architecture. As different product architecture means different decomposability, the possibility of cross-border production could be considerably varied. In the two types of product architecture, products with modular architecture are commonly applied in the intra-product international division of labor. Typical examples include computer, its parts and components as well as various electronic products. An important reason for this lies in the natural property of these products which makes it possible for these products to be decomposed into standard modular parts. Then these parts are dispersed to different countries and regions for production and final assembling. For example, the entire production process of the fifth generation of Apple is dispersed to countries and regions such as the USA, Japan, South Korea, Taiwan (China) and China’s mainland. As products with integral architecture cannot be decomposed into standard parts like products with modular architecture, their cross-border and cross-region production may be limited to a certain extent. But it is not totally impossible for some products with integral architecture to adopt the form of intra-product division of labor such as various machine tools which can be produced in different countries and regions in the world. However, the model and organization structure of the division of labor corresponding to the two types of product architecture are differentiated with each other. As a result, the natural property of product architecture determines the difference in decomposability, which results in significant differences in the product’s possibility, intensity and depth of its participation in the international division of labor. The decomposability of architecture is the prerequisite and the fundamental factor determining the possibility of the intra-product division of labor. (2) The Difference of Factor Input Intensity at Different Production Processes. The H–O Theory holds that if a country has comparative advantages in producing products with heavily endowed factors, then the country shall export such kind of products and import products produced with its scarce factors. Similarly, in the intra-product division of labor, a whole product is usually separated into different production processes according to

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the value-added situation of each process, while different processes possess the characteristic of different factor intensity. For example, design, R&D, sales and branding in the upstream and downstream processes belong to technology-and-knowledge-intensive type, while processing and assembling in the intermediate processes belong to labor-and-capital-intensive type. A significant factor input difference exists between the two types. As the intra-product international division of labor is more subdivided and deepened, the degree of specialized production of intermediate products will be leveled up, and the input factors in the production of intermediate products will be more specialized. On one side, due to the advantage of factor heterogeneity, a country has the advantage in a certain production procedure and will specialize in this procedure in the international division of labor. On the other side, due to the property of a specific technology, different procedures of production processes will possibly have different effective scales. The larger difference of the effective scales between different procedures is, the more possible for saving costs and improving efficiency through domestic or the intra-product international division of labor. If the effective scales corresponding to different production blocks have a significant discrepancy, then even if adopting Ford’s early production mode with space centralization and integrated production, the effective scale of individual key segment has to be taken as the design scale for the whole production system, therefore, other segments with bigger effective scales cannot fully obtain the effect of a scale economy. The intra-product international division of labor provides an approach to get rid of this limit. Through the intra-product international division of labor, blocks corresponding to different effective scales are separated out and arranged to different space and locations for production. Therefore, the goals of saving average costs and improving the efficiency of resources allocation are achieved. In fact, it is possible for different procedures not only having the discrepancy of a scale economy, but also having the discrepancy of factor input ratios. Generally, the factor input ratio of a specific procedure determines the different countries engaging in the intra-product international division of labor. As a result, the intra-product division of labor dominated by multinational enterprises can allocate different production segments to countries and regions with different factor endowments for the purpose of realizing the optimized allocation of production. Grossman and Helpman (2002) argued that if the difference of factor intensity between these countries (regions) disappears, or different countries (regions) have realized the equalization of factor prices without cost variances, then there is no reason for the existence of intra-product division of labor. It is proved by experience and facts. For example, in producing Apple’s products, China with laborintensive factor undertakes the processing and assembling segments, while South Korea and Japan with technology and capital-intensive factors undertake the production of key parts and components, and the USA undertakes the R&D and partial selling channels.

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(3) Improvement of Transaction Efficiency and the Decline of Transaction Costs. The transaction cost is divided into endogenous and exogenous ones. As it is not easy to measure the endogenous transaction cost, it is generally the exogenous transaction cost to be analyzed. That is, to analyze the transportation cost and information cost in transactions as well as the impact of trade barriers on the intra-product division of labor. As the transportation vehicles have been developed, especially the great improvement of shipping technologies and the capacity of international freight, the costs of crossborder logistics in the intra-product division of labor have declined significantly. Lall, Albaladejo and Zhang (2004) held the view that the difference of factor intensity of different production segments is the resulting cause for the emergence of the intra-product division of labor in different industries. Only when the saved production costs from the low-price factors are enough to offset the transportation expenses and coordination expenses, the intra-product international division of labor is profitable. Obviously, under the condition of unchanged comparative prices of factors, only the decrease of transportation costs is possible for promoting the intra-product division of labor. Jones and Kierzkowski (2000, 2004) argued that the advances of science and technology and the declining of trade service costs (mainly including communication, transportation and financial services) lead to the fragmentation of the vertically integrated production processes into mutually independent segments which may enter international markets. The decline of transportation cost in international trade is mainly from two aspects: the decline of ocean transportation cost and the improvement of transportation quality, especially the substantial drop in transportation expenses and the saving of transportation time for bulk commodities; the decline of air transportation cost provides a new means for international trade. The ocean transportation cost dropped about 70% from the early 1980s to the mid-1990s. The efficiency improvement of contemporary ocean transportation is not only manifested in the decline of cost, but also in the improvement of quality. The improvement of transportation quality means the speed is accelerated, the procedure is convenient and the breakage rate slumps. The main reason for this lies in the rapid growth of the volume of international seaborne cargoes in containers. The proportion of the volume of containerized cargoes in the total seaborne trade increased from 12 to 14% in the 1960s to the current around 23%. The container transportation method starting from the late 1960s doubled the average speed of ocean shipping vessels. In 1998, the average shipping time per ocean transportation decreased to around 20 days. The second aspect is the decline of air transportation cost. As the unit cost of air transportation decreased by about 90%, the transportation of international cargoes has increasingly relied on air transportation, among which the special express service (such as overnight or two-day delivery) is growing rapidly.

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The slump of the air transportation cost promotes the labor division of international procedures. The transportation of parts, components and intermediate products produced in different procedures of international division of labor tends to use air transportation possibly due to two reasons. Firstly, in order to ensure the stability of production operation, manufacturers need to deal with the possible disturbances in production processes with stocks. Although disturbances occur randomly, the average occurrence rate has a positive relation with the transportation time of cargoes supplied by upstream and downstream suppliers or processors. As the vertical specialization needs to connect different production blocks through global supply chains, the distance of internal transportation is very long. If the average occurrence rate of disturbances is positively connected with transportation time, it is the same between the cost of inventories and the average occurrence rate of disturbances. As faster transportation can save more inventory costs, the “time difference” in the transportation of these parts, components and intermediate products may very likely replace the “price difference”. Therefore, when the price and time difference between air transportation and other means of transportation are set, it is more possible to select the air transportation. Secondly, as most vertical specialization products are manufactured products which have a comparatively high depreciation rate due to the quick change of terminal markets, shortening the transportation time is beneficial for saving the depreciation cost. Therefore, it is more possible to select the means of air transportation. Thirdly, the cost of information exchanges decreased. The contemporary information revolution and the slump of the information exchange cost enable multinational enterprises to connect global factories engaging in different procedures with a comparatively low communication cost. Thus, the coordination between different factories is enhanced and the development of vertical specialization is enormously pushed forward. The progress of information technologies makes it possible for multinational enterprises to deal with and analyze large numbers of data to strengthen the management of their global production networks. Through the Electronic Data Interchange (EDI) System, the daily transaction is dealt with automatically, so the purchase cost is greatly decreased. Meanwhile, information technologies also greatly lower the cost of searching and evaluating potential suppliers. Additionally, the deepening of economic globalization and agreements entered into through free trade negotiations greatly push forward the degree of global trade liberalization, which is a fact that cannot be ignored. The obvious decrease of cargo trade barriers is also an important factor in promoting the implementation of the intraproduct division of labor globally. For example, GATT/WTO, serving as multilateral organizations, organized multilateral negotiations which made the average tariff on manufactured products in developed countries dropping from around 40% to the current 3–4%. With the successive entry of more developing countries such as China and Viet Nam, the liberalization degree of cargo trade has been improved, which have significantly promoted

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the formation of the intra-product division of labor. Hummels et al. (1998, 1999, 2001) held the view that the reason that the intra-product division of labor is spread over quickly lies in the continuous reduction of trade barriers (including tariffs and transportation costs), which stimulates multinational enterprises to allocate production procedures with different factor input proportions to different countries and regions. (4) Effects of a Scale Economy. Due to the difference of technical properties, different production segments and procedures commonly have varied effective scales or the optimum production scales. The bigger such difference is, the more possible for adopting the intra-product division of labor. If all production segments (procedures) are concentrated at one enterprise, then the production must follow the optimum production scale of a certain segment (procedure), which results in the impossibility of realizing the optimum production scale of all segments (procedures) and generating the effects of a scale economy. If production segments (procedures) with different production scales are separated out through the international division of labor and arranged to different space for production, then it is possible to reach the optimum production scales of all segments (procedures). In practical applications, typical examples include the existence of obvious scale economies in the production of parts, components and terminal products in clothing, electronic and automobile industry. Krugman (1995), through his research on the effects of external economies of scale, industrial relevance and strategic complementation, proved that the division of labor has important impacts on the expansion of industry scales and the realization of increasing returns to scale. Allyn Young (1928) argued that the division of labor can realize the specialization of management to a higher degree, promote a better geographical distribution of industries and fully realize capitalization and the roundabout method of production. Stigler (1975) explained the increasing returns of scale generated by the division of labor from the angle of industry life cycle, and held the view that as a young industry is strange to existing economic systems, its required new materials and specialized equipment must be designed and made by itself. When the development of the industry reaches to a certain scale, the above work will be transferred to specialized factories, and then the industrial scale is expanded. (5) Improvement of Technological Innovation Capability. Countries’ efforts in accelerating the accumulation of knowledge and the remodification and innovation of production equipment, transportation and communication tools will promote the international division of labor. Becker and Murphy (1992) argued that the division of labor is determined by the quantity of knowledge mastered by workers. More experts have contributed to the increase of social knowledge and national progress, improved the benefits from knowledge investment at the same time, and realized sustainable economic growth. Sheng Hong (1994) held the view that the division of labor and specialization provide a prerequisite for the adoption of machines

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in mass production and force people to design and develop new machines and equipment. They not only improve the labor productivity of industries, but also promote the formation of the production of new machines and equipment into an independent field of division of labor. (6) Development of International Direct Investment. In 1960, Hymer put forward the view that the Monopolistic Advantage Theory could embody the advantageous position of developed countries in the international division of labor. In the mid and late 1970s, Kiyoshi Kojima’s Comparative Advantage Investment Theory elaborated the investment based on the vertical division of labor between developed and developing countries. In the 1960s to 1970s, Vernon’s Product Life Cycle Theory elaborated the gradient transfer of enterprises’ foreign direct investment under the condition of the international division of labor. He argued that when products enter standard stages, developing countries’ low cost advantages would become the optimum areas for investment. (7) Organization and Implementation of Multinational Enterprises. The evolution of international division of labor is pushed forward through the effective organization and implementation of multinational enterprises. In the process of deepening international division of labor, multinational enterprises have played ever-increasing bigger roles. Their foreign investment and trade have strengthened the international economic connections. They have conducted optimized allocation of resources worldwide, gradually involved the production and operation activities of enterprises in different countries into their own internal management activities, and prompted the vertical, horizontal and mixed division of labor to coexist and develop together. Firstly, multinational enterprises need to find out and take advantage of various information. After screening information, they will select countries and regions worldwide to realize the most effective production at different segments (procedures). This is closely related to the decline of transaction costs and factor endowments of different countries and regions; secondly, they need to divide the different segments (procedures) and formulate comprehensive technological standards so as to provide convenience for the connection of each segment (procedure). This is related to the decomposability of products; in the end, they need to play the role of integrating resources and coordinating production networks so as to effectively organize each segment (procedure) in the whole production networks. This is the result of the decline of coordinating costs brought by communication and transportation technologies. The involved management and coordination costs in this kind of global production are the pivotal factor affecting multinational enterprises’ efforts in effectively organizing the international division of labor. Therefore, as organizers and implementers of the international division of labor, multinational enterprises, in the process of resources allocation worldwide, will blur, or even break up traditional boundaries between enterprises.

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Other factors also have the promotion effect on the formation of international division of labor such as industrial policies of each country besides the above-summarized forces. Kimura and Mitsuyo (2003) analyzed the reason that Japanese enterprises could achieve great successes in the formation of East Asia International Production (Distribution) Network, while Latin American countries did not establish important industrial clusters and formed effective differentiations of vertical production chains. He pointed out that a key reason lies in the fact that China and countries in the ASEAN implemented export-oriented development strategies in the 1990s, and formulated a series of industrial policies which were beneficial for investment and industrial agglomerations, and attracted foreign investors to set up international production (distribution) networks in their countries. Lall, Albaladejo and Zhang (2004) also held the view that the important reason that East Asian countries could overpass countries in other regions in the global production networks lies in their industrial policies as well as the promotion effect of policy coordination for multilateral trade. 2. Factors Impeding the Evolution of Global Division of Labor (1) Lock-in Trade Division Pattern. Krugman (1987) firstly and clearly proposed the view that developing countries are locked in the production with low technology level in the division of labor in international trade. Lucas (1988) further pointed out that as the initial factor endowment will lock the trade model, therefore, developed countries with higher initial knowledge stocks will obtain faster technology progress and the increase of incomes than developing countries in the dynamic equilibrium. Stokey (1991b) held the view that due to the lock-in effect of producing lowquality products in developing countries in international trade, developing countries tend to import, not try to produce high-quality products. Therefore, this is a factor restraining the evolution of global division of labor. Young (1991, 1993) elaborated through the introduction of “Product Life Cycle” that the international industrial transfers in open economies and the product life cycle cause stages with stronger learning-by-doing effects positioned in developed countries, while the standard stages with weaker effects transferred to developing countries, therefore, developing countries only obtain limited technology progress in this process. Grossman (1990, 1991a), Matsuyama (1992), Lucas (1993) and Mano (2003) all held the view that although trade will push forward the technology progress in developing countries (compared with closed economies) through approaches such as imitation and spillover, from the perspective of a long-term development process, open economies will intensify the backward comparative advantage of less developed countries, prompt them in specialized production of low technology content and low-quality products, and then restrain their longterm technology progress, which further impedes the dynamic evolution of the global division of labor.

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(2) Constraints on Transaction Costs. Constraints on cross-border transaction costs in specialized division of labor include international trade tariffs and non-tariff barriers set up by countries. In vertical specialization, as there are several times of entry and exit of products through customs, therefore, even a slightly higher tariff will possibly impede the establishment of global production networks in the vertical specialization greatly. Hanson, Mataloni and Slaughter found that the tariff level is an important determinant of the ratio of intermediate product inputs coming from parent companies in the USA to the total sales amount of their foreign subsidiaries (this is one of direct gauges to measure the vertical division of labor). High tariffs generally lead to the lower degree of vertical specialization with the elastic coefficient between 2 and 4. (3) Double Impacts on Regional Economic Development Strategies. Industrial and economic policies promulgated by developed and developing countries at different periods have double impacts on the international division of labor. Particularly, policies related to investment, export and processing have direct impacts on these countries’ participation degree in different procedures of global production networks. The vertical specialization is closely related to foreign direct investment. Before the 1980s, many developing countries had many restrictions on foreign direct investment, but they gradually reduced these restrictions after the 1980s and shifted to implement the prohibited and restricted list. Additionally, after the end of the 2nd World War, many developing countries implemented the import substitution strategy. Although this kind of policies stimulated the growth of their national industries for some time, sooner or later all of them would be confronted with deep difficulties. Small countries in East Asian region had more sharp contradictions in implementing the import substitution strategy due to their small market scales. Starting from the mid-1960s, they changed their earlier strategy and shifted to the export-oriented direction. Countries in the ASEAN and part of Latin American countries adopted various economic policies targeting at encouraging export and processing. These policies have played promotive roles in developing the vertical specialization.

2.3 Motive Mechanism of the Evolution of the Pattern of International Division of Labor Throughout history, every major technological revolution has brought about important changes in the international division of labor, while each development of international division of labor has inevitably led to major leaps of global productivity as well as the rapid development of emerging industries, which have prompted the creation of a new system of international division of labor, and brought about new competitive advantages for late-mover countries. Currently, the new round of international division of labor caused by the information technology revolution has undergone

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profound changes from its contents to its forms, especially the rapid development of international service outsourcing. Developing countries can participate in the international division of labor with a higher level and in a wider field through the international service outsourcing. Thus, the pattern of vertical division of labor between developed and developing countries has been changed. In the evolution process of labor division, it is hard to make a precise division for the forms of labor division at a certain period. Various forms of labor division are intertwined and mutually inclusive. The pattern of international division of labor in the current world has already formed a complex and multi-tier structure with all sides crossed and overlapped together, presenting a dynamic evolution (Wang 2006). The various forms of division of labor mentioned above could co-exist in the way of a country’s participation in the international division of labor. In a word, the forms of international division of labor follow the evolution path from conventional inter-industry, to intra-industry, then to intra-product (value chains), and finally to the division of labor in modern industries. It is a continuous, ever-increasingly deepened, negation of negation and spiraling-up process. Generally, the dynamic evolution mechanism of the pattern of international division of labor can be presented in the Fig. 2.2.

Motives for Evolution from

Absolute Cost and Comparative Cost

Conventional Inter-industry to Intra-industry Labor Division

Differences in Comparative Advantage and Factor Endowment

Decomposability of Products and Scale Economies Changes of Transaction Efficiency and Transaction Costs Motives for the Evolution to Intra-product

division

of

labor

Differences in Factor Input Intensity at Different Segments Organization, Management and Industrial Policies

Differences in Industrial Structures of Countries

Interactions of Differences in Factor Endowments with Motives for the Evolution to the New Form of International Division of Labor

Innovation of International Production Organizations such as Modularization, Industrial Clusters and Regional Plates

Fig. 2.2 Dynamic mechanism of the evolution of the pattern of international division of labor

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References Buckley, P.J., and M. Casson. 1976. The Future of the Multinational Enterprise. London: Macmuan. Cheng, W., J. Sachs, and X. Yang. 2000. An inframarginal analysis of the Ricardian model. Review of International Economics 8: 208–220. Dixit, Avinash K., and Joseph E. Stiglitz. 1977. Monopolistic competition and optimum product diversity. American Economic Review 67: 297–308. Dunning, J.H. 1981. International Production and the Multinational Enterprise. London: Alien & Unwin. Grossman, G. M., and E. HelPman. 2002. Integration versus outsourcing in industry equilibrium. The Quarterly Journal of Economics 117(l): 85–120. Hummels, D., D. RapoPort, and K. M. Yi. 1998. Vertical specialization and the changing nature of world trade. Federal Reserve Bank of New York Economic Policy Review 79–99. Hummels, D., J. Shi, and K. M. Yi. 2001. The nature and growth of vertical specialization in world trade. Journal of International Economies 54: 75一96. Hymer, S.H. 1960. The International Operations of National Firms: A Study of Direct Foreign Investment. Cambridge, MA: MIT Press. Immanuel. 1999. Historical Capitalism. Beijing: Social Science Academic Press. Kimura, F., and A. Mitsuyo. 2003. Fragmentation and agglomeration matter: Japanese multinationals in Latin America and East Asia. North American Journal of Economics and Finance 14: 287–317. List. 1997. The National System of Political Economy. Beijing: The Commercial Press. Lu, Feng. Intra-product specialization — An analytical framework. Beijing University China Center for Economic Research Working Paper Series, No. C2004005. Ricardo. 1976. On the Principles of Political Economy and Taxation. Beijing: The Commercial Press. Rugman, A.M. 1980. Internalization as a general theory of foreign direct investment: A reappraisal of the literature. Weltwirtschaftliches Archiv 116: 365–379. Smith, Adam. 1972. An Inquiry into the Nature and Causes of the Wealth of Nations. Beijing: The Commercial Press. Vernon, R. 1966. International investment and international trade in the product cycle. Quarterly Journal of Economics 80: 190–207. Wang, Bin. 2006. Chinese Industry: Strategic Adjustment of Status and Structure in International Specialization. Beijing: Guangming Daily Press.

Chapter 3

Status and Roles of Participants of International Division of Labor Weiwei Yang

3.1 Status and Roles of Major Participants of Global Merchandise Trade I. Explanation of the Research Method 1. Selected Economies We have selected five economies including China (China’s mainland), Japan, South Korea, the USA and the EU (27 countries in the EU) as our objects of study. The five economies, due to their huge trade volume, are the major components of global trade. Statistics from WTO showed that the top 10 countries (regions) in the ranking of merchandise trade in 2010 were basically from the above five economies. In 2010, China, the USA and Germany were the top three exporters with export volumes all exceeding $1 trillion and each country occupying over 8% of the global share, while the USA, China and Germany were the top three importers with total import shares approaching a third of the global total. In general, the five economies have occupied important shares, whether in imports or exports. They are important participants in the pattern of global merchandise trade. 2. Merchandise Classification in International Trade Standard International Trade Classification (SITC) is a standard classification scheme used in international merchandise trade statistics and comparison among different countries. The formulation of the SITC shall trace back to the first half of twentieth century. After its establishment in 1920, the Leagues of Nations started to formulate the international trade terms and the merchandise statistic catalog. In the 1930s, it published the Draft Customs Nomenclature, on the basis of which the Minimum List W. Yang (B) School of Economics and Management, Beijing University of Technology, Beijing, China © Social Sciences Academic Press 2022 B. Jin and Q. Zhang (eds.), The New Trend of Global Industrial Division of Labor and China’s Responses, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-5674-4_3

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of Commodities for International Trade Statistics was revised for the joint use of all member states. After the end of the 2nd World War, 51 countries co-created the United Nations. In order to conduct statistics and analyses on international trade, the United Nations Statistical Commission further revised the above Minimum List and drew up the Standard International Trade Classification in 1950. The classification was divided into 10 sections, 50 divisions, 150 groups and 570 basic headings. It is the joint basis for every international institution in reporting its trade statistics and systematically analyzing global trade. This standard was recommended to every member state for use by the United Nations Economic and Social Council in 1951. Since its promulgation and implementation in 1951, the SITC has been revised several times. Except for the unchanged framework of sections, the groups, subgroups and basic headings have been expanded along with the increase of tiers. According to the Standard International Trade Classification rev.4 (SITC4) compiled by the United Nations, international merchandise trade is mainly divided into the following 10 sections (Table 3.1). In the above 10 sections, goods in the Section 0 and the Section 1 shall be regarded as the category of food, beverage and tobacco, while goods in the Section 2, 3, 4 as the category of raw materials and goods in Section 5, 6, 7, 8, 9 as the category of manufactured products and others. The production of food, beverage and tobacco tends to be the labor-intensive industry, while the production of raw materials to be the resource-intensive industry and the production of manufactured products and others to be the capital and technology-intensive industry. There is a one-to-one correspondence between the SITC and the Harmonized Commodity Description and Coding System (HS Code). The Harmonized Commodity Description and Coding System was drawn up by the Customs Cooperation Council (now known as World Customs Organization). It is a commodity classification coding system, also called “HS Code” with its full name as International Convention for Harmonized Commodity Description and Coding System, available for the joint use of relevant parties of customs, statistics, management on imports and exports, and international trade. The HS Code is a systematical international trade classification system with multiple purposes. Other than its use in customs tariffs and trade statistics, the HS Code also provides a set of usable international trade classification system which can be applied in areas such as the billings of transport commodities, statistics, computer data transfer, the simplification of international trade documents and the Generalized System of Preferences. 3. Explanation of Indexes (1) Revealed Comparative Advantage (RCA) The Revealed Comparative Advantage (RCA) index is to measure the comparative advantages of export products. This index, put forward by Bela Balassa, an American economist, possesses a comparatively high value in analyzing economics, and has already been used extensively by international organizations such as the World Bank

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Table 3.1 Merchandise trade classification scheme of SITC (revision 4) Section 0—Food and live animals Live animals except for animals of division 03 Meat and meat products Dairy products and bird’s eggs Fish (not marine mammals), crustaceans, molluscs and aquatic invertebrates and products thereof Cereal and cereal products Vegetables and fruits Sugars, sugar products and honey Coffee, tea, cocoa, spices and products thereof Feeding stuff for animals (not including unmilled cereals) Miscellaneous edible products and products Section 1—Beverages and tobacco Beverages Tobacco and tobacco manufactures Section 2—Crude materials, inedible, except for fuels Raw hide and raw fur skins Oil-seeds and oleaginous fruits Crude rubber (including synthetic and reclaimed) Cord and wood Pulp and waste paper Textile fibers (except for the wool tops and other combed wool) and their wastes (not manufactured into yarn and fabric) Crude fertilizers, except for those in division 56, and crude minerals (excluding coal, petroleum and precious stones) Metalliferous ores and metal scrap Crude animals and vegetable materials, n.e.s. (not elsewise specific) Section 3—Mineral fuels, lubricants and related materials Coal, coke and briquettes Petroleum, petroleum products and related materials Gas, natural and manufactured Electric currents Section 4—Animal and vegetable oils, fats and waxes Animal oils and fats Fixed vegetable oils and fats, crude, refined and fractionated Animal or vegetable fats and oils, processed; waxes of animal or vegetable origin; inedible mixtures or products of animal or vegetable fats or oils, n.e.s. Section 5—Chemicals and related products, n.e.s. Organic chemicals Inorganic chemicals Dyeing, tanning and colouring materials Medicinal and pharmaceutical products Essential oils and resinoids and perfume materials; toilet, polishing and cleaning products Fertilizers (excluding those of group 272) Plastics in primary forms Plastics in non-primary forms Chemical materials and products, n.e.s. (continued)

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Table 3.1 (continued) Section 6—Manufactured goods classified chiefly by material Leather, leather manufactures, n.e.s., and dressed furskins Rubber manufactures n.e.s. Cord and wood manufactures (excluding furniture) Paper, paperboard and articles of paper pulp, of paper or of paperboard Textile yarn, fabrics, made-up articles, n.e.s., and related products Non-metallic mineral manufactures n.e.s. Iron and steel Non-ferrous metals Manufactures of metals, n.e.s. Section 7—Machinery and transport equipment Power-generating machinery and equipment Machinery specialized for particular industries Metalworking machinery General industrial machinery and equipment, n.e.s., and machine parts, n.e.s. Office machines and automatic data-processing machines Telecommunications and sound-recording and reproducing apparatus and equipment Electrical machinery, apparatus and appliances, n.e.s., and electrical parts thereof (including non-electrical counterparts, n.e.s., of electrical household-type equipment) Road vehicles (including air-cushion vehicles) Other transport equipment Section 8—Miscellaneous manufactured articles Prefabricated buildings; sanitary plumbing, heating and lighting fixtures and fittings, n.e.s. Furniture and parts thereof; bedding, mattresses, mattress supports, cushions and similar stuffed furnishings Travel goods, handbags and similar containers Articles of apparel and clothing accessories Footwear Professional, scientific and controlling instruments and apparatus, n.e.s. Photographic apparatus, equipment and supplies and optical goods, n.e.s. Miscellaneous manufactured articles, n.e.s. Section 9—Commodities and transactions not classified elsewhere in the SITC Postal packages not classified according to kind Special transactions and commodities not classified according to kind Coins (other than gold coins), not being legal tender Gold, non-monetary (excluding gold, ores and concentrates) Data source Statistics Division of UN Department of Economic and Social Affairs

and scholars both in China and abroad. The RCA is equal to the proportion of a country’s exports that are of the class under consideration divided by the proportion of world exports that are of that class. The formula of RCA index is as follows: RC Aij =

X ij /X it X wj /X wt

In the formula, X ij is the export volume of product j from the country i, and X it is the total volume of all export products from the country i, X wj is the global export volume of the product j, X wt is the global total export volume.

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This paper has adopted the standard of demarcation set up by Japan External Trade Organization (JETRO) in determining the situation of a product’s RCA to achieve a more accurate study on the comparative advantage. If RCA ≥ 2.5, it indicates that this product has a strong comparative advantage; if RCA is within the range from 1.25 to 2.5, it then indicates the product has a remarkable comparative advantage; if RCA is above the range from 0.8 to 1.25, it then indicates the product has an average comparative advantage; and if RCA < 0.8, it indicates the product has comparatively disadvantage. (2) Trade Competitive Index Trade Competitive Index, also called the Index of Horizontal Division of Labor, is to reflect the situation that a domestically produced product is positioned in a competitive advantage or a disadvantage when compared with the same product produced by other countries in world markets as well as the degree of the disadvantage. The formula is: T Ci = (X i − Mi )/(X i + Mi ) In the formula, T Ci is the TC index of I product; X i is the export volume of I product; Mi is the import volume of I product. In order to conduct an in-depth study on the foreign trade competitiveness of various commodities from different economies, this paper holds that −0.1 ≤ T Ci ≤ 0.1 indicates that the product has a neutral competitive advantage; 0.1 < T Ci ≤ 0.5 indicates the product has a weak competitive advantage, while 0.5 < T Ci ≤ 1 for a strong competitive advantage; similarly, −1 ≤ T Ci < −0.5 indicates the product has a strong competitive disadvantage, while −0.5 ≤ T Ci < −0.1 for a weak competitive disadvantage. II. Brief Analyses on the Overall Pattern of International Trade In the divided 10 sections, the trade volumes of commodities from different categories are different largely from each other. Take China’s export trade in 2010 as an example. Commodities in the three sections of machinery and transport equipment, miscellaneous manufactured articles and manufactured goods classified by material occupied the dominant position in terms of value, accounting for about 90% of the total export amount. Commodities from other 7 sections were in the secondary position. Other four economies had the similar situation with a large part of trade value concentrated in the Section 7 (machinery and transport equipment) (Table 3.2). From the comparison of Tables 3.3 with 3.4, it is found that with regard to commodities in the Section 0 and 1, namely, the food, beverage and tobacco, except that China had a weak competitive advantage in food and live animals and the EU had a strong competitive advantage in beverage and tobacco, other economies were basically in competitive disadvantages, and the situation was much more prominent especially in Japan, South Korea and the USA. With regard to commodities in the Section 2, 3 and 4, except that the USA had a competitive advantage in inedible crude materials, other economies were basically in competitive disadvantages and most were in strong comparative disadvantages. The situation of commodities in the

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Table 3.2 Commodities with competitive comparative advantages in the five economies Section

Classification of Goods

China

Japan

South Korea

The USA

0

Food and Live Animals

0.31

–0.86

–0.61

0.05

The EU –0.15

1

Beverages and Tobacco

–0.12

–0.82

0.08

–0.52

0.52

2

Inedible Crude Materials (except for fuels)

–0.90

–0.67

–0.69

0.46

–0.31

3

Mineral Fuels, Lubricants and Related Materials

–0.75

–0.88

–0.58

–0.64

–0.66

4

Animal and Vegetable Oils, Fats and Waxes

–0.92

–0.82

–0.90

–0.01

–0.36

5

Chemicals and Related Products, n.e.s.

–0.26

0.13

0.09

0.03

0.26

6

Manufactured Goods Classified Chiefly by Material

0.31

0.26

0.04

–0.26

0.04

7

Machinery and Transport Equipment

0.17

0.48

0.36

–0.24

0.12

8

Miscellaneous Manufactured Articles

0.54

–0.18

0.20

–0.38

–0.19

9

Commodities and Transactions not Classified in the SITC

–0.85

0.56

0.32

0.31

0.02

Note The red areas in the table indicate “strong competitive comparative advantage” and the yellow for the “weak competitive comparative advantage” Data source Calculating and sorting based on the data from the website of UN comtrade

Section 5–9 was the contrary, mainly presenting that the USA was in a competitive disadvantage while other four economies were in comparative advantages. As a result, the conclusion is that the five economies with comparatively large trade volumes are generally in competitive disadvantages in food, beverage, tobacco and crude materials, while they are generally in competitive advantages in manufactured products. The USA is an exception as it is in competitive disadvantageous states for most commodities. On one hand, the USA is one of the largest trading nations in the world; meanwhile, for most commodities, it exports more than its imports. Table 3.3 Commodities with competitive comparative disadvantages in the five economies Section

Classification of Goods

China

Japan

South Korea

The USA

The EU

0

Food and Live Animals

0.31

–0.86

–0.61

0.05

–0.15

1

Beverages and Tobacco

–0.12

–0.82

0.08

–0.52

0.52

2

Inedible Crude Materials (except for fuels)

–0.90

–0.67

–0.69

0.46

–0.31

3

Mineral Fuels, Lubricants and Related Materials

–0.75

–0.88

–0.58

–0.64

–0.66

4

Animal and Vegetable Oils, Fats and Waxes

–0.92

–0.82

–0.90

–0.01

–0.36

5

Chemicals and Related Products, n.e.s.

–0.26

0.13

0.09

0.03

0.26

6

Manufactured Goods Classified Chiefly by Material

0.31

0.26

0.04

–0.26

0.04

7

Machinery and Transport Equipment

0.17

0.48

0.36

–0.24

0.12

8

Miscellaneous Manufactured Articles

0.54

–0.18

0.20

–0.38

–0.19

9

Commodities and Transactions not Classified in the SITC

–0.85

0.56

0.32

0.31

0.02

Note The blue areas in the table indicate “strong competitive comparative disadvantage” and the green for the “weak competitive comparative disadvantage” Data source Calculating and sorting based on the data from the website of UN comtrade

3 Status and Roles of Participants of International …

69

Table 3.4 Revealed comparative advantage of every section in 2010 China

Japan

South Korea

the USA

the EU

Section 0

0.450

0.089

0.145

1.118

0.699

Section 1

0.149

0.105

0.268

0.528

1.963

Section 2

0.181

0.347

0.297

1.563

0.610

Section 3

0.143

0.143

0.586

0.533

0.443

Section 4

0.056

0.041

0.028

0.834

0.563

Section 5

0.476

0.873

0.901

1.269

1.444

Section 6

1.200

0.986

0.986

0.711

0.952

Section 7

1.371

1.649

1.570

0.974

1.167

Section 8

2.124

0.674

0.890

0.930

0.909

Section 9

0.019

1.228

0.133

2.097

0.955

Data source Calculated based on the data from the website of UN comtrade. The light blue areas in the table indicate “comparative disadvantage”, the light yellow for the “remarkable comparative advantage” and no background color for the “neutral comparative advantage”

Therefore, the USA has no commodities with obvious comparative advantages in such rough grouping. Compared with the USA, other four economies generally have competitive comparative advantages in capital-and-technology-intensive industries, while having competitive comparative disadvantages in labor-and-resource-intensive industries. The similar results can be achieved through the calculation of the Revealed Comparative Advantage of the 10 sections of each economy (see Table 3.4). China, Japan and South Korea, all had a comparative disadvantage in the Section 0–4, while had a remarkable comparative advantage in the Section 7, which is the machinery and transport equipment, and a comparative disadvantage in the field of food, beverage, tobacco and crude materials. Under such comparison, the USA had no obvious regularities to be found. The EU had a remarkable comparative advantage in beverage, tobacco, chemicals and related products, but had a comparative disadvantage in food and crude materials. The conclusion got from the calculation of RCA index is roughly the same with the one achieved from the calculation of TC index. III. Major Economies’ Status in the Development Pattern of Global Trade 1. China China’s goods imports and exports have maintained a momentum of rapid growth since 2002. Except for a certain decline in 2009, other years all saw comparatively large growth. The situation that the exports were greater than the imports has always been maintained. The trade surpluses had been gradually expanded since 2004 and dropped in 2009. Currently, the trade surpluses have maintained in a stable state. In total, China has developed into a big trade power since its entry into the WTO 10 years ago. Its imports and exports all have sustained rapid growth, but the rise

70

W. Yang

in exports was larger than that in imports. The economic crisis had some adverse effects on China’s foreign trade. From the perspective of trade volumes, China’s exports were mainly concentrated in the Section 6 (manufactured articles classified chiefly by material), the Section 7 (machinery and transport equipment) and the Section 8 (miscellaneous manufactured articles). The total shares of the three sections accounted for near 90%. Except for the Section 9 (commodities and transactions not classified in the SITC), the growth rates of other sections were very close. As China’s foreign trade declined significantly in 2009 due to the effect of the economic crisis, the growth rate of exports from 2009 to 2010 was around 30%, relatively higher than before. The average growth rates from 2006 to 2010 were at around 10%. The import volume of commodities from the Section 7 (machinery and transport equipment) accounted for 39.4% of the total volume, the largest one. Every section kept a high growth rate from 2009 to 2010. The average rates from 2006 to 2010 were mostly around 10–20% with a relatively faster growth of food, beverage, tobacco and crude materials, a stable growth of manufactured goods and a sharp increase of commodities and transactions not classified in the SITC (Tables 3.5 and 3.6). From the perspective of the export situation, commodities in the Section 7 (machinery and transport equipment) of SITC were China’s top export goods. Commodities not in the Section 7 but in the top 10 export goods were only liquid crystal device, optical instruments and appliances (SITC No. is 871 and HS Code is 9013). Commodities ranked in the top two places were the major export goods with quantities much larger than those of later products. They were automatic dataprocessing machines and units thereof and wire telephone sets and radio-telegraph equipment (see Table 3.7). Table 3.5 China’s exports classified by sections (Unit: billion US dollars) SITC

2010

Total volume

1,578,193

Average growth rate (%) 2006–2010

2009–2010

13

31.3

Ratio in 2010 100

0+1

43,068.9

12.5

25.8

2.7

2+4

11,990.1

9.9

41.2

0.8

3

26,717.1

10.7

31.1

1.7

5

87,555.7

18.4

41.2

5.5

6

249,180.7

9.3

34.9

15.8

7

781,265

14.4

32.2

49.5

8

376,949

12.2

26.1

23.9

9

1,466.4

10.8

−10

0.1

Source UN Comtrade

3 Status and Roles of Participants of International …

71

Table 3.6 China’s imports classified by sections (Unit: billion US dollars) SITC

2010

Average growth rate (%) 2006–2010

Ratio in 2010

2009–2010

Total volume

1,394,200

15.2

38.6

100

0+1

24,003.8

21.4

43.1

1.7

2+4

219,712.8

26

47.8

15.8

3

188,456.7

20.6

52

13.5

5

149,328.7

14.4

33.4

10.7

6

131,045.2

10.8

21.6

9.4

7

550,003.9

11.4

34.7

39.4

8

113,213.4

12.2

33.3

8.1

9

18,435

73.6

457.6

1.3

Source UN Comtrade

From the perspective of the import situation, China’s main imports were commodities from the Section 7 (machinery and transport equipment), while parts of commodities in the Section 2, 3, and 8 were also listed in the top 10. The top 4 commodities were more prominent as their import volume all reached over $50 billion. They were electronic integrated circuits, petroleum, iron ores and concentrates, and optical instruments and apparatus (see Table 3.8). 2. The USA From 1996 to 2010, the trade volume of the USA sustained a steady rise with a stable export volume and a rapid rise of the import volume. The overall situation showed a trend of a gradually expanding trade deficit. As affected by the economic crisis, the trade volume slumped in 2009. From 2006 to 2010, the average annual growth rate of the export volume rose by 5.3%, while the rate for the import volume was 0.6%. The well-performing section in the exports of the USA was the Section 7 (machinery and transport equipment) with products in this section accounting for 35.2% of the total exports, while products in other sections were almost in the same level of growth rates. Recently, the Section 9 (commodities and transactions not classified in the SITC) recorded the fastest growth and the Section 3 (mineral fuels, lubricants and related materials) followed it. The Section 7 (machinery and transport equipment) still occupied the largest share of the imports of the USA, accounting for 37%. Additionally, the Section 3 (mineral fuels, lubricants and related materials) and the Section 8 (miscellaneous manufactured articles) accounted for 18.4% and 15.3% respectively (see Tables 3.9 and 3.10). While observing the subdivided commodity categories, we can see that among the top 10 export commodities of the USA, 6 belonged to the commodities in the Section 7 and the others belonged to the Section 3, 5, 8 and 9. In 2010, two categories with its export volume exceeding $50 billion were special transactions and

Monitors and projectors, not incorporating television reception apparatus; reception apparatus for television, whether or not incorporating radio-broadcast receivers

Parts and accessories (other than covers, carrying cases and the 32 like) suitable for use solely or principally with machines falling on the tax items 84.69–84.72

8528

8473

23.6 17

Liquid crystal devices, n.e.s.; lasers (other than laser diodes)

9013

24.7

14.7

16.7

Transformers, static converters (e.g., rectifiers) and inductors

8504

Source UN Comtrade

15.5 17.1

Diodes, transistors and similar semiconductor devices

Printing blocks (plates), cylinders, other printing components 19.9 and machinery prepared for printing purposes falling on the tax item of 84.42

8541

20.3

23.9

23.6

26.2

26.7

86.5

101.6

8443

17.2

Integrated circuits

Cruise ships, excursion boats, ferry-boats, freighters, barges and similar vessels designed for transport of both persons and cargoes

8542

8901

35.2

89.9

Telephone sets, including telephones for cellular networks or for other wireless networks

8517

105.7

20.2

23.6

32

27.9

35.2

29.6

31.3

31.9

106

139.1

1,578.2

2010

8.7

26

122.7

84.6

12.2

26.9

100.2

87.7

2009

2008

1,201.6

2009

2008 1,430.7

Unit value

Value (billion US dollars)

Automatic data-processing machines and units thereof; magnetic or optical readers, n.e.s.

All goods

4-digit heading of harmonized system 2007

8471

HS code

Table 3.7 China’s top ten export goods from 2008 to 2010 (Unit: billion US dollars)

16.7

31.1

116.6

93.3

2010

Dollar/unit

Dollar/kg

Dollar/unit

Dollar/unit

Unit

771

726

776

871

793

776

759

761

764

752

SITC code

72 W. Yang

60.7 48.5

30.2

Iron ores and concentrates, including roasted iron pyrites

Liquid crystal devices, n.e.s.; lasers (other than laser diodes)

Automatic data-processing machines and units thereof; magnetic or optical readers, n.e.s.

Petroleum oils and oils obtained from bituminous minerals (other than crude)

2601

9013

8471

2710

14.1

Motor cars and other motor vehicles principally designed for the transport of persons (excluding cargoes falling on the tax item of 87.02), including station wagons and racing cars

Diodes, transistors and similar semiconductor devices

8703

8541 16.7

21.8 18.9

Soya beans, whether or not broken

Telephone sets, including telephones for cellular networks or for other wireless networks

1201

8517

22.8

129.3

Petroleum oils and oils obtained from bituminous minerals, crude

15.6

1.4

19.1

18.8

17

21.8

38.3

50

89.3

120.8

1,005.6

130.6

1,132.6

2709

All goods

Integrated circuits

2009

2008

22.3

28.9

22.5

25.1

22.3

26.9

51.4

79.1

135

158

1,394.2

2010

4-digit heading of harmonized system 2007 Value (billion US dollars)

8542

HS code

Table 3.8 China’s top ten import goods from 2008 to 2010 (Unit: billion US dollars)

35.3

0.6

0.8

43.6

0.1

0.7

34.6

0.4

0.5

37.6

0.1

0.4

2009

Unit value 2008

36.4

0.5

0.6

37.6

0.1

0.6

2010

Thousand dollars/unit

Dollar/kg

Dollar/kg

Dollar/unit

Dollar/kg

Dollar/kg

Unit

776

781

764

222

334

752

871

281

333

776

SITC code

3 Status and Roles of Participants of International … 73

74

W. Yang

Table 3.9 Exports of the USA classified by sections (Unit: billion US dollars) SITC

2010

Average growth rate (%) 2006–2010

Ratio in 2010

2009–2010

Total volume

1,277,109

5.3

20.9

100

0+1

88,113.4

10.4

15.1

6.9

2+4

85,504.5

13.1

31.2

6.7

3

80,728.2

23.3

47.5

6.3

5

188,729.8

8.7

18.4

14.8

6

119,486.9

3.7

26.3

9.4

7

449,129.5

−2.4

22.4

35.2

8

133,791.4

3.6

11.7

10.5

9

131,625.3

33.6

10.2

10.3

Source UN Comtrade

Table 3.10 Imports of the USA classified by sections (Unit: billion US dollars) SITC

2010

Average growth rate (%) 2006–2010

Ratio in 2010

2009–2010

Total volume

1,966,497

0.6

22.8

100

0+1

92,004.7

4.6

11.8

4.7

2+4

34,806.6

−0.8

32.9

1.8

3

362,637

1.2

29.9

18.4

5

177,010.4

4.8

15

9

6

203,215.4

−3.5

28.1

10.3

7

728,142.8

0.1

25.4

37

8

300,110

0.8

16.7

15.3

9

68,569.8

1.5

7

3.5

Source UN Comtrade

commodities not classified in the SITC and petroleum oils and oils obtained from bituminous minerals (other than crude). In the top 10 import commodities, most of them belonged to the Section 3 and 7. The top 6 commodities (the import volume in 2010 exceeding $50 billion) were petroleum; motor cars and other motor vehicles principally designed for the transport of persons; petroleum oils and oils obtained from bituminous minerals (other than crude); wire telephone sets and radio-telegraphy equipment; automatic data-processing machines and units thereof; and special transactions and commodities not classified in the SITC (see Tables 3.11 and 3.12). 3. The EU The trade development of the EU reached the highest level in 2008 and then declined in 2009. It has maintained a trade deficit all along. The exports sustained an average

Motor cars and other motor vehicles principally designed for the transport of persons (excluding cargoes falling on the tax item of 87.02), including station wagons and racing cars

8703

Medicaments consisting of mixed or unmixed products for therapeutic or prophylactic use

3004

18.8

23.7

Automatic data-processing machines and units thereof; magnetic or optical readers, n.e.s.

8471

41.7 31.7

Integrated circuits

Parts and accessories for the vehicles falling on the tax items of 87.01–87.05

8542

8708

50.7

51.8

Petroleum oils and oils obtained from bituminous minerals (other than crude)

2710

22.5

20.3

23.7

30.1

28.4

36.5

105.5

1,056.7

1,299.9 37.4

All goods

1,277.1

23.1

23.9

32.6

37.6

39.3

53.7

113.7

164.1

441.5

16.8

0.5

2009

Unit value 2008

2009

2010

Value (billion US dollars) 2008

Commodities not classified in the SITC

4-digit heading of harmonized system 2007

9999

HS code

Table 3.11 Top ten export goods of the USA from 2008 to 2010 (Unit: billion US dollars)

167.2

402.8

18.4

0.6

2010

Dollar/kg

Dollar/unit

Thousand dollars/unit

Dollar/kg

Unit

(continued)

542

752

784

776

781

334

931

SITC code

3 Status and Roles of Participants of International … 75

Telephone sets, including telephones for cellular networks or for other wireless networks

Instruments and appliances for medical, surgical, dental or veterinary purposes

Other aircrafts; spacecraft and spacecraft launch vehicles and suborbital launch vehicles

8,517

9018

8802

Source UN Comtrade

4-digit heading of harmonized system 2007

HS code

Table 3.11 (continued)

48.4

20.1

21.7

2.5

20.1

19.2

2009

1.805

22

23.4

2010

Value (billion US dollars) 2008

2008

9.1

2009

Unit value

5.2

2010

Cents dollar/unit

Unit

792

872

764

SITC code

76 W. Yang

57.5

64.3

Petroleum oils and oils obtained from bituminous minerals (other than crude)

Telephone sets, including telephones for cellular networks or for other wireless networks

Automatic data-processing machines and units thereof; magnetic or optical readers, n.e.s.

Commodities not classified in the SITC

Medicaments consisting of mixed or unmixed products for therapeutic or prophylactic use

2710

8517

8471

9999

3004

43.2

61.2

90.3

127.9

Motor cars and other motor vehicles principally designed for the transport of persons (excluding cargoes falling on the tax item of 87.02), including station wagons and racing cars

8703

2,164.8 363.4

1,601.9

45.4

55.3

54.3

59.3

54.6

82.2

200.6

1,966.5

49.9

56

71.4

71.9

69.3

116.8

266.6

131.9

0.6

20.4

0.6

2010

267.62543

119.6

0.5

19.1

0.4

2009

Unit value

2010

2008

2009

Value (billion US dollars) 2008

Petroleum oils and oils obtained from bituminous minerals, crude

All goods

4-digit heading of harmonized system 2007

2709

HS code

Table 3.12 Top ten import goods of the USA from 2008 to 2010 (unit: billion US dollars)

Dollar/kg

Dollar/unit

Dollar/kg

Thousand dollars/unit

Dollar/kg

Unit

(continued)

542

931

752

764

334

781

333

SITC code

3 Status and Roles of Participants of International … 77

Monitors and projectors, not incorporating 40.3 television reception apparatus; reception apparatus for television, whether or not incorporating radio-broadcast receivers

Petroleum gases and other gaseous hydrocarbons

8528

2711

Source UN Comtrade

Parts and accessories for the vehicles falling on the tax items of 87.01–87.05

8708

36.8

41.9

17.9

33.5

29.9

2009

20.1

35.8

43.4

2010

Value (billion US dollars) 2008

4-digit heading of harmonized system 2007

HS code

Table 3.12 (continued) 2008

0.4

203.3

2009

Unit value

0.4

213.8

2010

Dollar/kg

Dollar/unit

Unit

343

761

784

SITC code

78 W. Yang

3 Status and Roles of Participants of International …

79

annual growth rate of 5.2% from 2006 to 2010, mainly coming from the products of the Section 7 (machinery and transport equipment). In 2010, the exports of commodities in the Section 7 accounted for 42.1% of the total exports. The imports sustained an average annual growth rate of 3.9% from 2006 to 2010, mainly coming from the products of the Section 7 (machinery and transport equipment) and the Section 3 (mineral fuels, lubricants and related materials) (Tables 3.13 and 3.14). From the perspective of subdivided commodities, the top 10 export commodities of the EU were mainly from the Section 7. In general, four categories with its export volume exceeding $50 billion in 2010 included: special transactions and commodities not classified in the SITC; motor cars and other motor vehicles principally designed for the transport of persons; medicaments; and petroleum oils and oils obtained from bituminous minerals. Commodities in the Section 3 and 7 recorded a comparatively Table 3.13 Exports of the EU classified by sections (Unit: billion US dollars) SITC

2010

Total volume

1,784,926

Average growth rate (%) 2006–2010

Ratio in 2010

2009–2010

5.2

12.4

100

0+1

100,611.2

8.5

14.1

5.6

2+4

48,445.3

9

26.9

2.7

3

93,882.3

6.9

25.2

5.3

5

300,412.6

7.9

11.3

16.8

6

223,562.8

2.4

15.1

12.5

7

751,875.9

4.7

19.1

42.1

8

182,378.5

3.2

9

83,757.5

5

11.1 −34.5

10.2 4.7

Source UN Comtrade

Table 3.14 Imports of the EU classified by sections (Unit: billion US dollars) SITC

2010

Average growth rate (%) 2006–2010

Ratio in 2010

2009–2010

Total volume

1,975,722

3.9

15.9

100

0+1

106,603.6

5.8

4.2

5.4

2+4

92,801.7

4.4

40.1

4.7

3

461,268.2

3.5

24.3

23.3

5

175,620.2

6

13.2

8.9

6

204,641.9

0.9

28.3

10.4

7

586,651.8

3.8

23.2

29.7

8

267,638.2

4.4

7

13.5

9

80,496.1

3.9

−35.2

4.1

Source UN Comtrade

80

W. Yang

large import volume. Six categories with its import volume exceeding $50 billion in 2010 included: petroleum; special transactions and commodities not classified in the SITC; natural gases, petroleum oils and oils obtained from bituminous minerals; automatic data-processing machines and units thereof; and wire telephone sets and radio-telegraphy equipment (Tables 3.15 and 3.16). 4. Japan Trade in Japan started a new period of growth in 2003 and 2004, and reached the highest level in 2008, but shrank significantly in 2009. It has sustained a moderate trade surplus all along. Japan’s exports mainly relied on commodities in the Section 7 (machinery and transport equipment) which accounted for 59.5% of the total export volume in 2010. Commodities in the Section 3 (mineral fuels, lubricants and related materials) recorded a rapid growth with the average annual growth rate reaching 21.9% from 2006 to 2010 (Tables 3.17 and 3.18). From the perspective of subdivided product categories, the top 10 export commodities were mainly from the Section 7, especially including the motorcars and other motor vehicles principally designed for the passenger transport with the export volume in 2010 reaching $90 billion. The top import commodities were mainly from the Section 3. In 2010, the top 2 import commodities were petroleum oils and natural gases with import volume of $105.8 billion and $48.3 billion respectively (Tables 3.19 and 3.20). 5. Summary Based on the analysis of major economies’ sectors with trade advantages, we have further conducted analyses on the subdivided commodity domains to find out commodities with a comparatively large trade volume for the purpose of analyzing the overview of the pattern of the international division of labor. China, the USA, the EU and Japan as the four largest economies possess some common characteristics as they all import a large number of oil and gas resources. China mainly exports digital communication equipment, and imports crude materials such as petroleum oils and iron ores, and manufactured products such as electronic integrated circuits and optical instruments and apparatus. The important imports and exports of the USA all contain petroleum oils, while the important imports also include digital communication equipment and motor cars in the category of manufactured products as well as petroleum oils in the category of resources. The important exports of the EU include motorcars, medicaments and petroleum oils, while the important imports include digital communication equipment besides oil and gas resources. Japan’s important exports are motorcars. Among the major economies, the USA and the EU are quite similar in imports, while China’s major products correspond to the major imports of the USA and the EU. From the perspective of the trade situation of the four major economies, resources-type products, information and communication equipment in the information age and motorcars are the major categories of trade goods (Table 3.21).

92.5

94.5 38.4

Motor cars and other motor vehicles principally designed for the transport of persons (excluding cargoes falling on the tax item of 87.02), including station wagons and racing cars

Medicaments consisting of mixed or unmixed products for therapeutic or prophylactic use

Petroleum oils and oils obtained from bituminous minerals (other than crude)

Other aircrafts; spacecraft and spacecraft launch vehicles and suborbital launch vehicles

Parts and accessories for the vehicles falling on the tax items of 87.01–87.05

Telephone sets, including telephones for cellular networks or for other wireless networks

8703

3004

2710

8802

8708

8517

38

37.4

79.8

102.7

1,928.6

Commodities not classified in the SITC

27.1

27.2

35.7

61

82.2

66.7

119.9

1,588.6

31.8

38.9

40.3

78.5

87.4

101.2

71.2

1,784.9

11.2

8.3

0.8

140.1

17.5

2008

11.5

13.3

0.5

144.3

19.4

2009

Unit value

2010

2008

2009

Value (billion US dollars)

All goods

4-digit heading of harmonized system 2007

9999

HS code

Table 3.15 Top ten export goods of the EU from 2008 to 2010 (Unit: billion US dollars)

10.7

13

0.7

140.1

23.6

2010

Dollar/kg

Cents dollar/unit

Dollar/kg

Dollar/kg

Thousand dollars/unit

Unit

(continued)

764

784

792

334

542

781

931

SITC code

3 Status and Roles of Participants of International … 81

Diamonds, whether or not worked, but not 19.3 mounted or set

Machines and mechanical appliances having individual functions, n.e.s.

7102

8479

Source UN Comtrade

Turbo-jets, turbo engines and other gas turbines

8411

19.6

30.5

15.7

13.5

30.6

2009

16.5

19.8

32.4

2010

Value (billion US dollars) 2008

4-digit heading of harmonized system 2007

HS code

Table 3.15 (continued)

126.6

2008

110.5

2009

Unit value

126.4

2010

Dollar/karat

Unit

728

667

714

SITC code

82 W. Yang

92.9

82.3 52.1

52.3

Commodities not classified in the SITC

Petroleum gases and other gaseous hydrocarbons

Petroleum oils and oils obtained from bituminous minerals (other than crude)

Automatic data-processing machines and units thereof; magnetic or optical reader, n.e.s.

Telephone sets, including telephones for cellular networks or for other wireless networks

Motor cars and other motor vehicles principally designed for the transport of persons (excluding cargoes falling on the tax item of 87.02), including station wagons and racing cars

9999

2711

2710

8471

8517

8703 44

98.2

396

2,284.9

30.6

43.1

43.3

53.9

64.4

113.9

225.6

1,704.7

29.1

5.5

52.1

70.1

69.2

69.8

292.7

1,975.7

12.9

97.5

0.9

0.6

0.7

2008

13.3

100.8

0.5

0.4

0.4

2009

Unit value

2010

2008

2009

Value (billion US dollars)

Petroleum oils and oils obtained from bituminous minerals, crude

All goods

4-digit heading of harmonized system 2007

2709

HS code

Table 3.16 Top ten import goods of the EU from 2008 to 2010 (Unit: billion US dollars)

13.1

115.1

0.7

0.4

0.6

2010

Thousand dollars/unit

Dollar/unit

Dollar/kg

Dollar/kg

Dollar/kg

Unit

(continued)

781

764

752

334

343

931

333

SITC code

3 Status and Roles of Participants of International … 83

Medicaments consisting of mixed or unmixed products for therapeutic or prophylactic use

Turbo-jets, turbo engines and other gas turbines

Diodes, transistors and similar semiconductor devices

3004

8411

8541

Source UN Comtrade

4-digit heading of harmonized system 2007

HS code

Table 3.16 (continued)

20.3

24.2

31.5

17.8

24.5

34.3

2009

35

24.7

33.6

2010

Value (billion US dollars) 2008 222.3

2008 220.3

2009

Unit value 211.9

2010 Dollar/kg

Unit

776

714

542

SITC code

84 W. Yang

3 Status and Roles of Participants of International …

85

Table 3.17 Japan’s exports classified by sections (Unit: billion US dollars) SITC

2010

Average growth rate (%) 2006–2010

Total volume

Ratio in 2010

2009–2010

769,839.4

4.5

32.6

100

0+1

4,615.5

10.8

18.5

0.6

2+4

10,997.3

8.7

22.1

1.4

3

13,037.6

21.9

23.8

1.7

5

78,452.3

7.9

27.7

10.2

6

99,801.7

7.7

33.4

13

7

458,062.6

2.7

35.6

59.5

8

58,417.8

2.6

31.1

7.6

9

46,454.6

8.7

19.9

6

Source UN Comtrade

Table 3.18 Japan’s imports classified by sections (Unit: billion US dollars) SITC

2010

Average growth rate (%) 2006–2010

Total volume 0+1 2+4

Ratio in 2010

2009–2010

692,620.6

4.6

25.5

100

59,245.5

4.9

10.7

8.6

56,354.9

7.1

46.2

8.1

3

198,624.3

5.3

30.3

28.7

5

60,792.5

10.5

24.9

8.8

6

58,768.6

2.1

32.6

8.5

7

161,354.6

3.3

27.2

23.3

8

84,471

1.7

10.5

12.2

9

13,009.1

7.4

17.6

1.9

Source UN Comtrade

3.2 Status and Roles of Major Participants of International Trade in Services I. Explanation of the Research Method 1. Selected Economies We have selected five economies including China (China’s mainland), Japan, South Korea, the USA and the EU (27 countries in the EU) as our objects of study. The five economies, due to their huge trade volume, are the major components of global trade in services. Statistics from WTO show that the top 10 countries (regions) in

Cruise ships, excursion boats, ferry-boats, 19,226 freighters, barges and similar vessels designed for transport of both persons and cargoes

Printing blocks (plates), cylinders, other printing components and machinery prepared for printing purposes falling on the tax item of 84.42

Diodes, transistors and similar semiconductor devices

Petroleum oils and oils obtained from bituminous minerals (other than crude)

Diodes, transistors and similar semiconductor devices

8901

8443

8486

2710

8541

32,875

11,263

16,971

13,706

17,742

29,431

Integrated circuits

Parts and accessories for the vehicles falling on the tax items of 87.01–87.05

36,873

8542

Commodities not classified in the SITC

9999

115,440

781,412

580,719

8,879.9

9,360.6

8,260.4

13,140

21,615

24,657

27,430

34,259

62,268

769,839

12,396

11,643

19,071

15,204

25,592

35,073

34,533

40,037

90,379

0.9

11.1

16

2008

0.5

27.9

11.8

16.5

2009

Unit value

2010

2008

2009

Value (billion US dollars)

8708

Motor cars and other motor vehicles principally designed for the transport of persons (excluding cargoes falling on the tax item of 87.02), including station wagons and racing cars

All goods

4-digit heading of harmonized system 2007

8703

HS code

Table 3.19 Japan’s top ten export goods from 2008 to 2010 (Unit: billion US dollars)

0.7

33 1

12.4

18.1

2010

Dollar/kg

Dollar/unit

Dollar/kg

Thousand dollars/unit

Unit

(continued)

776

334

776

726

793

784

776

931

781

SITC code

86 W. Yang

Source UN Comtrade

Transmission apparatus for 12,488 radio-broadcasting or television, whether or not incorporating reception apparatus or sound-recording or reproducing apparatus

8525 8,969.5

2009 9,318.1

2010

Value (billion US dollars) 2008

4-digit heading of harmonized system 2007

HS code

Table 3.19 (continued) 2008 270.4

2009

Unit value 280.6

2010 Dollar/unit

Unit 764

SITC code

3 Status and Roles of Participants of International … 87

Coal, briquettes, ovoid and similar solid fuels manufactured from 29,469 coal 16,299

Source UN Comtrade

8,229.6

Copper ores and concentrates

2603

10,037

10,267

Telephone sets, including telephones for cellular networks or for 10,327 other wireless networks

8517

8,692.1 10,239

13,215 11,949

Iron ores and concentrates, including roasted iron pyrites

Commodities not classified in the SITC

2601

11,346

12,726

9999

Automatic data-processing machines and units thereof; magnetic 14,024 or optical readers, n.e.s.

8471

20,721

Integrated circuits

Petroleum oils and oils obtained from bituminous minerals (other 23,350 than crude)

8542

2710

22,052

36,644

2701

56,596

Petroleum gases and other gaseous hydrocarbons

2711

11,705

13,444

11,965

15,316

14,464

18,744

20,413

23,946

48,278

0.5

0.1

0.5

0.7

0.1

0.6

2010

Dollar/kg

Dollar/kg

Dollar/kg

Unit

334

776

321

343

333

SITC code

2

0.1

1.7

0.1

2.2

0.1

Dollar/kg

Dollar/kg

283

764

931

281

126.4 118.8 136.6 Dollar/unit 752

0.9

105,775 0.8

762,534 551,984.8 692,621

Petroleum oils and oils obtained from bituminous minerals, crude 155,474 79,974

2009

Unit value

2010

2008

2009

Value (billion US dollars) 2008

2709

All goods

HS code 4-digit heading of harmonized system 2007

Table 3.20 Japan’s top ten import goods from 2008 to 2010 (Unit: billion US dollars)

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89

Table 3.21 Major imports and exports of the four economies Economy Major exports

Major imports

China

(7) Automatic data-processing machines and units thereof (7) Wire telephone sets and radio-telegraph equipment

(7) Integrated circuits (3) Petroleum oils (2) Iron ores and concentrates (8) Optical instruments and apparatus

The USA

(9) Special transactions and commodities not classified in the SITC (3) Petroleum oils and oils obtained from bituminous minerals (other than crude)

(3) Petroleum oils (7) Motor cars and other motor vehicles principally designed for the transport of persons (3) Petroleum oils and oils obtained from bituminous minerals (other than crude) (7) Wire telephone sets and radio-telegraph equipment (7) Automatic data-processing machines and units thereof (9) Special transactions and commodities not classified in the SITC

The EU

(9) Special transactions and commodities not classified in the SITC (7) Motor cars and other motor vehicles principally designed for the transport of persons (5) Medicaments (3) Petroleum oils and oils obtained from bituminous minerals

(3) Petroleum oils (9) Special transactions and commodities not classified in the SITC (3) Natural gases (3) Petroleum oils and oils obtained from bituminous minerals (7) Automatic data-processing machines and units thereof (7) Wire telephone sets and radio-telegraph equipment

Japan

(7) Motor cars and other motor vehicles (3) Petroleum oils principally designed for the transport of (3) Natural gases persons

Note The number before the names of products refers to the sections that the products belong to

the ranking of service trade in 2010 were basically from the above five economies (Table 3.22). From the perspective of the export, the USA, Germany, the UK and China were ranked the top four in 2010 with the total amount accounting for 31.2% of the world service trade exports; from the perspective of the import, the USA, Germany, China and the UK were ranked the top four occupying 27.5% share of the global service trade. In general, the five economies have occupied important shares, whether in imports or exports, with the foreign trade in services accounting for 65.88% of the world total amount. The economies mentioned above are the major participants in the pattern of global trade in services (Table 3.23). 2. Classification of Trade in Services The Uruguay Round negotiation group of trade in services, after the mid-term review meeting of the Uruguay Round, sped up the service trade negotiation and proposed

India

10

1,100

1,120

1,100

Singapore

Holland

1,210

1,380

1,400

1,700

8

Spain

7

2,300

2,270

9

France

Japan

5

China

4

6

Germany

The UK

2

5,150

The USA

1

3

Amount

Export country (region)

Ranking

3.0

3.0

3.0

3.3

3.8

3.8

4.6

6.2

6.3

14.1

Ratio (%)

0

20 10

9

8

7

−1

5 6

−1 9

4

3

2

1

Ranking

32

0

2

8

Growth rate (%)

Ireland

Italy

Holland

India

France

Japan

The UK

China

Germany

The USA

Import country (region)

Table 3.22 2010 top thirty countries (regions) in global trade in services (Unit: hundred million US dollars)

1,060

1,080

1,090

1,170

1,260

1,550

1,560

1,920

2,560

3,580

Amount

3.0

3.1

3.1

3.3

3.6

4.4

4.5

5.5

7.3

10.2

Ratio (%)

2.0

1.0

1.0

0.0

6.0

−1.0

22.0

1.0

7.0

Growth rate (%)

90 W. Yang

3 Status and Roles of Participants of International … Table 3.23 2010 ratio of trade in services of major countries in the world (Unit for amount: hundred million US dollars)

Country/region

91 Trade in services Amount

Ratio (%)

The USA

8,764

Germany

4,921

6.831642073

Japan

2,947

4.090606216

The UK

3,878

5.383094799

France

2,715

3.769396282

Italy

2,050

2.846172153

China

3,624

5.031053486

Spain

2,096

2.909425209

Holland

2,194

3.045101823

India

2,394

3.323528187

The EU (27)

29,729

Total of the world

72,037

12.1660952

41.26962533 100.0

Data source International Trade Statistics Databases, WTO

the sectoral classification method of trade in services based on the commodity-centric classification of trade in service and combining the requirements of the service trade statistics and the openness of service trade sections. After soliciting the proposals and opinions of each negotiating party, the negotiation group divided the trade in services into 12 categories with details as follows. (1) Business Services Business services refer to service exchange activities involved in commercial activities. The six types of services listed by the negotiation group of trade in services include both services for personal consumptions and for the consumptions from enterprises and governments. (1) Professional Services (including consultation). Professional services involve: legal services; engineering design services; services provided by tourism companies; urban planning and landscape; and public relation services. They also involve consultancy service activities related to the above-mentioned services; installation and assembly engineering services (excluding architectural engineering services) such as equipment installation and assembly services; equipment maintenance services except for fixed buildings such as regular maintenance for complete sets of equipment, locomotive overhaul and repairs on transport equipment such as vehicles. (2) Computer and Related Services. This type of services includes consultancy services related to the installation of computer hardware, software development and implementation service, data processing services, database services and others.

92

W. Yang

(3) Research and Development Services. This type of services includes R&D services on natural sciences, social sciences and humanities, and interdisciplinary R&D. (4) Real Estate Services. This type of services means service exchanges within the range of real estate excluding land lease services. (5) Rental/Leasing Services without Operators. This type of services mainly involves the lease services of transportation equipment such as cars, trucks, planes and ships, and of non-transportation equipment such as computers and entertainment equipment. However, they don’t include services possibly involved with the hire of operators or training services for needed staff. (6) Other Business Services. This type of services refers to biotechnology services; translation services; advertising services; market research and public opinion polling services; management consulting services; consulting services related to human beings; technical testing and analysis services; services incidental to agriculture, forestry, husbandry, mining and manufacturing; services incidental to energy distribution; placement and supply services of personnel; investigation and security; services incidental to science and technology; building-cleaning services; photographic services; packaging services; printing and publishing services; convention services; and others. (2) Communication Services This type of services mainly refers to all services related to information products, operation, storage devices and software functions. The communication services refer to information transfers and the provision of services among public communication departments, information service departments, closely related enterprise groups and private enterprises. They mainly include: postal services; courier services; telecommunication services that contain telephone services, telegraphy services, data transmission services, telex services, facsimile services; audiovisual services including radios and television services; and others. (3) Construction Services This type of services mainly refers to the whole service process of engineering buildings from design, site selection to construction. They include: siting services; domestic engineering construction projects such as the site selection of bridges, ports and railways; installation and assembly work for buildings; construction work for projects; maintenance for fixed buildings; and other services. (4) Distribution Services This type of services refers to service exchanges in the sales process, mainly including: business sales which mean wholesale services; retailing services; agency fees and commissions related to sales; franchising services; and other sales services.

3 Status and Roles of Participants of International …

93

(5) Educational Services This type of services refers to service exchanges of higher education, secondary education, primary education, pre-school education, special education and other education among countries, such as mutually sending students and visiting scholars. (6) Environmental Services They include sewage treatment services, refuse disposal services, sanitation and similar services. (7) Financial Services They mainly refer to financial service activities related to banking and insurance industry, including: ➀ banking and other financial services; acceptance of deposits; services related to the operation and management of financial markets; financial leasing; other leasing services; services related to bond markets mainly involving brokerage, stock issuances, registration management and negotiable securities management; other services auxiliary to financial intermediaries including money broking, financial advisory and foreign exchanges services. ➁ Insurance services; cargo transportation insurance including coverage for goods transported by sea, air and land; non-cargo transportation insurance including life insurance, pension or annuity insurance, invalidity and medical insurance, property insurance and debt insurance; services auxiliary to insurance including broking, consultation on insurance categories, insurance statistics and data services; reinsurance. (8) Health Related and Social Services They mainly refer to medical services, other human health related services and social services. (9) Tourism and Travel Related Services They refer to accommodation, food and beverage services, catering services and other related services provided by hotels and restaurants; travel agencies and tourists guide services. (10) Recreational, Cultural and Sporting Services They refer to all cultural, entertainment, news, libraries and sporting services excluding broadcasts, films and televisions, such as cultural exchanges and art performances. (11) Transport Services They mainly include: cargo transportation services including air transport, maritime transport, rail transport, pipeline transport, coastal and inland waterway transport and road transport; aerospace launch and transportation services such as the launches of satellites; passenger transport; vessels services (including the hire of crew); services auxiliary to transportation which refer to customs declaration, cargo loading and discharge, warehousing, port services and pre-departure inspection services.

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W. Yang

(12) Other Services Except for the two Indexes mentioned above, this paper has also selected the index of international market share when explaining the trade in services. The international market share is an important index to measure the international status of a country’s service trade. It is the ratio of the country’s service exports to the world’s total service exports, reflecting a country’s overall competitiveness in exports of trade in services. The occupying ratio of every category of trade in services refers to the proportion of export volume of every category of trade in services to the world’s total volume of trade in services of this category (Table 3.24). II. Brief Analyses on the Overall Pattern of International Trade in Services Based on the comparison between Tables 3.25 and 3.26, it is known that with regard to the field of trade in construction services, except China, the USA had a relatively weak competitive comparative advantage in this field, while Japan had a relatively weak competitive comparative disadvantage, and other countries had neutral competitive advantages. With regard to computer and information services, China had a relatively strong competitive comparative advantage and the EU also improved its advantage in this field although currently the EU has a relatively weak competitive comparative Table 3.24 Proportion of trade in services of different countries China

China

India

India

Japan

Japan

The USA

The USA

The EU

The EU

2010

2011

2010

2011

2010

2011

2010

2011

2010

2011

–0.298

–0.386

–0.556

–0.530

–0.088

–0.127

–0.050

–0.038

–0.479

–0.090

–0.198

0.142

0.118

–0.357

–0.425

0.240

0.266

–0.438

Communication

0.035

0.237

0.083

0.069

–0.165

–0.125

0.150

0.227

0.016

0.041

Construction

0.482

0.595

–0.308

#VALUE!

0.149

0.174

0.052

#VALUE!

0.210

0.217

Insurance

–0.802

–0.710

–0.475

–0.405

–0.684

–0.611

–0.618

–0.579

0.066

0.065

Transportation

Tourism

–0.49451

–0.43138

Financial Services

–0.021

0.070

–0.061

–0.123

0.068

0.102

0.656

0.658

0.371

0.359

Computers and Information

0.515

0.519

#VALUE!

#VALUE!

–0.547

–0.558

–0.169

–0.221

0.350

0.371

Royalties and License Fees

–0.880

–0.893

–0.900

#VALUE!

0.174

0.205

0.487

0.498

–0.121

–0.110

Other Business Services

0.282

0.241

#VALUE!

#VALUE!

0.041

–0.006

0.232

#VALUE!

0.064

0.070

Personal, Cultural and Entertainment Services

–0.502

–0.434

–0.165

#VALUE!

–0.725

–0.718

0.735

#VALUE!

–0.015

0.058

Government Services

–0.092

–0.223

–0.183

–0.172

0.183

0.230

–0.306

#VALUE!

–0.120

–0.082

Note The red areas in the table indicate “strong competitive comparative advantage” and the yellow for the “weak competitive comparative advantage” Data source Calculating and sorting based on the data from the website of UN comtrade

3 Status and Roles of Participants of International …

95

Table 3.25 Competitive advantage index of trade in services of the five economies from 2010 to 2011 China

China

India

India

Japan

Japan

The USA

The USA

The EU

The EU

2010

2011

2010

2011

2010

2011

2010

2011

2010

2011

–0.298

–0.386

–0.556

–0.530

–0.088

–0.127

–0.050

–0.038

–0.479

–0.49451

–0.090

–0.198

0.142

0.118

–0.357

–0.425

0.240

0.266

–0.438

–0.43138

Communication

0.035

0.237

0.083

0.069

–0.165

–0.125

0.150

0.227

0.016

0.041

Construction

0.482

0.595

–0.308

#VALUE!

0.149

0.174

0.052

#VALUE!

0.210

0.217

Insurance

–0.802

–0.710

–0.475

–0.405

–0.684

–0.611

–0.618

–0.579

0.066

0.065

Financial Services

–0.021

0.070

–0.061

–0.123

0.068

0.102

0.656

0.658

0.371

0.359

Computers and Information

0.515

0.519

#VALUE!

#VALUE!

–0.547

–0.558

–0.169

–0.221

0.350

0.371

Royalties and License Fees

–0.880

–0.893

–0.900

#VALUE!

0.174

0.205

0.487

0.498

–0.121

–0.110

Other Business Services

0.282

0.241

#VALUE!

#VALUE!

0.041

–0.006

0.232

#VALUE!

0.064

0.070

Personal, Cultural and Entertainment Services

–0.502

–0.434

–0.165

#VALUE!

–0.725

–0.718

0.735

#VALUE!

–0.015

0.058

Government Services

–0.092

–0.223

–0.183

–0.172

0.183

0.230

–0.306

#VALUE!

–0.120

–0.082

Transportation

Tourism

Note The blue areas in the table indicate “strong competitive comparative disadvantage” and the green for the “weak competitive comparative disadvantage” Data source Calculating and sorting based on the data from the website UN comtrade

disadvantage; Japan had a relatively strong competitive comparative advantage in this field, while the USA had a relatively weak competitive comparative disadvantage; due to the absence of relevant data, India was out of this comparison. With regard to communication services, China and the USA possessed relatively weak competitive comparative advantages, while Japan had a relatively weak competitive comparative disadvantage. With regard to other business services, similarly, China and the USA possessed relatively weak competitive comparative advantages, while other four economies were in neutral positions; data in this field related to India also lacked. With regard to transportation services, India had a relatively strong competitive comparative advantage, while the USA was in the neutral position and the other three economies have relatively weak competitive comparative disadvantages. With regard to tourism services, the USA and India had relatively weak competitive comparative advantages, while other three economies have relatively weak competitive comparative disadvantages. With regard to insurance services, the EU was in a neutral position and India had a relatively weak competitive comparative advantage, while other three economies had relatively strong competitive comparative disadvantages.

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W. Yang

Table 3.26 Revealed competitive advantage index of trade in services of the five economies from 2010 to 2011 China

China

India

India

Japan

Japan

The USA

The USA

The EU

The EU

2010

2011

2010

2011

2010

2011

2010

2011

2010

2011

Transportation

2.163

2.070

1.528

1.854

1.064

0.965

0.470

0.483

1.002

1.003

Tourism

2.410

2.273

1.359

1.497

0.300

0.223

0.747

0.738

0.815

0.818

0.649

0.827

0.062

0.063

0.169

0.161

0.634

0.669

1.178

1.191

Construction

7.673

7.266

0.506

#VALUE!

2.435

2.330

0.145

#VALUE!

0.934

0.892

Insurance

1.067

1.944

2.007

2.729

0.340

0.412

0.949

0.939

1.111

1.069

Financial Services

0.241

0.129

1.984

1.885

0.283

0.286

1.266

1.238

1.127

1.145

Computers and Information

2.141

2.440

#VALUE!

#VALUE!

0.105

0.104

0.335

0.323

1.214

1.194

Royalties and License Fees

0.175

0.155

0.049

#VALUE!

2.426

2.342

2.036

2.039

0.832

0.811

Other Business Services

3.132

3.016

#VALUE!

#VALUE!

0.940

0.915

0.600

#VALUE!

1.059

1.079

Personal, Cultural and Entertainment Services

0.137

0.141

0.681

#VALUE!

0.072

0.067

1.703

1.607

1.058

1.109

Government Services

0.681

0.449

0.631

0.730

1.000

1.158

1.397

#VALUE!

0.665

0.670

Communication

With regard to financial services, the USA had a relatively strong competitive comparative advantage, the EU and Japan had relatively weak competitive advantages, while India had a relatively weak competitive comparative disadvantage and China was in a neutral position. With regard to patent and franchise services, China and India had relatively strong competitive comparative disadvantages while the EU had a relatively weak competitive comparative disadvantage, and Japan and the USA had relatively weak competitive comparative advantages. With regard to personal, cultural and entertainment services, Japan had a relatively strong competitive comparative advantage, while India and China had relatively weak competitive comparative disadvantages, the EU was in a neutral position and the USA had a relatively strong competitive comparative advantage. With regard to government services, Japan had a relatively weak competitive comparative advantage and the EU was in a neutral position, while other three economies have relatively weak competitive comparative disadvantage. In total, the five economies with comparatively large trade volumes have relatively strong competitive comparative advantages in a few fields and have relatively weak competitive comparative advantages and competitive comparative disadvantages in other more fields. In contrast to other economies, the fields in which China possesses relatively strong comparative advantages are basically related to labor-intensive and resource-intensive industries.

3 Status and Roles of Participants of International …

97

The similar results can be achieved through the calculation of the Revealed Comparative Advantage of the 11 fields of trade in services of each economy (see Table 3.26). But from the results of RCA index, China had a strong competitive comparative advantage in the field of other business services, while having a remarkable competitive comparative advantage in the field of computer and information services. Although the result was a little differentiated from the result of TC index, they were basically similar with each other. However, the calculated results of RCA index and TC index of India in insurance services, financial services and transportation services were differentiated largely. Except for government services, the results of other items of Japan were basically similar. The conclusion got from the calculation of RCA index was roughly the same with the one got from the calculation of TC index. The ratio of international market share of various kinds of trade in services was calculated as follows. The trade in transportation services of the five economies accounted for 63.14% of the total trade of international markets. Among the shares, the EU occupied 43% and the USA 8.9%, while China only occupied 4.3%, 10% of the share of the EU and less than a half of American share. The trade in tourism services of the five economies accounted for 57.1% of the total trade of international markets. Among the shares, the EU occupied 35% and the USA 14.2%, while China only occupied 4.8%, less than one-seventh of the share of the EU and about a third of American share. The trade in communication services of the five economies accounted for 66.5% of the total trade of international markets. Among the shares, the EU occupied 51%, the USA 12.1% and India 1.5%, while China only occupied 1.3%, a little higher than that of Japan, but less than one-fortieth of the share of the EU and about a tenth of American share. The trade in construction services of the five economies accounted for 70.3% of the total trade of international markets. Among the shares, the EU occupied 40%, the USA 2.8% and India 0.6% and Japan 11.5%, while China only occupied 15%, less than a half of the share of the EU, but took the second place. The trade in insurance services of the five economies accounted for 71.92% of the total trade of international markets. Among the shares, the EU occupied 48%, the USA 18% and India 2.2% and Japan 1.6%, while China only occupied 2.1%, a little higher than that of Japan and about one twenty-fourth of the share of the EU and one-ninth of American share. The trade in computer and information services of the five economies accounted for 63.56% of the total trade of international markets. Among the shares, the EU occupied 52.4%, the USA 6.4% and Japan 0.5%, while China only occupied 4.3%, a little higher than that of Japan and about one-twelfth of the share of the EU and near to the American share (India’s data on trade in computer and information services lacked). The trade in patent and franchise services of the five economies accounted for 86.25% of the total trade of international markets. Among the shares, the EU occupied 35.93%, the USA 38.7% and Japan 11.22%, while China only occupied 0.35%, a little higher than India’s 0.05% share and about a hundredth of the share of the EU, a hundred and tenth of American share and one thirty-second of that of Japan. The trade in other business services of the five economies accounted for 67.75% of the total trade of international markets. Among the shares, the EU occupied 45.74%, the USA 11.39% and Japan

98

W. Yang

4.34%, while China only occupied 6.26%, a little higher than that of Japan (lack of India’s data) and about one seventh of the share of the EU and a half of American share. The trade in personal, cultural and entertainment services of the five economies accounted for 79.4% of the total trade of international markets. Among the shares, the EU occupied 45.68%, the USA 32.37%, Japan 0.33% and India 0.75%, while China only occupied 0.27%, about 1/170 of the share of the EU and 1/120 of the share of America. The trade in government services of the five economies accounted for 61.02% of the total trade of international markets. Among the shares, the EU occupied 28.73%, the USA 26.55% and Japan 3.68%, while China only occupied 1.36%, a little higher than India’s 0.69% share and about a twentieth of the share of the EU and the USA, and a half of that of Japan. The trade in financial services of the five economies accounted for 76.7% of the total trade of international markets. Among the shares, the EU occupied 48.67%, the USA 24.06%, Japan 1.31% and India 2.2%, while China only occupied 0.48%, about a hundredth of the share of the EU, a fiftieth of that of the USA, a third of that of Japan and a fifth of that of India (Figs. 3.1, 3.2, 3.3, 3.4 and 3.5). The change trends of every field of trade in services of the five economies are shown in Fig. 3.6. It is known that China had been in an upward trend in the transportation services all along before 2008 and started to fall after 2008, but has always

Fig. 3.1 Comparison of magnitude of value of China’s exports in 2010

3 Status and Roles of Participants of International …

99

Fig. 3.2 Changes of China’s foreign trade (Unit billion US dollars)

Fig. 3.3 Changes of American foreign trade (Unit billion US dollars)

been in a position lower than the USA and Japan, while higher than the EU and India. The USA has always been in an upward trend since 2004, while Japan dropped a little after 2008, lower than that of the USA. In the trade in tourism services, China started to decline sharply after 2006. The USA and India surpassed China after 2006 and 2007 respectively, while Japan has basically been in an upward trend and the EU has maintained a stable state. In the trade in communication services, except for a relatively small violation of the EU, other four economies recorded relatively huge violations, especially China and India. China fell sharply in 2001, but rocketed up in 2011. India fell sharply in 2002 and 2009. The USA surpassed China after 2004, while Japan has always been in a disadvantage.

100

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Fig. 3.4 Changes of the EU’s foreign trade (Unit billion US dollars)

Fig. 3.5 Changes of Japan’s foreign trade (Unit billion US dollars)

In the trade in construction services, the EU, Japan and the USA have been stable all along, while China and India have experienced huge changes. China has always been stronger than other four economies in this field since 2008. In the trade in insurance services, China has always been the last one among the five economies since 2003 although it has always been in an upward trend. The EU has an obvious comparative advantage and India follows the EU. Japan experienced huge violations while the USA has been stable. In the trade in financial services, China and India experienced changes one after another. The USA is still the most competitive country in this field and the EU is in the secondary place followed by Japan. However, Japan has been in a downward trend.

3 Status and Roles of Participants of International …

101

Year

Fig. 3.6 Change chart of competitive index of trade in transportation services of the five economies

In the trade in computer and information services, China has been the top among the five economies since 2009 (India is out of the comparison due to the lack of data). The EU has maintained a slowly upward trend, while the USA and Japan have been in downward trends. In the trade in patent and franchise services, the USA has possessed a comparatively strong competitive advantage, while China has been the last one among the five economies. India experienced a huge change with a rapid rise in 2011. The EU and Japan have been in slowly upward trends. In the trade in other business services, the USA had been in the leading position among the five economies before 2009, but China took its place after 2009. The EU has been in a slowly upward trend and Japan experienced a huge violation, but basically has been in an upward trend. Data on India were in shortage. In the trade in personal, cultural and entertainment services, Japan has always been the last one among the five economies. The change trends of China and India were basically similar. The EU has been in a slowly upward trend, while the USA has been in a downward trend, but has been the top one among the five economies. In the trade in government services, the change trends of the EU and the USA were similar. They all have been in an upward trend since 2008. India has been in a downward trend. Although China and Japan experienced ups and downs with relatively huge violations, Japan has possessed a stronger competitive advantage. III. Development Situation of Trade in Services of Major Economies 1. China China’s development of trade in services started relatively late. However, since the 1990s, China’s trade in services has grown rapidly with a rate higher than that of world trade in services at the same period. From the perspective of statistical breakdown

102

W. Yang

of balances of trade in services, China’s deficits of trade in services are concentrated in the fields of transportation and other services. From the perspective of transportation services, as services in this field have always been in a state of deficit, its TC index is a negative number, which means that China is in a competitive disadvantage in this field. This situation is mainly caused by the population of ocean container transportation and air transportation which have increasingly higher demand for transportation vehicles. As a result, transportation services increasingly tend to be capital-intensive type, or even the technology-intensive type. However, China has always been weak in the foundations of capital and technology. With regard to other trade in services, it is known from the development trend that the deficit has continuously increased. From the analysis angle of factor intensity, other trade in services belongs to capital, technology and human capital-intensive product and is one of China’s weak segments. It is known from Tables 3.27, 3.28 and the figure below that China has a competitive advantage in construction services, other business services, computer and information services, especially in the trade in construction services as it also belongs to a labor-intensive product. Meanwhile, the gap between traditional services and modern services in China is increasingly widened, which means that China’s structure of trade in services has not been optimized significantly. Currently, traditional services are still in a dominant position. The development level of trade in services in China is relatively low with its structure in an urgent need to be improved (Figs. 3.7, 3.8, 3.9, 3.10, 3.11, 3.12, 3.13, 3.14, 3.15, 3.16, 3.17, 3.18, 3.19, 3.20 and 3.21). 2. The USA Since 1981, the trade in service in the USA has always been dominated by capitalintensive services. After the 1990s, the information age brought by new technological revolutions and the all-dimensional penetration of high and new technologies into economic lives opened up a new landscape for the trade in services in the USA. Scientific and technological revolutions have also accelerated the international flow of labor and high-quality scientific and technical personnel in the USA, especially professional scientific and technical personnel as well as senior management personnel, which have promoted the export of trade in services. From the perspective of specific departments, the ratio of transportation services in the total trade in services has basically been stable with less violation since the 1990s. It was the same situation for the export of trade in tourism services (except for 2001). The proportions of other trade in services have risen steadily since the 1990s. Other trade in services replaced the traditional service departments and became the new leading item in the export of trade in services in the USA. From the analysis perspective of the factor intensity of products, since the 1990s, the trade in services in the USA has mainly been capital-intensive type, representing a trend that the capital-intensive services have still occupies a higher proportion in the total export trade in services, while the proportion of labor-intensive services has declined year after year, and technology and human capital-intensive services have grown steadily. The proportions of patent and franchise services and of personal, cultural and leisure services have

−0.198

2011 −0.386

0.695

0.237

0.035

−0.005

0.019

0.041

−0.017

−0.109

−0.035

0.198

0.078

−0.092

−0.246

0.595

0.482

0.235

0.406

0.298

0.146

0.231

0.046

0.043

0.128

−0.010

−0.916

−0.710

−0.802

−0.753

−0.804

−0.844

−0.883

−0.858

−0.883

−0.872

−0.879

−0.845

0.112

0.070

−0.021

−0.248

−0.285

−0.415

−0.719

−0.047

−0.190

−0.210

−0.276

0.125

Data source Calculating and sorting based on the data from the website UN comtrade

−0.048

−0.090

2009 −0.328

0.061

2008 −0.134

2010 −0.298

0.165

0.111

2006 −0.241

0.148

2005 −0.297

2007 −0.160

0.068

0.147

2003 −0.395

0.139

2002 −0.408

2004 −0.341

0.106

0.122

2000 −0.478

2001 −0.419

0.519

0.515

0.337

0.328

0.326

0.260

0.063

0.133

0.031

−0.279

0.144

0.146

−0.893

−0.880

−0.925

−0.895

−0.920

−0.940

−0.943

−0.900

−0.941

−0.918

−0.893

−0.882

0.241

0.282

0.144

0.091

0.141

0.169

0.177

0.178

0.254

0.134

0.059

0.048

−0.434

−0.502

−0.482

0.243

0.346

0.062

−0.070

−0.622

−0.350

−0.528

−0.282

0.536

−0.223

−0.092

0.061

−0.160

−0.216

0.067

−0.115

−0.168

−0.117

−0.105

0.296

0.244

Transportation Tourism Communications Construction Insurance Finance Computer Patent Other Personal Government and and commercial cultural services information franchise services leisure

Table 3.27 China’s competitive advantage index of trade in services

3 Status and Roles of Participants of International … 103

2.273

2011 2.070

2.008

0.827

0.649

0.647

0.805

0.709

0.518

0.408

0.427

0.753

0.774

0.389

0.976

7.266

7.673

4.812

4.728

3.152

2.038

2.296

1.575

1.639

1.771

1.306

0.211

1.944

1.067

0.999

0.829

0.594

0.445

0.561

0.340

0.287

0.235

0.407

0.039

0.129

0.241

0.085

0.053

0.039

0.033

0.041

0.031

0.063

0.024

0.051

Data source Calculating and sorting based on the data from the website UN comtrade

2.274

2.410

2009 1.721

2.128

2008 2.157

2010 2.163

2.236

2.133

2006 1.653

2.109

2005 1.356

2007 2.045

1.605

2.002

2003 0.982

2.071

2002 0.805

2004 1.202

1.693

1.893

2000 0.535

2001 0.683

2.440

2.141

1.674

1.563

1.351

1.137

0.857

0.849

0.726

0.532

0.433

0.367

0.155

0.175

0.099

0.132

0.090

0.063

0.052

0.089

0.053

0.074

0.067

0.048

3.016

3.132

2.589

2.449

2.390

2.083

1.912

1.888

1.993

1.418

1.252

1.189

0.141

0.137

0.120

0.499

0.388

0.190

0.208

0.064

0.062

0.061

0.063

0.024

0.449

0.681

0.720

0.490

0.407

0.461

0.436

0.366

0.401

0.502

0.677

0.469

Transportation Tourism Communications Construction Insurance Finance Computer Patents Other Personal Government and and commercial cultural services information franchise services leisure

Table 3.28 China’s RCA index of trade in services

104 W. Yang

3 Status and Roles of Participants of International …

105

Year

Fig. 3.7 Change chart of competitive index of trade in tourism services of the five economies

Year

Fig. 3.8 Change chart of competitive index of trade in communication services of the five economies

increased significantly, which reflected that the competitive advantage of technology and human capital-intensive services has been increasingly enhanced. In total, since the 1990s, the overall development level of trade in services in the USA has been relatively quick and the structure of its trade in services has been optimized and upgraded (Tables 3.29 and 3.30). 3. The EU With regard to the Competitive Advantage Indexes of fields of trade in services, except for the four fields as transportation, tourism, patent and franchise, and government services, all of others were positive, while the four negative ones were with small numerical values. The TC index of tourism became negative in 2009 due to the influence of the financial crisis. The transportation services have been always in a

106

W. Yang

Year

Fig. 3.9 Change chart of competitive index of trade in construction services of the five economies

Year

Fig. 3.10 Change chart of competitive index of trade in insurance services in the five economies

competitive disadvantage, while the government services started to fall in 2003 and picked up a little in 2011, but still in a disadvantage. The patent and franchise services have risen all along with small violations in the mid. From the analysis perspective of product factors, the EU’s capital-intensive products are still in a competitive advantage, the technology and human capital-intensive products are in the secondary place. Although construction services belong to the labor-intensive products, the EU still has had a competitive advantage all along in this field. The proportion of exports of communication services, computer and information services from the EU accounted for over 51% with a comparatively strong competitiveness. The proportion of insurance services, financial services, personal, cultural and entertainment services as

3 Status and Roles of Participants of International …

107

Year

Fig. 3.11 Change chart of competitive index of trade in financial services of the five economies

Year

Fig. 3.12 Change chart of competitive index of trade in computer and information services of the five economies

well as other business services accounted for over 46%, still possessing a comparatively strong competitiveness. In total, the structure of trade in services in the EU is comparatively good (Tables 3.31 and 3.32). 4. Japan From the perspective of Japan’s Competitive Advantage index and the RCA of trade in services, its overall competitive advantage of every service item was relatively weak. Except the TC Index of construction, patent and franchise, government services and financial services, others were all negative. But this did not mean that Japan’s trade in services lagged behind other countries. The construction services are one of advantageous industries in Japan. Japan has run a surplus in export of construction services since the 1990s, possessing a comparatively strong competitiveness in international

108

W. Yang

Year

Fig. 3.13 Change chart of competitive index of trade in patent and franchiser services of the five economies

Fig. 3.14 Change chart of competitive index of trade in other business services of the five economies

markets. What worth mentioning are Japan’s financial services. The competitive advantage of Japan’s financial services has been strengthened significantly since 2000 and maintained a trend of steady growth. Japan’s advantage in patent and franchise services was in the secondary place, weaker than that of the USA. In 2004, the surplus firstly showed in patent and franchise services, which reflected the globalized development of Japan’s manufacturing industry. Furthermore, Japan had certain competitiveness in the field of government services. Japan mainly conducted traditional trade in services before 1990 and shifted to modern trade in services after 1990. The exports of capital-intensive services have occupied a very high proportion since 1990s, which has reflected that Japan has huge potentials in technology and human capital-intensive services (Tables 3.33 and 3.34).

3 Status and Roles of Participants of International …

109

Fig. 3.15 Change chart of competitive index of trade in personal, cultural and entertainment services of the five economies

Fig. 3.16 Change chart of competitive index of trade in government services of the five economies

5. India Due to the incomplete data, we have to analyze India by relying on the existing data. From these data, it is known that India had a comparatively strong competitiveness in other business services and tourism services, a very strong competitive advantage in financial services and certain competitiveness in construction. From the analysis of the existing data, we also know that India mainly exported capital-intensive services, and had a relatively competitive advantage in technology and human capital-intensive services, but had a relatively weak competitive advantage in labor-intensive services (Tables 3.35 and 3.36).

110

Fig. 3.17 RCA index of China’s trade in services from 2000 to 2011

Fig. 3.18 Change chart of American RCA index of trade in services from 2000 to 2011

W. Yang

3 Status and Roles of Participants of International …

111

Year

Fig. 3.19 Change chart of the EU’s RCA index of trade in services from 2000 to 2011

Year

Fig. 3.20 Change chart of Japan’s RCA index of trade in services from 2000 to 2011

3.3 Status and Roles of Multinational Enterprises The development of multinational enterprises has promoted the growth of international trade and world economy, making it possible for products from developed countries to be produced and sold in host countries through the way of foreign direct

112

W. Yang

(Year)

Fig. 3.21 Change chart of India’s RCA index of trade in services from 2000 to 2011

investment for the purpose of circumventing trade barriers and promoting the competitiveness of products; the foreign direct investment and private credits of multinational enterprises have complemented developing countries’ shortages in their import funds; the capital flow of multinational enterprises has accelerated the changes of composition of foreign trade of developing countries; many important manufactured products and trade in raw materials are under control of multinational enterprises; multinational enterprises have also controlled the trade of international technologies; in the fields of global scientific and technological development and technology trade, multinational enterprises, especially those from advanced countries like the USA, Japan, Germany and the UK, play a pivotal role. At present, multinational enterprises have occupied around 80% of patent rights of the world total, basically monopolizing the technology trade in international markets; in developed countries, about 90% of production technologies and 75% of technology trade are under control of the Top 500 multinational enterprises in these countries. Many experts and scholars hold the view that multinational enterprises are the main resources of new modern technologies. Therefore, our research group conducted a simple analysis on the world Top 500 multinational enterprises in 2012. I. Distribution of Industries Among the world Top 500 multinational enterprises in 2012, 15 engaged in the banking and insurance industry, 15 in energy-related industries such as oil refining, mining and petroleum, 7 in industries related to vehicles, and parts and components, 5 in electronic and electrical equipment industry, 4 in comprehensive business industries like general commodity retail, food and wholesale, 3 in telecommunications industry and 1 in public facilities industry. Manufacturing of automobiles, electronic and electrical equipment, computers and office equipment all belong to

0.266

2011 −0.038

0.179

0.227

0.15

0.128

0.104

0.043

0.043

−0.009

−0.025

−0.001

−0.054

−0.062

0.656

NA

0.052

0.06

0.059

0.555

0.508

0.794

0.701

0.606

0.602

0.666

−0.513

−0.579

−0.618

−0.63

−0.629

−0.612

−0.575

−0.583

−0.598

−0.617

−0.66

−0.66

0.536

0.658

0.656

0.642

0.571

0.51

0.538

0.657

0.67

0.663

0.62

0.551

Data source Calculating and sorting based on the data from the website UN comtrade

0.210

0.240

2009 −0.046

0.231

2008 −0.082

2010 −0.050

0.163

0.19

2006 −0.151

0.164

2005 −0.172

2007 −0.106

0.155

0.15

2003 −0.163

0.157

2002 −0.116

2004 −0.171

0.187

0.171

2000 −0.131

2001 −0.139

−0.221

−0.169

−0.117

−0.126

−0.08

−0.14

0.514

0.515

0.527

0.561

0.502

0.550

0.498

0.487

0.499

0.523

0.535

0.504

0.447

0.418

0.423

0.394

0.422

0.448

NA

0.232

0.227

0.226

0.223

0.196

0.178

0.2

0.202

0.214

0.2

0.168

NA

0.735

0.719

0.741

0.825

0.836

0.758

0.897

0.944

0.959

0.964

0.960

NA

−0.306

−0.327

−0.346

−0.28

−0.231

−0.181

−0.253

−0.248

−0.163

−0.027

0.060

Transportation Tourism Communications Construction Insurance Finance Computer Patent Other Personal Government and and commercial cultural services information franchise services leisure

Table 3.29 Competitive advantage index of trade in services in the USA

3 Status and Roles of Participants of International … 113

0.738

2011 0.483

0.649

0.669

0.634

0.584

0.556

0.544

0.548

0.448

0.505

0.583

0.611

0.694

0.310

#VALUE!

0.145

0.216

0.187

0.169

0.145

0.125

0.225

0.285

0.416

0.392

0.747

0.939

0.949

0.950

0.846

0.751

0.807

0.813

0.687

0.577

0.522

0.646

1.166

1.238

1.266

1.272

1.108

1.092

1.132

1.174

1.263

1.208

1.233

1.192

Data source Calculating and sorting based on the data from the website UN comtrade

0.747

0.747

2009 0.472

0.763

2008 0.441

2010 0.470

0.771

0.743

2006 0.473

0.804

2005 0.484

2007 0.450

0.839

0.800

2003 0.538

0.942

2002 0.617

2004 0.497

1.106

1.029

2000 0.698

2001 0.643

0.323

0.335

0.365

0.345

0.392

0.408

0.462

0.475

0.570

0.622

0.677

0.753

2.039

2.036

2.027

2.163

2.294

2.296

2.249

2.256

2.453

2.605

2.599

2.694

0.600

0.613

0.566

0.572

0.575

0.582

0.614

0.665

0.768

0.782

0.744

1.607

1.703

1.917

1.756

1.945

1.929

1.688

1.742

1.959

2.066

2.136

1.938

1.397

1.411

1.210

1.394

1.377

1.194

0.958

0.763

0.765

0.952

1.170

Transportation Tourism Communications Construction Insurance Finance Computer Patent Other Personal Government and and commercial cultural services information franchise services leisure

Table 3.30 RCA index of trade in services in the USA

114 W. Yang

−0.198

2011 −0.386

−0.046

0.041

0.016

0.006

0.020

−0.008

−0.009

0.014

−0.005

−0.032

−0.037

−0.037

0.169

0.217

0.210

0.177

0.206

0.190

0.226

0.213

0.135

0.162

0.163

0.166

0.194

0.065

0.066

0.098

0.087

0.102

0.052

−0.072

0.110

0.206

0.295

0.179

0.353

0.359

0.371

0.387

0.391

0.400

0.358

0.348

0.352

0.345

0.341

0.349

Data source Calculating and sorting based on the data from the website UN comtrade

−0.048

−0.090

2009 −0.328

0.061

2008 −0.134

2010 −0.298

0.165

0.111

2006 −0.241

0.148

2005 −0.297

2007 −0.160

0.068

0.147

2003 −0.395

0.139

2002 −0.408

2004 −0.341

0.122

0.106

2001 −0.419

2000 −0.478

0.371

0.350

0.339

0.341

0.332

0.328

0.314

0.348

0.321

0.272

0.236

0.247

−0.110

−0.121

−0.135

−0.170

−0.117

−0.137

−0.134

−0.165

−0.248

−0.230

−0.248

−0.226

0.070

0.064

0.042

0.053

0.056

0.057

0.051

0.030

0.011

−0.011

−0.013

−0.020

0.058

−0.015

−0.061

−0.092

−0.109

−0.138

−0.097

−0.060

−0.094

−0.121

−0.217

−0.224

−0.082

−0.120

−0.120

−0.128

−0.086

−0.041

−0.039

0.040

0.212

0.226

0.074

0.027

Transportation Tourism Communications Construction Insurance Finance Computer Patents Other Personal Government and and commercial cultural services information franchise services leisure

Table 3.31 Competitive advantage index of trade in services in the EU

3 Status and Roles of Participants of International … 115

0.818

2011 1.003

1.014

1.191

1.178

1.156

1.179

1.189

1.193

1.241

1.230

1.211

1.142

1.105

1.229

0.892

0.934

0.976

0.990

1.086

1.136

1.200

1.153

1.327

1.225

1.269

1.026

1.069

1.111

1.139

1.177

1.220

1.190

1.077

1.302

1.413

1.440

1.204

1.153

1.145

1.127

1.182

1.262

1.265

1.231

1.221

1.218

1.203

1.175

1.160

Data source Calculating and sorting based on the data from the website of UN comtrade

0.896

0.815

2009 1.061

0.938

2008 1.064

2010 1.002

0.975

0.968

2006 1.071

0.984

2005 1.067

2007 1.072

1.041

1.020

2003 1.066

0.985

2002 1.033

2004 1.081

0.966

0.964

2000 1.001

2001 1.022

1.194

1.214

1.269

1.298

1.311

1.307

1.347

1.402

1.378

1.294

1.233

1.179

0.811

0.832

0.870

0.812

0.750

0.733

0.751

0.744

0.647

0.597

0.581

0.575

1.079

1.059

1.125

1.162

1.188

1.189

1.216

1.218

1.203

1.180

1.170

1.097

1.109

1.058

0.976

0.955

0.920

0.911

1.034

1.047

0.989

0.856

0.873

0.766

0.670

0.665

0.718

0.780

0.812

0.802

0.833

0.983

0.968

1.025

0.876

0.802

Transportation Tourism Communications Construction Insurance Finance Computer Patent Other Personal Government and and commercial cultural services information franchise services leisure

Table 3.32 RCA index of trade in services in the EU

116 W. Yang

−0.425

2011 −0.127

−0.167

−0.125

−0.165

−0.253

−0.242

−0.300

−0.254

−0.219

−0.155

−0.092

−0.104

−0.197

0.188

0.174

0.149

0.042

0.096

0.131

0.184

0.205

0.177

0.148

0.126

0.114

−0.842

−0.611

−0.684

−0.712

−0.689

−0.507

−0.487

−0.369

−0.526

−0.810

−1.267

−1.080

0.207

0.102

0.068

0.225

0.156

0.265

0.346

0.305

0.248

0.228

0.315

0.244

Data source Calculating and sorting based on the data from the website UN comtrade

−0.419

−0.357

2009 −0.124

−0.441

2008 −0.070

2010 −0.088

0.163

0.19

2006 −0.151

0.164

2005 −0.172

2007 −0.106

0.155

0.15

0.157

2002 −0.116

2003 −0.163

0.171

2004 −0.171

−0.81

2000 −0.156

2001 −0.139

−0.558

−0.547

−0.627

−0.615

−0.576

−0.527

−0.367

−0.354

−0.324

−0.306

−0.303

−0.323

0.205

0.174

0.126

0.168

0.165

0.129

0.093

0.070

0.054

−0.028

−0.030

−0.037

−0.006

0.041

0.044

0.008

−0.028

0.015

0.015

−0.058

−0.124

−0.174

−0.189

−0.157

−0.718

−0.725

−0.733

−0.777

−0.786

−0.806

−0.840

−0.875

−0.742

−0.581

−0.844

−0.833

0.230

0.183

0.157

0.048

0.100

0.133

0.170

0.281

0.143

−0.247

−0.182

−0.115

Transportation Tourism Communications Construction Insurance Finance Computer Patent Other Personal Government and and commercial cultural services information franchise services leisure

Table 3.33 Japan’s competitive advantage index of trade in services

3 Status and Roles of Participants of International … 117

0.223

2011 0.965

0.531

0.161

0.169

0.156

0.145

0.145

0.132

0.144

0.190

0.338

0.451

0.447

4.099

2.330

2.435

2.737

2.716

2.615

2.878

2.766

3.186

2.501

2.842

3.263

0.412

0.340

0.234

0.244

0.384

0.554

0.386

0.412

0.286

0.283

0.404

0.394

0.454

0.598

0.610

0.628

0.619

0.647

−0.185 0.148

0.621 0.606

0.147 −0.079

Data source Calculating and sorting based on the data from the website UN comtrade

0.255

0.300

2009 0.997

0.244

2008 1.140

2010 1.064

0.241

0.231

2006 1.281

0.206

2005 1.359

2007 1.184

0.188

0.202

2003 1.422

0.205

2002 1.460

2004 1.385

0.203

0.203

2000 1.614

2001 1.530

0.104

0.105

0.096

0.102

0.130

0.161

0.227

0.234

0.307

0.411

0.574

0.699

2.342

2.426

2.163

2.568

2.626

2.681

2.534

2.566

2.632

2.507

2.745

2.619

0.915

0.940

1.042

0.939

0.842

0.954

0.969

0.897

0.892

1.024

1.041

1.189

0.067

0.072

0.087

0.079

0.084

0.084

0.065

0.049

0.113

0.281

0.116

0.106

0.858

0.797

0.793

0.736

0.655

0.744

0.891

1.120

0.816

0.480

0.571

0.666

Transportation Tourism Communications Construction Insurance Finance Computer Patent Other Personal Government and and commercial cultural services information franchise services leisure

Table 3.34 Japan’s RCA index of trade in services

118 W. Yang

0.118

2011 −0.530

0.702

0.069

0.083

0.074

0.407

0.462

0.565

0.579

0.308

0.227

−0.125

0.611

0.596

NA

−0.308

−0.126

0.089

0.017

−0.124

−0.270

−0.232

−0.628

−0.444

−0.757

−0.520

−0.405

−0.475

−0.449

−0.470

−0.359

−0.412

−0.425

−0.350

−0.481

−0.458

−0.484

−0.645

−0.123

−0.061

−0.013

0.095

0.022

0.095

0.136

−0.397

−0.142

−0.411

−0.707

Data source Calculating and sorting based on the data from the website UN comtrade

0.089

0.142

2009 −0.527

0.104

2008 −0.573

2010 −0.556

0.116

0.132

2006 −0.534

0.095

2005 −0.565

2007 −0.547

0.109

0.123

2003 −0.510

0.019

2002 −0.550

2004 −0.503

0.125

0.031

2000 −0.630

2001 −0.611

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

−0.900

−0.812

−0.824

−0.753

−0.866

−0.531

−0.841

−0.916

−0.890

−0.790

−0.548

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

−0.165

0.272

0.370

0.502

0.494

0.029

−0.143

NA

NA

NA

NA

−0.172

−0.183

−0.281

−0.130

−0.136

−0.267

−0.175

0.003

0.149

0.146

0.273

0.385

Transportation Tourism Communications Construction Insurance Finance Computer Patent Other Personal Government and and commercial cultural services information franchise services leisure

Table 3.35 India’s competitive advantage index of trade in services

3 Status and Roles of Participants of International … 119

1.497

2011 1.854

0.078

0.063

0.062

0.070

0.110

0.116

0.132

0.110

0.087

0.094

0.089

0.140

1.483

#VALUE!

0.506

0.776

0.702

0.805

0.836

0.558

1.010

0.640

0.600

0.187

0.916

2.729

2.007

1.743

1.707

1.807

1.649

1.752

1.370

0.683

0.680

0.921

0.252

1.885

1.984

1.293

1.308

1.042

0.966

0.583

0.205

0.276

0.522

0.289

Data source Calculating and sorting based on the data from the website UN comtrade

1.164

1.359

2009 1.462

1.124

2008 1.184

2010 1.528

1.037

1.121

2006 1.085

0.984

2005 0.922

2007 1.076

0.751

0.875

2003 0.684

0.575

2002 0.635

2004 0.794

0.658

0.621

2000 0.526

2001 0.551

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE!

#VALUE! #VALUE!

0.049

0.081

0.062

0.078

0.034

0.125

0.036

0.022

0.020

0.041

0.089

Government services

0.617

0.631

0.560

0.517

0.426

0.398

0.528

#VALUE! 0.730

0.681

1.051

1.540

1.139

0.773

0.315

0.130

#VALUE! 0.549

#VALUE! 0.890

#VALUE! 1.533

#VALUE! 1.964

Transportation Tourism Communications Construction Insurance Finance Computer Patent and Other Personal and franchise commercial cultural information services leisure

Table 3.36 India’s RCA index of trade in services

120 W. Yang

3 Status and Roles of Participants of International …

121

the high-tech manufacturing industry. Therefore, a total of 13 enterprises (including 7 in auto industry) among the world Top 50 shall be included into the high-tech manufacturing industry if the fact is taken into consideration that a large proportion of diversified productions of the General Electric of the USA belongs to the manufacturing industry. Therefore, the high-tech manufacturing enterprises accounted for 26% of the total. This proves the importance of the high-tech manufacturing industry to the whole world as it provides automobiles, electronic and electrical appliances and equipment, computers and office equipment for people to use in their daily lives and working. Fifteen of the global Top 50 engaged in oil refining and petroleum production, accounting for 30% of the sum. From the perspective of the ranking lists of recent years, a certain number of enterprises in this industry entered the Top 50 list with a comparatively stable frequency. The most interesting thing is that these oil refining enterprises and petroleum production enterprises are not from major oilproducing countries in the world, but are concentrated in oil consuming countries. This fully demonstrates that oil, as the important strategic resource currently, is the focus that world powers are scrambling for and the core of energy problems. The three Chinese enterprises in the Top 50 list are all energy-related enterprises including an electric power company (State Grid Corporation of China). It further demonstrates that energy is a global problem. II. Distribution of Regions From the perspective of the regional distribution, the Top 500 multinational enterprises are mainly distributed in three regions—North America, the EU and East Asia. In 2012, 146, 152 and 160 enterprises were located in these regions respectively, accounting for 91.6% of the Top 500. The number of enterprises in North America declined a little, while the number in the EU has been basically stable; the number of enterprises in the Top 500 coming from East Asia such as China and South Korea has increased year by year. From a vertical perspective, enterprises from the three regions as the USA, Japan and the EU have taken major places in the Top 500 since 2001, except for China’s rise. However, in 2011, China quickly lifted up its place into the top four, ranking the second. In a sense, the newly added over 60 Chinese enterprises grabbed market shares from enterprises in the three regions. On the list of 2001, 186 and 105 enterprises were from the USA and Japan respectively, and 143 were from major countries in the EU (Germany, Italy, the UK, France, Holland, Swiss, Sweden and Spain). The three regions could be viewed as with equal influence and power. However, enterprises from the USA, Japan and the EU totaled 434, accounting for 86.8% of the Top 500. They dominated the basic pattern of the world economy. Other places on the list were sparsely distributed. But the number of enterprises into the TOP 500 from Asia (especially East Asia) has presented a stable increasing trend. There were 25 enterprises in 2001, accounting for about 5% of the total. Although currently the USA has still the most enterprises on the list, the number of enterprises on the list declined sharply in the past 10 years with the reduction ranked the first among all countries. 132 enterprises on the list of this year headquarter

122

W. Yang

in the USA, one less that of last year. It is worth of noting that this is the 10th consecutive years that the number of enterprises from the USA has declined. Ten years ago, the USA had 197 enterprises on the list and their revenues occupying 42% of the total revenue of the TOP 500 at that time. Ten years ago, the number of enterprises from the USA had continuously increased from 149 in 1995 to 175 in 1998. The highest was up to 197 in 2002, accounting for a third of the Top 500. Correspondingly, the competitiveness of American super-large enterprises had been increasingly enhanced. Among the Global Top 100, the number of American enterprises rose from 22 in 1995 to 32 in 1998, and reached 32 in 1998 and 37 in 2001. In 2001, four of the top 5 enterprises among the TOP 500 were from the USA. The General Motors, Wal-Mart and Exxon Oil were ranked on the top. The number of Japanese enterprises in the TOP 500 dropped from 147 in 1995 to 114 in 1998, further to 105 in 2001 and to 68 now. After 1995, the number of Japanese enterprises on the list declined year by year. It was the first time that the number of enterprises from China’s mainland surpassed that of Japanese enterprises. Such kind of change has close relation with the economic status of the whole country. The period from the end of the 2nd World War to the early 1990s was a period of Japan’s postwar economic miracle. During the period, Japan realized the economic takeoff with a speed surprising the whole world. However, with the bursting of Japan’s asset bubbles, Japanese enterprises on the Top 100 list decreased from 41 (a half of the total) in 1995 to 22 in 2001. Now there are no Japanese enterprises in the Top 10. But Japan has still occupied absolute advantages in the aspect of high-tech manufacturing as it has 5 enterprises in the TOP 50, while the USA only has 4, Germany 3 and South Korea 1. The number of the EU’s enterprises on the list declined a little due to the influence of the debt crisis. A total of 161 enterprises were on the list this year, while it was 172 in last year. The strength of the three countries-the UK, France and Germany, is obviously higher than other countries. The total number of enterprises from the three countries has maintained at over 100 for a long term, occupying around 80% of the European enterprises on the TOP 500 list. The specific number of enterprises from the three countries is generally similar, basically at 33–40 each. In the Top 500, the number of Germany enterprises dropped from 42 in 1995 to 34 in 2001. After 10 years passed by, there were still 32 Germany enterprises existing on the list. This demonstrates the stability of Germany’s economy. However, France only had 32 enterprises on the list, and the UK 27, an obviously larger decline than that of Germany. III. Degree of Internationalization With the development of economic globalization, the degree of internationalization of multinational enterprises has been increasingly deepened and improved. Statistics show that in 2009, among the world Top 500 multinational enterprises, 451 had overseas subsidiaries totaled 211,916, an average of 470 for each enterprise. The internationalized trend in production, R&D, market, asset and employment has been ever-increasingly prominent. In this paper, the ratio of overseas sales amount

3 Status and Roles of Participants of International …

123

to the total sales amount is adopted to show the degree of internationalization in multinational enterprises. Statistics 2009 show that the degree of internationalization of multinational enterprises was highly varied in line with different industries and countries that they belong. The internationalization degree in industries such as electronic and electrical equipment, food and beverage, was generally high. The internationalization degree of the Top 500 multinational enterprises in developed countries was higher than that in developing countries. The average ratio of overseas sales amount to the total sales amount of world Top 500 multinational enterprises was 0.478. The internationalization degree in industries such as medicaments, chemicals, construction materials and glass, food, beverage and tobacco, was generally high, while the degree in industries such as telecommunications, commodity retail, engineering and construction, was relatively low. Additionally, the internationalization degree of the same industry in different countries also had differences. For example, in the industries of automobiles, parts and components, the ratio of Top 500 enterprises in the USA was 0.584, 0.684 in Germany and 0.44 in Japan, while it was 0.171 in China. In the USA, the ratio of electronic and electrical equipment industry was 0.547 and in Japan it was 0.394.

Chapter 4

Evolution of the Structure of World Product Space Hao Li and Qizi Zhang

From the perspective of the global economic development, countries with excellent performance in economic growth, whether developed or developing countries, or the rising stars—the Four Asian Tigers, or the newly industrialized developing countries such as Malaysia, all follow one principle without exception. That is, countries select their suitable products in line with their comparative advantages, develop competitive industries or cultivate corresponding competitive advantages by undertaking international industrial transfers to realize the accumulation of capital and an economic takeoff, and finally win a place in the international markets. On the contrary, for countries disobeying the Comparative Advantage Theory and adopting the forging ahead strategy to forcibly give priority to non-competitive industries, their economies will usually deviate from the optimal industrial structure determined by the factor endowment structure, then encumber the accumulation of capital and the speed of economic development. As a result, the economic development shall strictly comply with the comparative advantage of each phase determined by the factor endowment structure. In 2006, two professors—Hausmann and Klinger of Harvard University put forward the “Capability Theory” which holds that it is possible for a product to be produced when it possesses all necessary capabilities. On the basis of this theory, in 2007, Hausmann et al. further put forward the theory on the evolution of comparative advantage which holds that a country’s comparative advantage can be embodied by the country’s product mix. Countries possessing more capabilities with a higher degree of diversity, compared with countries possessing fewer capabilities, can produce a wider variety of products with higher complexity. Furthermore, the more categories the capability has, the more different combinations the capability will be created. Hence, countries possessing more capabilities will easily combine or develop new capabilities necessary for new products. Therefore, the evolution of comparative H. Li (B) · Q. Zhang Institute of Industrial Economics of Chinese Academy of Social Sciences, Beijing, China © Social Sciences Academic Press 2022 B. Jin and Q. Zhang (eds.), The New Trend of Global Industrial Division of Labor and China’s Responses, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-5674-4_4

125

126

H. Li and Q. Zhang

advantage will be faster and the performance of economic growth greater. Hidalgo proved the characteristic of convexity in the accumulation of capability in his paper in 2011. That is, countries possessing more capabilities will enjoy greater dividends caused by the accumulation of capability. According to the theory on the evolution of comparative advantage, a country’s product mix reflects the country’s factor endowment structure and production technology structure to a considerable extent. The relatedness of products is based on the similarity of some capabilities required for the production of these products. Countries do not produce what they need, but produce their products according to the structure of product space and their capabilities. In sum, every country will select to produce and export products with comparative advantages. The degree of sparsity of product space, and the distance between highproductivity products in the core area of the space and the low-productivity products in the peripheral areas mainly determine the discrepancy of economic performance among economies. Each country’s position in the structure of product space determines the country’s direction and path for industrial upgrading and performance in future economic growth.

4.1 The Structure of Global Product Space I. Explanation of Methodology and Data The first thing to describe the structure of product space is to calculate a country’s comparative advantage of different products. The RCA Index (Revealed Comparative Advantage Index) of each product in individual country is calculated by taking reference from the methodology of Hausmann et al. (2007) and relying on the export data of 5-digit products listed on UN SITC rev.3 (there are over 4,000 types of commodities on SITC rev.3 list totally. 3,118 types of 5-digit products are exclusively drawn out by eliminating 1 to 4-digit products). For the purpose of avoiding confusion, M ipt is used for measuring a country’s capability to export a certain product. If a country possesses the RCA of producing and exporting a certain product, then the country has the comparative advantage and capability of producing such a product worldwide. Presuming that if RCAipt > 1, then M ipt = 1; otherwise, if RCAipt ≤ 1, then M ipt = 0, among which, i represents the country, p represents the product while t represents the time. Thus, a 0–1 matrix about a country and its product is in shape. According to the definition of Hausmann et al. (2007) about pr oximt y AB = min{P( A|B ), P(B| A )}, a proximity matrix of different products is therefore worked out by combining with the above 0–1 matrix. Based on the proximity of different products, the structure of product space can be described by means of network software. When we observe vertically the distribution change of a country’s products in the structure of product space, we can find out the evolution process of the country’s comparative advantage; when we compare horizontally the positions of different countries’ products in the structure of product space, we can find out the distribution discrepancy of the product space of different countries as well as the difference of product types among

4 Evolution of the Structure of World Product Space

127

countries. The structure of product space of developed countries can be used as a reference for underdeveloped countries in their industrial upgrading. Explanation of the Data and Index: 1. in the calculation of RCA index, we have adopted the export data of 5-digit commodities of each country. The exclusion of service industry data in the adopted data could lead to comparably small measured values of indexes of part of developed countries; 2. The adopted export data are not the value-added data of all products as the difficulty is apparent for finding out subdivided data which can reflect the production structure of 5-digit products of all countries. Therefore, the adopted export data in this paper are the second best. Although the export data cannot reflect the overall situation of the production structure of a country, under the condition that all countries select the same data, they can reflect some common trends or typical characteristics of these product types among countries, which have a certain reference value for the analysis of the industrial competitiveness. We will try to avoid the insufficiency of the above data and index in our further study. II. The Structure of World Product Space and Its Evolution In the theory on the evolution of comparative advantage, product space is the basis for the evolution path of a country’s comparative advantage. The positions of a country’s products in product space will affect the direction of industrial upgrading and the performance of economic development. In this paper, a world product space is drawn firstly and then its structure characteristics are analyzed. 1. The Graphic Characteristics of the Structure of Product Space Based on the export data of all countries in the world from 2009 to 2011 in the UN comtrade database, the structure of world product space is constructed according to the above-mentioned method.1 For the avoidance of possible disturbance caused by the discrepancy of trade conditions in different years, the pairwise proximities of all products are calculated out on the basis of the export data of each year in the period. By averaging all the results from the above calculation, the final proximity of all products is achieved and a product proximity matrix is formed. On the basis of the product proximity matrix, the structure of product space is constructed. Through the observation of the product space and the analysis on relevant data, a series of characteristics and evolution trends of the structure of product space are achieved. (1) The product space network exhibits a prominent core—periphery characteristic. That is, high-end manufactured products such as electromechanical and chemical products, instruments and meters are in the center, while primary products 1

In the structure of product space, we take the 5-digit products on the SITC rev. 3 list as nodes to construct the connection (edge) among them based on the elements of the product proximity matrix, or the proximity between two products. In order to exhibit the effective connections among all products, we firstly draw the maximum spanning tree connecting all product nodes. Then we add the edges whose proximities are greater than the specific threshold (0.55) into the maximum spanning tree and form the final product space graph. The proximities beyond the edges necessary for the constitution of the maximum spanning tree and less than the specific threshold are not into consideration.

128

H. Li and Q. Zhang

such as agricultural, animal husbandry and fishery products and mineral mining are in the periphery. Based on the data from 2009 to 2011, the product space network is worked out (see Fig. 4.1). We can find out through the observation of the product space that if the product space is regarded as a mountain, the capital and technology-intensive products such as electromechanical products, instruments and meters are positioned in the core area, while chemical products are near the core area. The two types of products are connected closely and together constitute the “main peak” of the product space; while primary products like agricultural, animal husbandry and fishery products and mineral mining constitute the peripheral areas of the network, positioned at the “foot” of the mountain; other intermediary products constitute ridges of the mountain from the “foot” to the “peak”. (2) Products such as clothing and electronic products constitute an independent agglomeration area outside the core area. Outside the central “peak” of the product space, clothing, forest products and part of electronic products constitute a relatively independent cluster that can be regarded as several independent “small peaks” outside the “main peak”. Firstly, the clothing products are connected closely with each other, forming a highly dense cluster as part of the network; secondly, forest products and related products form a relatively dense cluster; thirdly, parts of communication, electronic and electrical products are separated from the cluster of electromechanical products and are combined with parts of instruments and meters into a relatively close cluster which is distributed at one side of the “main peak” in the product space; fourthly, what is worth attention is that some communication, office electronic products are further separated out and form a highly dense and independent cluster at the peripheral areas of the product space through the connections with parts of traditional labor-intensive products such as timber processing, paper products and clothing manufacturing. 2. Intra-Industry Connectivity and Out-of-Industry Connectivity For the purpose of further analyzing the relations of different industries distributed in product space and grasping the formation mechanism of product clusters in product space, in this paper, we have introduced two indexes-Intra-Industry Connectivity (IIC) and Out-of-Industry Connectivity (OIC). Here, IIC refers to the average of the edges formed through the mutual connections among all products in an industry. Its definition formula is: I I C(H ) =

|E H −inner | |VH |

(4.1)

In the formula (4.1), H presents a specific industry, E H −inner are the edges formed through the connections of intra-industry products, |E H −inner | is the total number of edges formed through the connections of intra-industry products, VH are the nodes of the intra-product products, and |VH | is the total number of nodes of the intra-industry products.

Fig. 4.1 The structure of world product space from 2009 to 2010

4 Evolution of the Structure of World Product Space 129

130

H. Li and Q. Zhang

OIC refers to the average of the edges formed through the connections between the intra-industry products and products outside the industry. Its definition formula is: O I C(H ) =

|E H −outer | |VH |

(4.2)

In the formula (4.2), H represents a specific industry, E H −outer are the edges formed through the connections between the intra-industry products and products outside the industry, |E H −outer | is the total number of edges formed through such connections, VH are the nodes of the intra-product products, and |VH | is the total number of nodes of the intra-industry products. According to the above definitions, IIC reflects the connectivity of intra-industry products. The higher the index is, the stronger connectivity among different products in an industry is; OIC reflects the connectivity between the intra-industry products and other neighboring products. The higher the index is, the stronger connectivity between the intra-industry products and other neighboring products is. In this paper, the 5-digit products on the SITC rev. 3 list are divided into 10 industries.2 The IIC and OIC of the 10 industries during the period from 2009 to 2011 are calculated respectively by using the above-mentioned proximity matrix of the world product space with the selection of edges of which the proximities are greater than the specific threshold (0.55). The final results are shown in Table 4.1 and Fig. 4.2. From the perspective of the IIC index, the index of textile and clothing, electromechanical and chemical products are among the highest, which demonstrates that the mutual connectivity of products in these industries is comparatively strong. Therefore, these products possess conditions to form an industry-centric cluster in the structure of product space. From the perspective of the OIC index, except for the textile and clothing industry, all the OIC of other industries are higher than the IIC, which demonstrate the characteristic of indented product connections in different industries, and the fact that product clusters are mainly formed by products of relevant industries inlaid with each other. Further subdivisions of the electromechanical and chemical industry, textile industry and other industries are conducted in this paper for the calculation of the IIC and OIC index to reflect the relatedness of products more specifically. The results are shown in Figs. 4.3, 4.4, 4.5 and 4.6. From the analysis on the connectivity of the subdivided industries, we can see that all the IIC of the subdivided industries are much lower than that of their belonged industry while the OIC is much higher than that of their belonged industry; additionally, except for the clothing, agricultural chemicals and the shipbuilding industry, all 2

The 10 industries are agriculture, animal husbandry and fishery, forestry (including logs, timber, paper making and paper products), mineral mining industry, energy industry, textile and clothing manufacturing industry, metallurgical industry, chemical industry, electromechanical industry, instrument and meter industry and others.

4 Evolution of the Structure of World Product Space Table 4.1 The connectivity index of 10 industries

131 Intra-Industry Connectivity (IIC)

Out-of-Industry Connectivity (OIC)

0.3600

0.7124

Forestry and related 0.4000 products

1.9538

Mineral mining

0.0519

0.3377

Energy products

Agriculture, animal husbandry and fishery

0.0333

0.4000

Textile and clothing 1.6532

0.6792

Metallurgy

0.3972

1.3879

Chemical products

0.7219

1.0041

Electromechanical products

1.1336

1.3948

Instruments and meters

0.4683

2.0794

Others

0.5368

1.8506

Fig. 4.2 The connectivity of 10 industries

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Fig. 4.3 The connectivity of subdivided electromechanical industry

the OIC of other subdivided industries are higher than the IIC. The conclusion is the case that after the subdivisions of all industries, each subdivided industry does not exhibit the trend of independent aggregation. On the contrary, the characteristic of indented product connections in different industries and the characteristic of industries inlaid with each other in product clusters are more obvious. 3. The Evolution of the Structure of Product Space Relying on the same methodology, we have constructed the structure of product space in three periods as from 1992 to 1994, 1999 to 2011, and 2004 to 2006 (see Fig. 4.8). By comparing with the structure of product space in the period of 2009 to 2011, we can analyze the evolution of the structure of product space. (1) The basic structure of product space has certain stability. Through the observation of the structure of product space in the above periods, we can find that in recent 20 years, the structure of world product space has generally maintained certain stability. Firstly, the structure characteristic that electromechanical and chemical products and instruments and meters are in the core area, while primary

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Fig. 4.4 The connectivity of subdivided chemical industry

products in the periphery has been maintained all along; secondly, the product clusters mainly of clothing and parts of electronic products have similarly existed in the structure of product space in each period. (in Fig. 4.8, the cluster of textile and clothing products is marked out with a blue oval shape, while the cluster of parts of electronic products with a yellow oval shape.) (2) The overall connectivity of the product space presents a trend of decline. Through the observation of the structure of product space in each period, we can find that from 1992 to 2010, the overall connectivity of the product space had presented a trend of decline with concrete manifestations in the decline of density of the core cluster in the product space and the gradual sparsity of connection between the core cluster and products in the periphery. In order to prove the observation result, in this paper, we have calculated the inner connectivity of world product space (IWC)3 under the condition of the same proximity threshold (0.55). The results are presented in Table 4.2, Figs. 4.7 and 4.8. 3

The definition formula of the inner connectivity of the product space (IWC) is similar with the IIC. Regarding all products in product space as integration, the IWC is the average of the edges formed by mutual connections of all products.

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Fig. 4.5 The connectivity of subdivided textile industry

The results in Table 4.2 and Fig. 4.7 show that the inner connectivity of world product space slumped from 6.4 to around 1.4 during the period from 1992 to 2008. Although it rose up to a certain degree in 2010, it declined again to around 2.4 in 2011. (3) The positions of part of products in the structure of product space have been changed greatly. With the development of technologies, the positions of some products in product space have experienced an evolution, while the basic structure of product space has been maintained stable. Take part of communication, office electronic products as an example.4 In Fig. 4.9, we can find that the distribution of these products in product space was changed greatly from 1992 to 2011 (their positions in the structure of product space of each period are marked out with black). During the period from 1992 to 1994, these products, as comparatively high-end and technology-intensive products, were mainly positioned at the central area of the product space; with the evolution of the product life cycle, these products are gradually separated from the central area due to the maturity of production technologies, and are finally diffused to 4

These products include 32 products with their codes in SITC rev.3 as follows: 72,681, 72,831, 73,178, 74,423, 75,115, 75,118, 75,132, 75,133、75,134, 75,135, 75,192, 7521, 7591, 76,333, 76,382, 76,383, 76,413, 76,415, 76,419, 76,482, 76,491, 77,314, 77,315, 77,641, 77,643, 77,645, 77,649, 78,436, 78,621, 79,281, 79,282, 79,329.

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Fig. 4.6 The connectivity of other subdivided industries

Table 4.2 The change trend of the inner connectivity of product space from 1992 to 2010 Year

Overall connectivity of product space

Year

Overall connectivity of product space

1992

6.4330

2002

1.4240

1993

6.4330

2003

1.4339

1994

4.2790

2004

1.4339

1995

3.1559

2005

1.8272

1996

2.7258

2006

1.3817

1997

2.2050

2007

1.3197

1998

2.2368

2008

1.4827

1999

1.6555

2009

1.4397

2000

1.5090

2010

3.0093

2001

1.5558

2011

2.4391

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Fig. 4.7 Overall connectivity of the product space

Fig. 4.8 The structure of world product space in each period

the peripheral areas of the product space during the period from 2009 to 2011. They are connected with traditional labor-intensive products such as timer processing, paper products or even clothing manufacturing, and constituted highly dense clusters.

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Fig. 4.9 The evolutionary graph of the distribution of 32 electronic products in the product space

4.2 National Differences of the Evolution of Product Space If a country possesses products with comparative advantages (RCA > 1), it manifests that the country has competitiveness in its export, and reflects the country’s factor endowment. We have placed products with comparative advantages in the structure of product space to analyze the distribution of different countries’ products with comparative advantages. This method is helpful for the systematical studies on the differences of comparative advantages across countries and its evolutionary trend. In this paper, we have calculated the RCA of export products based on the export data, and used RCA > 1 as a screening condition to select out the products with comparative advantage. Then we have identified these products’ positions in the structure of world product space of each period with black, and formed the space distribution graph of different countries’ comparative advantage products, which is used in the studies on the space distribution of different countries’ comparative advantage products and its evolution trend. In order to abate the possible disturbance caused by the discrepancy of trade conditions in different years and truly reflect a country’s comparative advantages, we have set up a standard in this paper for measuring a country’s comparative advantage products in a specific period. That is, the RCA > 1 in 4 years among the consecutive 5 years before the end of the period. Figures 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18, 4.19 and 4.20 show the space distribution of comparative advantage products in part of countries and regions

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Fig. 4.10 The evolution of China’s comparative advantages in the product space

Fig. 4.11 The evolution of the USA’s comparative advantages in the product space

in each period. The comparison of different countries shows that advanced industrial countries possess more comparative advantage products and have a higher density in the core area of product space; with the decline of industrialization development level, other countries’ comparative advantage products have been gradually diffused to the peripheral areas with the gradual decline of the number of comparative advantage products.

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Fig. 4.12 The evolution of Japan’s comparative advantages in the product space

Fig. 4.13 The evolution of Germany’s comparative advantages in the product space

By comparing the space distribution of comparative advantage products in the four periods, we can analyze the evolution regularity of all countries’ comparative advantage products. Through the observation of Figs. 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18, 4.19 and 4.20, we find out that: firstly, the formation of a

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Fig. 4.14 The evolution of Spain’s comparative advantages in the product space

Fig. 4.15 The evolution of Greece’s comparative advantages in the product space

country’s products with comparative advantage has a close relation to the distribution of existing comparative advantage products. The development of industrialization need to rely on the existing comparative advantage to realize the adjustment and upgrading of product mix through the evolution of comparative advantage products, and cannot be accomplished overnight. Secondly, in recent 20 years, the comparative advantage products of the Four Asian Tigers and other Southeast Asian countries

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Fig. 4.16 The evolution of Southeast Asian countries’ comparative advantages in the product space

Fig. 4.17 The evolution of BRICS countries’ comparative advantages in the product space (China excluded)

have continuously evolved from the peripheral areas of the product space to the core area. The density of these products at the core area has been increasingly increased. Therefore, the economic development of these countries has been injected impetus. Thirdly, the observation of the existing graphs shows that the number of comparative advantage products in countries like Greece and Argentina is relatively small. The

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Fig. 4.18 The evolution of comparative advantages of the four Asian tigers in the product space

Fig. 4.19 The evolution of Argentina’s comparative advantages in the product space

distribution of these products has been marginalized and the evolution of comparative advantages to the core area has been stagnant for a long time, which have impeded these countries’ economic development to a considerable extent and brought about some economic risks to a certain extent. Fourthly, from the perspective of the distribution of China’s products with comparative advantage, China has currently relied on some traditional competitive industries such as clothing, textile and electronic and

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Fig. 4.20 The evolution of African countries’ comparative advantages in the product space

electrical equipment to further evolve to the core area of the product space. China’s structure of comparative advantages and the evolutionary path are similar to that of Southeast Asian countries, but have relatively large differences from other BRICS countries.

4.3 Changes of the Connectivity of Product Space In this paper, we have calculated the inner connectivity degree and outer connectivity degree of countries’ products with comparative advantage as well as the comparative advantage degree for the purpose of further analyzing the mutual relations of a country’s products with comparative advantage and the structural characteristics in the product space. 1. Inner Connectivity Degree of Countries’ (ICC) Products with Comparative Advantage The Inner Connectivity Degree is equal to the average of edges formed through the mutual connections of a country’s products with comparative advantage. It reflects the density of the position of a country’s products with comparative advantage in the product space. Its definition formula is: I CC(C) =

|E C−inner | |VC |

(4.3)

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In the formula (4.3), C represents a specific country, E C−inner are the edges formed through the connections of the country’s comparative advantage products, |E C−inner | is the total number of edges formed through the connections of the country’s comparative advantage products, VC are the nodes of comparative advantage products, and |VC | is the total number of nodes of comparative advantage products. 2. Comparative Advantage Degree (CAD) of Countries We have considered the problem that although the number of products with comparative advantage of some countries is relatively small, these products are positioned at the dense area of the product space, which leads to a higher ICC index that cannot fully reflect the industrial competitiveness of these countries. Therefore, we have further introduced the Comparative Advantage Degree (CAD) index. This index is equal to a country’s ICC index multiplied by the proportion of the total number of the country’s products with comparative advantage in the total number of world products. Its formula is: C AD(C) = I CC(C) ×

Mc MT

(4.4)

In the formula (4.4), C represents a specific country, I CC(C) is the ICC of the country’s products with comparative advantage, Mc represents the total number of the country’s products with comparative advantage, and MT represents the total number of world products. 3. Outer Connectivity Degree of Countries’ (OCC) Comparative Advantage Products The Outer Connectivity Degree of Countries’ (OCC) products with comparative advantage refers to the average of edges formed through the connections between a country’s products with comparative advantage and products with comparative disadvantage. According to the theory on the evolution of comparative advantage, it reflects the evolution space of a country’s comparative advantages to other products. Its formula is: OCC(C) =

|E C−outer | |VC |

(4.5)

In the formula (4.5), C represents a specific country, E C−outer are the edges formed through the connections between a country’s products with comparative advantage and products with comparative disadvantage, |E C−outer | is the total number of such kind of edges, VC are the nodes of the products with comparative advantage, and |VC | is the total number of nodes of the products with comparative disadvantage. In this paper, the ICC, CAD and OCC of every country are calculated respectively by using the above-mentioned proximity matrix of world product space during the period from 2009 to 2011 with the selection of edges of which the proximities are greater than the specific threshold (0.55). The detailed results are shown in Fig. 4.3.

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The results of Table 4.3 show that: firstly, the high or low CAD can reflect a country’s industrial structure and its industrial development level to some extent. The top 10 countries in the ranking of the CAD were mainly advanced industrial countries which have more products with comparative advantage concentrated in the core cluster of product space with close mutual connections; all of the last 10 countries were developing countries which have a quite low industrial development level and less products with comparative advantage, and mainly exported resourcesbased primary products with sparse connections among products. Secondly, from the perspective of the Inner Connectivity Degree (ICC) of countries’ products with comparative advantage, some countries such as Cambodia are in the initial stage of industrial development and mainly export labor-intensive product clusters such as clothing. Therefore, the inner connectivity degree of comparative advantage products in these countries was relatively high. On the contrary, the ICC of some countries, due to their vast territories, a variety of product types and a certain difference of endowment among different regions, was pulled down. For example, the ICC of the USA and Canada was relatively low. Thirdly, from the perspective of the Outer Connectivity Degree (OCC), a higher index reflects that a country’s products with comparative advantage have more connections with other products and the evolution space of comparative advantages is more extensive. The index values in Table 4.3 show that the ICC and OCC of many developing countries were relatively low, which demonstrated that these countries will be confronted with many difficulties in the processes of upgrading their product mix and implementing the evolution of comparative advantages. Fourthly, China took the 4th place in the ranking of CAD in 2011, surpassing many developed countries, which reflected China’s status as a big manufacturing country to some extent. However, the ICC of China’s comparative advantage products was not high and at around 0.98, which demonstrated that the product mix of China’s different regions has a certain degree of difference. Additionally, the OCC of products with comparative advantage was already lower than 1, which demonstrated that China will be faced up with certain challenges in the process of implementing the evolution of comparative advantages towards more high-end products, and some existing products are faced with bottlenecks in upgrading.

4.4 Basic Conclusions from the Analysis on the Structure of Product Space 1. Late-mover countries’ efforts in the realization of industrialization shall be focused on pushing the evolution of comparative advantages towards the core area to achieve the upgrading of their product mix. From the structure of product space and the distribution of different countries’ products with comparative advantage, we can find out that the product space has an obvious core-periphery characteristic. The products in the core area with capitalintensive characteristics and complex technologies are the comparative advantages

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Table 4.3 Indexes of comparative advantage products of some countries Ranking of comparative advantage degree

Country

Number of products with comparative advantage

Comparative advantage degree

Inner connectivity degree

Outer connectivity degree

1

Germany

1,043

0.57541

1.682646

0.549377

2

Italy

1,176

0.48623

1.261054

0.727041

3

Austria

757

0.385902

1.554822

0.97358

4

China

1,067

0.34623

0.989691

0.592315

5

Japan

660

0.335738

1.551515

0.898485

6

The USA

998

0.335082

1.024048

0.734469

7

France

927

0.324918

1.06904

0.993528

8

Czech Rep

661

0.323934

1.494705

0.912254

9

Poland

673

0.300984

1.364042

0.863299

10

Spain

899

0.26918

0.913237

0.934372

52

Canada

452

0.076393

0.515487

1.064159

57

Cambodia

62

0.058033

2.854839

3.532258

133

Central African Rep

8

0.000328

0.125

0.625

134

Ethiopia

82

0.000328

0.012195

0.292683

135

Gambia

32

0.000328

0.03125

0.28125

136

Kiribati

9

0.000328

0.111111

2.333333

137

Libya

8

0.000328

0.125

0.125

138

New Caledonia

16

0.000328

0.0625

0.0625

139

Niger

36

0.000328

0.027778

0.083333

140

Suriname

34

0.000328

0.029412

0.352941

141

Tonga

24

0.000328

0.041667

0.666667

142

Vanuatu

17

0.000328

0.058824

0.470588

of advanced industrial countries, and the main embodiment of their strong industrial capability. However, underdeveloped countries’ products with comparative advantage are in the peripheral areas of the product space, and mainly are resource-intensive and labor-intensive products, which embody their weak industrial competitiveness. Continuous efforts are required to optimize the product mix and move comparative advantage products towards the core area for the purpose of improving countries’ industrial capability and realizing economic development and catching-up. This is the journey that those successfully industrialized countries such as the Four Asian Tigers experienced, and also the direction other late-mover countries shall strive to. Otherwise, if a country’s products with comparative advantage are less, the distribution in the product space is marginalized and the evolution of comparative advantages is

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stagnant, then the country’s economic development will be impeded to a considerable extent and be faced with certain economic risks. 2. A practical choice for countries to realize the upgrading of their product mix is to comply with their comparative advantages and gradually evolve from the existing comparative advantage products to neighboring products in the product space. Edges formed through the connections of different products in the product space demonstrate that products have a high probability of possessing comparative advantages in the same country and have closer requirements for factor endowment. According to the Comparative Advantage Theory, the practical choice for the realization of the product mix is to fully utilize the advantage of national factor endowment and evolve from the existing comparative advantage products to the neighboring products. In the upgrading process, the clusters with dense connections among products can be fully utilized to realize quickly the expansion of comparative advantages in the clusters for the purpose of achieving considerable improvements in national industrial scale in a short time. 3. Cross-industry upgrading has great significance for the upgrading of product mix. The graphic characteristics of the product space and the data of the industrial connectivity show that the product connections of different industries are indented, and each industry in the product clusters is inlaid with each other, which demonstrate that among products in a same industry, the requirements for the factor endowment are varied, while the requirements among specific products in different industries may be closer. Therefore, it is hard for a country to adhere to one industry and realize independently the evolution from the labor-intensive products to the capital-intensive or technology-intensive products in the process of upgrading its product mix. It needs to follow the status quo of its factor endowment, fully take advantage of the potential for the cross-industry upgrading, and advance in a roundabout way among different industries to achieve the goal of an all-round upgrading of its product mix. 4. The study on the characteristics of the structure of product space is beneficial for the formulation of strategic planning and policies of industrial development. The above analyses suggest that in recent 20 years, the structure of world product space has maintained overall stability. This has laid the foundation for the upgrading of China’s product mix and the evolving of long-term planning facilitated by the application of product space structure theory. Meanwhile, some products’ positions in the product space will be changed due to reasons such as the evolution of the life cycle of product technologies. Thus, a timely capture of these changes is conducive for enterprises, regions and countries to properly adjusting development strategies and industrial policies to meet these changes, seize opportunities for industrial development, and avoid potential losses triggered by not upgrading industries promptly.

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References Hausmann, Ricardo, and Bailey Klinger. The evolution of comparative advantage: the impact of the structure of the product space. In CID Working Paper No. 106.

Chapter 5

Reindustrialization of Developed Countries and the Impact of the New Industrial Revolution on the Pattern of International Division of Labor Zhou Deng

After the financial crisis, developed countries have generally gotten stuck in a situation in which the unemployment rate increased, the credit growth remained weak and the financial status worsened. Developed countries like the USA drew up the reindustrialization plan one after another in a bid to go out of the shadow of the financial crisis, recover their domestic economic growth and lower down the unemployment rate. In the wave of reindustrialization, developed countries have promoted the development of their industries, adjusted their economic structure, raised the proportion of the real economy and encouraged manufacturing enterprises to return back. From this perspective, the reindustrialization is the reflection and correction of the deindustrialization; on the other side, developed countries have further strengthened the driving roles of intangible assets such as technology, brand, patent and standard for economic growth. They have upgraded their industrial structure, initiated the new technology revolution, developed emerging industries with high added value and eliminated traditional industries with low technology content, waste of resources and environmental pollution. From this perspective, the reindustrialization is the continuation and upgrading of the deindustrialization. Although the reindustrialization may not change the basic characteristics of the pattern of international division of labor, it will pose an impact on the international industrial transfer of some industries, the development of emerging industries in developing countries and the division of labor of global R&D activities to a certain extent in a period of time.

Z. Deng (B) Institute of Industrial Economics of Chinese Academy of Social Sciences, Beijing, China © Social Sciences Academic Press 2022 B. Jin and Q. Zhang (eds.), The New Trend of Global Industrial Division of Labor and China’s Responses, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-5674-4_5

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Z. Deng

5.1 The Constant Dominant Role of Developed Countries in International Division of Labor 1. The Constant Dominant Role of Developed Countries in the Labor Division of Manufacturing Industry In recent 30 years, the manufacturing industry of developing countries represented by China, India and Brazil have recorded a rapid growth with its scale of manufacturing and the scale of industrial export surpassing developed countries such as the USA, Japan and European countries. Although the proportion of manufacturing industry in developed countries against the world total has decreased due to the challenges from the rapid growth of manufacturing industry in developing countries, a quite few important sectors of the manufacturing industry have still occupied a relatively large proportion. The statistics from United Nations Industrial Development Organization (UNIDO) show that the proportion of the manufacturing value added (MVA) in developed industrial countries declined from 74.3% in 2000 to 69.4% in 2005, while the proportion of the MVA in developing countries rose from 24.3% in 2000 to 29.0% in 2005. However, during the period from 2000 to 2006, developed countries still maintained a relatively high proportion in some industries with a rapid growth such as other transportation equipment, radio, television and communication equipment, electrical equipment, alkali metal, machinery and equipment. For example, the USA occupied 69.1% of the MAV of the global radio, television and communication equipment manufacturing, much higher than that in other developed and developing countries. Even for some traditional basic industries like the alkali metal manufacturing, developed countries still occupied a quite large proportion (see Table 5.1). Meanwhile, we must be aware of the fact that the rapid rise in the proportion of the MAV in developing countries like China shall attribute to overseas factories which belong to multinational enterprises of developed countries. The real competitiveness of the manufacturing industry in developing countries is not so high. It is thus clear that developed countries have never abandoned the development of their manufacturing industry. The deindustrialization is regional within the range of some industries. In some senses, there is no existence of the concept of deindustrialization. Furthermore, from the perspective of the competitiveness of manufacturing industry in developed countries, we can find out that although the proportion of manufacturing industry against GDP and the proportion of manufactured goods against the total exports in developed countries were less differentiated from those in developing countries, some quality indexes like the value added per capita and the proportion of high-tech products were much higher than those in developing countries (see Table 5.2). According to the evaluation of Competitive Industrial Performance (CIP), in the 2005 ranking of the CIP of 122 major countries and regions in the world, Japan took the 3rd place, Germany the 6th, the USA the 11th, the UK the 15th, while China took the 26th place, Brazil the 38th and India the 54th. Among the top 10 countries, except for Singapore, South Korea and the Taiwan region of China, all were developed countries. It is clear that although the proportion of industries and the

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Table 5.1 The proportion of the value added of high growth industries against the World Total (2006) Unit: % Country and proportion

TOP 1

TOP 2

TOP 3

TOP 4

TOP 5

Other transport equipment (ISIC 35)

China (34.1)

The USA (20.4)

Brazil (6.3)

Japan (5.8)

the UK (4.8)

Radio, television and communication equipment (ISIC 32)

The USA (69.1)

Japan (10.1) China (6.8)

South Korea (4.8)

Taiwan (China) (1.7)

Electrical equipment (ISIC 31)

China (28.2)

Japan (19.1) The USA (11.9)

Germany (10.3)

India (2.9)

Alkali metals (ISIC 27)

China (23.8)

Japan (19.0) The USA (10.9)

Germany (4.9)

South Korea (3.4)

Machinery and equipment (ISIC 29)

Japan (21.5) The USA (16.7)

China (11.0)

Italy (4.8)

Germany (12.2)

Source UNIDO database

manufacturing industry in national economies of developed countries have continuously declined, their international competitiveness has been much higher than that in developing countries. Developed countries are still manufacturing powers. After the financial crisis, developed countries have enhanced their efforts in supporting their domestic manufacturing industry and further leveled up the international competitiveness of their manufacturing industry. The international division of labor in the manufacturing industry will be dominated by developed countries in a quite long period. The outbreak of the financial crisis reflected the malpractice adopted by developed countries such as the USA and European countries in driving their economic growth by heavily relying on the financial industry and their domestic consumption. In order to cope with the challenges of the financial crisis, developed countries have implemented a series of industrial policies to stimulate their domestic economies and balance their trade deficits, which have strengthened their dominant roles in the international division of labor of the manufacturing industry to a certain degree. For examples, after President Obama took office, the US federal government launched the “National Export Initiative” to transform its economic growth to be driven by the export and the manufacturing industry. The Initiative aimed at improving the export of industrial goods and creating new jobs domestically; the UK government formed “elite organizations with technology and innovation at its core” to promote the development of its manufacturing industry, aiming at facilitating the UK to grab a dominant position in global markets; France released a series of policies to regenerate its industrial productivity, established a fund with the capital of 200 million euros

5,464

556

82

3,706.7

495.9

83.0

748.7

The UK

China

India

Brazil

4,387

Note Based on the value of US dollar in 2000 Source UNIDO database

463

10,900

8,474.1

5,179.0

Japan

2,707

5,528.1

Export of manufactured goods per capita

Germany

The USA

Manufacturing value added (MVA) per capita

20.4

14.1

34.1

13.6

21.7

21.7

15.0

Proportion of manufacturing industry against GDP

72.8

87.3

95.1

85.6

92.0

94.2

88.7

Proportion of manufacturing industry against the total export

33.5

39.3

46.9

56.1

61.1

56.9

55.7

Proportion of middle-and-high technology against the total MVA

Table 5.2 The situation of the manufacturing industry in part of developed countries and developing countries (2005) Unit: US $

47.9

22.6

57.5

65.4

71.9

82.0

72.1

Proportion of middle-and-high exports against the total export of manufactured goods

152 Z. Deng

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to support French enterprises to remove their production bases back to France, and pushed forward the integrated development of industries by enhancing cooperation among enterprises in the fields of chemistry, software, food and electrical equipment. These policies and measures can change the economic development model of developed countries to some extent in a certain period of time, and increase the proportion of the manufacturing industry in the economies of developed countries. Meanwhile, they have also intensified the impact on the international division of labor in the manufacturing industry as the development of their domestic manufacturing industry will affect the development of the export-oriented manufacturing industry in developing countries, and the stimulation to export will increase competition in export markets of international industrial products. The encouragement for the manufacturing business of their multinational enterprises to return will have an impact on developing countries in attracting foreign direct investment. 2. Service Industry Working as the Main Driving Force for the Economic Recovery of Developed Countries According to the objective regularities of economic development, the further development of a country’s economy after the completion of industrialization will mainly rely on the development of its service industry. The service industry will become the pillar industry in the national economy with its output value, export and quantity of employment exceeding other industries. For example, the statistics from the World Bank show that the proportion of the service industry in the American economic aggregates in 1981 and 1990 was 63% and 75% respectively. After 2000, the proportion remained basically stable at around 77%, while the proportion of industries declined from 34% in 1981 to 28% in 1990, then further to 23% in 2000. After the financial crisis, although the policy for reindustrialization in developed countries focused on the manufacturing industry, these countries also enhanced the support for the tertiary industry. The reindustrialization has not restricted the development of the service industry in developed countries, but instead it has possibly promoted the emergence of some high-end producer service industries and the upgrading of the service industry. For example, since the implementation of the reindustrialization, the increase in the number of employment in most traditional substantial industries has been very slow, while the employment rebound in tourist industry, education industry, healthcare industry and entertainment industry has been very prominent. It is thus clear that as the comparative advantage of developed countries like the USA is concentrated in the service industry, after the financial crisis, whether the recovery of the national economy, the decline of unemployment rate, or the recovery of consumers’ confidence and the increase of export, all need to rely on the regeneration and upgrading of the service industry at the first place to drive the development of the manufacturing industry. On the other side, as the development level of the service industry in most developing countries lags behind that of the manufacturing industry, and the development of the modern service industry in developing countries is still in its initial stage, therefore, it is hard for them to compete with developed countries in international markets. For example, the statistics show that around 90% of industrial values in

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American manufacturing industry come from the industrial design, while in China, the values of industrial design are possibly explored less than 1%. The proportion of China’s social logistics cost in 2010 against the GDP reached up to 17.8%, nearly twice as much as that in developed countries such as the USA, Japan and European countries. As a result, for a fairly long period, developed countries will continue to occupy the dominant status in technological R&D, brand marketing, legal consultation and financial services in the pattern of global division of labor in the service industry. These industries with the most comparative advantage are the main driving forces for developed countries in their efforts to cope with the financial crisis and recover their domestic economic growth.

5.2 Changes of the Pattern of Labor Division of Technology-Intensive and Labor-Intensive Industries 1. The Return of the Technology-intensive and Labor-intensive Industry to Developed Countries Currently, the manufacturing industry of developed countries is mainly concentrated in the fields of complete equipment and core components. Among the production and export of industrial goods, the proportion of automobiles, computers, electronic components, weapons, biological products and medical equipment is relatively large. Although these products have different regularities of technological evolution and characteristics of product architecture, they all belong to the technology-intensive and labor-intensive industry. After the financial crisis, developed countries have strengthened their support for the manufacturing industry to recover their economies and promote the employment. As a result, industries with comparative advantages such as automobile manufacturing, equipment manufacturing, electronic information and biomedicine appeared signs of returning. Of course, the return under the wave of the reindustrialization is conditional within a certain range and in a certain stage. Firstly, removing back the labor-intensive manufacturing industry is not in line with the comparative advantage of developed countries and their industrial environment. Furthermore, it will reduce the allocative efficiency of production factors worldwide. Comparatively, the possibility of returning the technology-intensive and labor-intensive manufacturing industry is larger. Secondly, the necessary condition for the return of the high-tech industry is the accelerated transfer of the medium and low-end traditional industry. As the development of the high-tech industry in developed countries needs to optimize the allocation of both domestic and international resources, only through the way of speeding up the transfer of the medium and lowend traditional industry to other countries, the preferential policies proposed in the reindustrialization to encourage the development of the real economy can be focused on the high-tech industry with high value-added and the requirement for high-quality labor forces. In the end, the return of the manufacturing industry promoted in developed countries is out of the possibility to be a long-term policy. The joint efforts

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of standardization and the rise of labor costs resulted in the transfer of traditional modular manufacturing featured with processing and assembling from developed countries to developing countries. Meanwhile, developed countries focus more on the development of the high-tech industry as well as the service industry. This is the basic pattern of the current international division of labor and international trade. It is also the reflection of countries’ comparative advantages and the result of competition in international markets. The result of excessive involvement of developed countries’ governments will lead to the decrease of the allocative efficiency of resources, and affect the promotive role of international trade on the world economic growth. As a result, with the recovery of the global economy and consumers’ confidence as well as the rise in the employment rate in developed countries, the policy to encourage the return of the manufacturing industry in developed countries will be weakened till to the end. 2. The Continuous Transfer of the Labor-intensive Industry with Low Technology Content to Developing Countries The reindustrialization implemented by developed countries and the adoption of various policies and measures to encourage the return of their manufacturing industry will not affect the overall trend in which the labor-intensive industry with low technology content is transferred from developed countries to developing countries. The manufacturing processes of some industries such as common garments, textiles, household appliances, common mobile phones, toys, common tools and furniture have low technology contents, small value added and high labor intensity, thus the possibility for the return of these industries is very limited. The pattern of the international division of labor in these industries and the trend for the further transfer from developed countries to developing countries will not be changed. Firstly, the key of the policies encouraging the return of manufacturing industry in developed countries is to remove back the high-tech industry which represents the future direction for technological development. Therefore, the plan of the return could not mean the return of the entire manufacturing industry. Neither governments nor enterprises have the impetus to remove back the low-end manufacturing industry. Secondly, developed countries are not suitable for the development of the labor-intensive industry. The statistics from the International Labor Organization show that the average salary difference between the USA and China in 2000 and 2008 was 26 times and 10 times respectively. If the value added in the manufacturing processes is not high, the manufacturing industry in developed countries is unable to bear the expensive labor cost. Thirdly, developing countries such as China, India and Brazil are the markets with the most potentials and the fastest growth in the world. Meanwhile, the structure of consumption in these countries is all concentrated in the scale production of medium-and-low-end products. Multinational enterprises of developed countries have transferred a large number of low-end manufacturing industries to these countries to get close to markets. Amid the financial crisis, stable profits of these overseas enterprises fed back into the losses of their domestic enterprises, which released the impact of the financial crisis to a certain extent. After the financial crisis, the momentum of demand growth in emerging economies such as China has remained robust, which will further promote

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the transfer of the related manufacturing industry. In the end, while developed countries have been transferring the manufacturing industry to developing countries, the supply chain system has also been transferred to countries outside their boundaries. The skill training corresponding to the development of their domestic low-end manufacturing industry and the mechanical maintenance system has already been incomplete. The industrial structure and the supporting environment are not suitable for the development of the low-end manufacturing industry. Although many developed countries have launched relevant policies to encourage the return of their manufacturing industry, this act did not actually reverse the transfer of the international industry, especially the trend for transferring the labor-intensive industry with low technology content from developed countries to developing countries. Let’s take China as an example. The statistics from Chinese Ministry of Commerce show that after the outbreak of the financial crisis, the newly established foreign invested enterprises decreased by 8.69% year on year in 2007, while the actual use of foreign capital increased by 13.8% year on year; in 2008, the figures were 27.35% and 23.58% respectively; in 2009, the newly established foreign invested enterprises decreased by 14.83%, while the actual use of foreign capital decreased by 2.56%; in 2010, the newly established foreign invested enterprises increased by 16.94%, while the actual use of foreign capital increased by 17.44%; in 2011, the newly established foreign invested enterprises increased by 1.12%, while the actual use of foreign capital increased by 9.72%. Hence, since the outbreak of the financial crisis, the number of newly established foreign invested enterprises in China has decreased annually (the phenomenon appeared before the financial crisis), and the growth rate of the amount of the actual use of foreign capital has also declined. But except for 2009, the actual use of foreign capital was still in the range of increase, and the phenomenon that foreign enterprises exit from China in large scales caused by the reindustrialization of developed countries did not exist in all regions of China. For foreign direct invested projects, the contracted projects and the actual use of foreign capital in the manufacturing industry occupied about 40% of the total contracted projects and 50% of the total amount of actual use of foreign capital. Assembling and processing are still the main sectors for China’s attraction of foreign direct investment. 3. New Changes Appearing in the Pattern of International Labor Division for R&D Activities Superficially, the reindustrialization of developed countries emphasized on the return of the manufacturing industry and increased the proportion of the real economy in the national economy. But technological innovation is the prerequisite and basis for such kind of return and the change in industrial structure. Various reindustrialization plans in the post financial crisis era all include a lot of contents of promoting technological innovation. Meanwhile, the technology policies that developed countries launched after the financial crisis, compared with market-based technology strategies followed by these countries before the financial crisis, have paid more attention to the reserves of future technologies and the conquering of top-level technologies, which will pose an impact on the international division of labor of global R&D activities. Firstly,

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developed and developing countries may form a pattern of division of labor for R&D according to the appliance time of different technologies. After the financial crisis, developed countries have formulated more detailed technology roadmaps with a more long-term view. The R&D activities are focused on future technologies; as basic technologies in developing countries are weaker, therefore, developing countries are incompetent to undertake the R&D of future technologies, thus the technological transformation of traditional industries is still the main form of technology progress in their national industries. Secondly, developed and developing countries may form a pattern of division of labor for R&D with different layers. On one hand, developed countries have enhanced their support for the R&D of top level technologies such as the framework design of industrial technologies and the selection of technology paths of products. Meanwhile, the R&D results of top-level technologies usually combine with technology patents and technology standards, and become a new approach for multinational enterprises of developed countries to maintain their competitive advantages and gain monopoly profits; on the other hand, as the R&D strength of developing countries has been enhanced and the R&D system has been improved, the comparatively low-end R&D activities have been transferred to developing countries with an accelerated speed. Therefore, developing countries have undertaken more and more R&D activities such as the improvement of mature technologies, the R&D of new products, the improvement of processes and the pilot scale experiment. Thirdly, developed and developing countries may form a pattern of division of labor for R&D in different industries and fields. The industrial policies and consumption policies to support the development of emerging industries in developed countries after the financial crisis will accelerate the pace of industrialization of reserved technologies. Therefore, the R&D activities in the field of emerging industries will increasingly be enhanced; due to different development stages, the dominant status of traditional industries and traditional parts of emerging industries in developing countries cannot be replaced in a short term. Although many developing countries have paid attention to the R&D of emerging industries, the R&D activities of enterprises have still mainly served for projects which can be quickly converted to profits. Generally, the inputs into the R&D in traditional fields are larger than that in the emerging fields. In sum, after the financial crisis, as affected by the wave of the reindustrialization of developed countries, the pattern of labor division of international R&D activities will be changed and possibly form a pattern of labor division in which developed countries will focus on the invention of future technologies, the top-level design on high-end technologies and the technological R&D of emerging industries, while developing countries will focus on the well-developed industrialized technological improvements, the R&D of medium-and-low-end technologies and the technological improvements of traditional industries.

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5.3 Impacts of Developed Countries’ Efforts in Quickly Deploying Emerging Industries on the Industrial Upgrading of Developing Countries After the financial crisis, the industrial policies of all developed countries have been focused on the emerging industries such as the new generation of information technologies, new energy, biology, aerospace, ocean and environmental protection. From the perspective of the industrial evolution, the reindustrialization launched by developed countries after the financial crisis is an adjustment and upgrading to the industrial structure based on the industrialization last time for the purpose of adapting to new technologies and new markets. It relies on the rapid development of information technologies, and develops the emerging industries which are in line with the future developmental direction of technologies and the change trend of market demand. On one hand, new industries are developed by relying on daily updated technologies; on the other hand, the transformation of industrial structure is driven by high technologies to promote the upgrading and improvement of traditional industries, and improve the capability of domestic economies in resisting financial risks. Therefore, this round of reindustrialization is a campaign to rebuild the real economy rather than the one to return to the real economy. Major developed countries carried out fierce competition on selecting future dominant industries after the outbreak of the financial crisis. Through strategic deployment, they have pushed forward the development of emerging industries such as energy saving and environmental protection, new energy, information technologies and biology in a bid to stimulate the growth of the real economy through the development of these emerging industries, and form new dominant industries (see Table 5.3). For examples, in 2009, the American government promulgated A Framework for Revitalizing American Manufacturing in which the government emphasized on the technological research and industrial development of new energy, aerospace, broadband networks and stem cells, actively pushed the “Green Economic Recovery Program” and the “Revolution of Green Technologies”; Japan focused on the emerging industries such as the appliance of information technologies, new-type automobiles, the low-carbon industry and new energy (solar energy); the EU aimed at promoting the development of green technologies and other high-tech technologies, and decided to make an investment of 105 billion euros before 2013 to stimulate the development of green technologies; the UK promulgated the Building Britain’s Future and the UK Low Carbon Transition Plan, proposing the start to build a “tomorrow’s economy”, and formally initiated the transformation to the low-carbon economy. Two conditions are necessary for the rapid development of emerging industries. First, the R&D shall be strengthened, and its efficiency be improved to provide technologies for industrial development; second, the existence of demand for the products of emerging industries. The USA is the first country to put forward the concept of the Information Revolution, while the level of information technologies in other developed countries like Japan and European countries is higher than the world average.

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Table 5.3 Relevant laws and plans on the development of emerging industries promulgated by major developed countries after the financial crisis Country or region

Time

Relevant laws and plans

Major fields

The USA

Feb., 2009

American Recovery and Reinvestment Act

New energy, environment protection

June, 2009

American Clean Energy and New energy Security Act

Sept., 2009

A Strategy for American Innovation

Clean energy, advanced automobile technology, health

Dec., 2009

A Framework for Revitalizing American Manufacturing

High-tech clean energy, biological engineering, aerospace, nanometer, smart grid

March, 2009

Plan on the Development of Information Technology

Information technology

April, 2009

Fourth Economic Stimulation Plan

Environment protection

Dec., 2009

New Growth Strategy

Environment protection, electric powered automobile, medical care, culture and tourism, solar energy

June, 2009

Building Britain’s Future

Low-carbon economy, biological industry, life science, digital economy

July, 2009

The UK Low Carbone Economy Transition Plan (supporting plans: The UK Renewable Energy Strategy, The UK Low Carbon Industrial Strategy, Low Carbon Transport.)

Low-carbon economy

April, 2009

Plan on the Development of Environment-friendly Economy

Green industry

Japan

The UK

The EU

Although American strategic layouts in the fields of new energy and new energy vehicles were later than that of Japan and European countries, even later than some developing countries like China, it has reserved a lot of basic knowledge and general technologies necessary for the development of emerging industries. Therefore, under the support of policies, the emerging industries can grow up quickly. In the early stage of its development, the costs of technology R&D and the market exploration of emerging industries are high, therefore, the prices of products are higher than that of traditional products of the same kind. However, as the Per Capita Disposable Income in developed countries is high and the social insurance and consumption credit system are perfect, even under the serious impact of the financial crisis, the

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USA, Japan and European countries are still the countries with the highest per capita consumption in the world. Hence, it is more likely that the initial markets of products of emerging industries, especially the high-and-medium-end products, are located in developed countries. China’s emerging industries such as electronic information and new energy will aim at markets in developed countries. In general, the conditions for the development of emerging industries in developed countries with regard to the technology supply and market demand are superior to those in developing countries. Furthermore, developed countries have accelerated the deployment of emerging industries after the financial crisis, which will cause huge pressures on the development of relevant industries in developing countries. The global pattern of the labor division of emerging industries will transfer to developed countries.

5.4 Impacts of the New Industrial Revolution on International Division of Labor The First Industrial Revolution was a factory system created by the mechanization of the manufacturing industry in the late of the eighteenth century. It thoroughly wiped out the family-based production organization form. The Second Industrial Revolution was the Fordism created by the automation of the manufacturing industry in the early twentieth century. Assembly lines made the “large-scale production” to be the basic production organization form in the manufacturing industry. The degree of product homogeneity and the production output all reached the highest level. Human beings welcomed the Third Industrial Revolution after the financial crisis. That was the digitalization of the manufacturing industry. It caused a complete change in material inputs, production equipment and assistive technologies of the manufacturing industry after the invention of the assembly lines (see Table 5.4). The mass customerization based on this Revolution has become the main production form in the future. It is also the key characteristic of this round of reindustrialization of developed countries. The Third Industrial Revolution is a tremendous change in the production form. The current international division of labor created by the automation of the manufacturing industry and the large-scale production may be thrown away and replaced by a new international division of labor which is possibly more helpful for developed countries to regain competitiveness of their manufacturing industry. Therefore, the existing competitive advantages of developing countries are in great perils. First of all, the Third Industrial Revolution will rebuild comparative advantages among countries. Firstly, the source of the competitive advantage of terminal products is no more the low price competition among homogeneous products, but relies on more flexible and economical new manufacturing equipment to produce more personalized products with higher added values. Developing countries may lose their existing comparative advantages which are gained by relying on the large-scale production of homogeneous products with the use of low factor costs to reduce

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Table 5.4 The comparison of technological bases for the three industrial revolutions New inputs in New production production (materials) equipment

Assistive technologies for new production (transportation, communication and infrastructure)

First Industrial Revolution

Wrought iron

Steam engine

Steam wheel, train; postal service; railway, canal

Second Industrial Revolution

Iron and steel

Assembly line

Automobile, plane; telephone, telegraph; transport network formed by highway, motorway, airport and port

Third Industrial Revolution

Composite material and nanomaterial

Industrial robot, 3D printing

New energy vehicles; digital telecommunication; information network

product costs. If developing countries, relying on their comparative advantage of low factor costs, cannot re-occupy a place in the differentiated manufacturing in the future, they will lose the competitive advantage of terminal products with high added values. Secondly, the new-type equipment supporting the digitalization of the manufacturing industry is also the basis for maintaining the manufacturing advantage of terminal products. However, this new-type manufacturing equipment belongs to technology-intensive and capital-intensive products, and more complies with the comparative advantage of developed countries. As for China, the comparative advantage of low labor cost mainly reflects in manufacturing processes. In the wave of the Third Industrial Revolution, with the decline of the importance of the manufacturing itself, the existing comparative advantage of the low labor cost in China will be weakened. Shi Zhenrong, the founder of Acer, proposed the “Smiling Curve” theory 20 years ago, in which he pointed out that the profit ratio of manufacturing processes in the value chain had a trend of decline. However, currently, with the coming of the Third Industrial Revolution and its in-depth development, the manufacturing not only has the problem of continuous decline in the profit ratio, but even has the possibility of a total exit. For example, while the invention and continuous improvements of 3D printing are providing unprecedented consumption experience for consumers, it will change the organizational structure of industrial production. With the emergence of integrated large-size 3D printer, the manufacturing possibly needs not to be finished in factories in the near future. Meanwhile, from the perspective of the manufacturing itself, with the technology standardization and the modular development of components, the proportion of production costs and profits of core and key parts and components in the total costs and profits of the whole manufacturing process will continuously increase, while the proportion of costs and profits of assembling

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will continuously decrease. This will cause huge attacks on China’s manufacturing industry which focuses mainly on the assembling. For example, the retail price of an iPad is $499, among which, the labor cost of the manufacturing process is only $33, while the cost of the assembling process that China undertakes is only $8. As a result, the Third Industrial Revolution not only impairs the traditional comparative advantage of developing countries, but also strengthens the comparative advantage of developed countries. The “core—periphery” world industrial system will be further consolidated. Secondly, the Third Industrial Revolution will rebuild the profit distribution mechanism among countries. The wave of the Third Industrial Revolution not only has an impact on the change of production relation, but also leads to the renovation of distribution ways. On one hand, the pattern in which the manufacturing process has a low added value in the value chain may be changed. The main reason for the current manufacturing process with a low added value is that the threshold for entry is very low as a lot of low cost labor forces are employed to engage in simple and repeated work. Such mode will hardly continue in the Third Industrial Revolution as the manufacturing process will involve a lot of more efficient and intelligent capital goods and equipment products for accomplishing not only simple and repeated work, but also more flexible and precise tasks. Thus, the profits of the production manufacturing process will be higher than before. This is also the important factor for part of high-end manufacturing industries flowing back to developed countries. On the other hand, the Third Industrial Revolution strengthens the supportive role of the service industry to the manufacturing industry. As the producer service industry is composed by people with professional skills to a considerable extent, therefore, their provided services have higher values, the threshold for entry is higher and the negotiation capability of employees is stronger, which enable the service industry to occupy a larger share in the distribution. As a result, with the further concentration of the manufacturing industry and relevant professional service industry in developed countries, developed countries are more qualified to enjoy the “structural dividends” caused by the adjustment of industrial structure among countries. In the end, developing countries are faced with the risk of the discontinuity of economic growth. On one side, the comparative advantage of developing countries is concentrated in the manufacturing processes, of which the cost ratio increasingly declines. One of the characteristics of the Third Industrial Revolution is that the proportion of the general manufacturing against the total product cost will further decline and the number of needed labor forces will decrease significantly. Therefore, the advantage of developing countries in the labor-intensive industry will gradually lose. On the other side, the industrial workers in developing countries need more time to comply with the requirements of the Third Industrial Revolution. For example, China’s manufacturing industry has possessed the best disciplined workers with the highest techniques in the largest scale in the world involved in the assembly lines. This is the fundamental condition for China to be the center of the global manufacturing and the world factory in the past over 20 years. However, amid the Third Industrial Revolution, as the production automation degree in factories and the proportion of personalized customization have been increasingly improved, we

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need more creative workers who are able to understand design drawings and the requirements of orders, adjust machine parameters and revise faults and tolerances. From the perspective of the current situation, the human resource status of industrial workers in developing countries like China is not suitable for the requirements of developing emerging industries. This is the potential risk of the discontinuity of economic growth commonly existing in developing countries.

5.5 Policy Priorities Dealing with Reindustrialization and the Third Industrial Revolution Although the reindustrialization of developed countries has no serious impacts on the trend of international division of labor, and the Third Industrial Revolution is not yet fully in place, the industrial policy adjustment and the technology revolution in developed countries will cause far-reaching impacts on the comparative advantage among countries. The relationship between the second and the tertiary industry, the world economic landscape and the profit distribution mechanism among countries in a long period of time will inevitably bring about huge challenges to the high-end and low-end segments of developing countries’ industries. Developing countries, such as China, need to formulate responsive policies and measures to be fully prepared before such tremendous changes are in place. Firstly, China shall seek the breakthrough of key technologies in support of the development of the manufacturing industry. Although China has had certain bases for the research and development in the field of the manufacturing industry and gained some achievements, compared with overseas advanced technologies, there is still a certain gap. For example, in the key technological fields represented the development direction of the Third Industrial Revolution such as the rapid prototyping manufacturing technology, the industry robot technology and new material technology, the technology maturity and the course of industrialization in China have significant gaps with developed countries. As a result, China must strengthen its efforts on the breakthrough of key technologies and policy supports to the industrialization. General industrial policies, scientific and technological innovation policies, and special policies for the strategic development of emerging industries shall take priority for these aspects. Secondly, China shall attach importance to the key role of market demand (especially domestic markets) in the development of future industries. China shall take advantage of favorable conditions resulting from both promotions of the consumption capability and the consumption level of Chinese citizens, and integrate the mass customerization with the promotion of the growth of emerging industries and the initiation of the domestic demand. Through approaches such as application demonstration, customer experience and exhibitions, China shall improve the recognition of consumers both in China and abroad to technologies and products of China’s emerging industries. Thirdly, China shall change its ideas in human capital development. On one hand, the reindustrialization of developed

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countries and the Third Industrial Revolution have put forward a higher request to employees in the global manufacturing industry. The new employment positions created by emerging industries are targeted to professional technicians and service staff particularly. This has required for a corresponding adjustment to the development of human capital in each country to satisfy the labor needs of industries in the future. On the other hand, studies have proved that the accumulation of human capital is also an important factor of effectively promoting the efficiency of R&D investment. The foundation for the accumulation of professional human capital in China is weak and the speed is slow. Furthermore, there are more restrictive factors to limit the flow of high-end talents, which will possibly affect the transformation and upgrading of China’s manufacturing industry in the wave of reindustrialization and the Third Industrial Revolution. As a result, it is necessary for China to conduct an all-round adjustment from the basic education, the higher education and vocational training, and conduct reform on unreasonable factors restricting the flow of high-end talents.

Chapter 6

The Industrial Competitiveness of the Next Wave of Emerging Economies Lixue Wu and Zhongzheng Jia

A country’s industrial competitiveness level has a close correlation with its economic system, its industrial structure, knowledge and technology innovation, its population size and structure, its natural resource endowment, its capital scale and international trade and investment. As currently the international status and competitiveness of China’s economy are in a key period of change, the industrial cooperation and competition with the next wave of emerging economies will have increasingly prominent impacts on China’s industrial development. As a result, we have defined developing economies whose economic development levels are not high, but economic growth is relatively rapid; whose impacts on the world economy are not strong, but the degree of their economic openness is relatively high; whose potentials for the future economic growth and the industrial competitiveness are relatively prominent as the next wave of emerging economies. We have selected some representative countries such as Viet Nam, Indonesia, Malaysia, Thailand and Philippines in Asia, Honduras, Panama in Latin America and Costa Rica, Nicaragua in North America, to analyze these countries’ economic development status and their characteristics of industrial structure, and conduct studies on their industrial competitiveness compared with that of China.

L. Wu (B) Institute of Industrial Economics of Chinese Academy of Social Sciences, Beijing, China Z. Jia Institute of World Economic and Political Studies of Chinese Academy of Social Sciences, Beijing, China © Social Sciences Academic Press 2022 B. Jin and Q. Zhang (eds.), The New Trend of Global Industrial Division of Labor and China’s Responses, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-5674-4_6

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6.1 The Economic Development Status of the Next Wave of Emerging Economies In this part, we have conducted simple discussions on the concept of the next wave of emerging economies, selected part of those representative countries, and described the basic status quo of these countries from the perspectives of population, economy and their relationship with international markets. 1. The Definition of the Next Wave of Emerging Economies In the early 1980s, the words of “newly industrialized economies” were used to describe several economies in Asia and Latin America which had rapid economic growth and implemented many liberalization policies. After many years, the International Financial Corporation, a member of the World Bank Group, firstly proposed the concept of the “emerging markets” pointing to a few economies with medium scale and relatively high income in developing countries. As time goes by, countries or regions involved in the “emerging markets” have been gradually expanded. Therefore, the two concepts of the “newly industrialized economies” and the “emerging markets” were replaced by the “emerging economies” with a wider coverage. Additionally, some scholars or research institutions classified these countries according to the different characteristics of national groups. The Economist of Britain once divided the emerging economies into two echelons. The first echelon included China, Brazil, India and Russia, or the four countries of the BRICS in an early period; the second echelon included some countries of “Next 11” such as Mexico, South Korea, South Africa, Poland, Turkey, Kazakhstan and Egypt. However, the Asian Development Bank involved the 10 economies in the Association of Southeast Nations (ASEAN) and China, Hong Kong (China), Taiwan (China) and South Korea into the East Asian Newly Emerging Economies.1 According to the criteria for classification of the International Monetary Fund (IMF), the BRICS countries (China, Russia, India, Brazil and South Africa) are typical emerging economies. Although these ways to define emerging economies similarly have some problems such as the simple criteria for classification or the excessively prominent functionality, they are extensively accepted as they are simple and clear with distinctive characteristics. It is not difficult to find out that the definitions of emerging economies have no unified standards. Different countries at different development stages possibly have similar or different economic, social or political characteristics. Some countries at a certain stage belong to the category of emerging economies according to a criterion such as the Per Capita GDP, but with the continue development and progress of their economies, they have already surpassed the category of emerging economies in other periods and shall be classified into advanced economies such as the case of the former Four Asian Tigers. Therefore, the definition of emerging industries is still faced with problems such as the criteria for classification, the range and the timeliness. The definitions of the next wave of emerging economies are more extensive and disputable. It is generally agreed that the current economic growth 1

“The Asia Economic Monitor” issued by the Asian Development Bank on December 15, 2009.

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of these economies shall be faster than the world average level. As the industrial structure of these economies is mainly concentrated in the labor-intensive low-end or medium-and-low-end manufacturing industry, with the development of the world economy, the continuously expanded range of international trade and the constant deepening of the international division of labor, these economies are undertaking or absorbing some traditional, emerging, potential, or even some declining industries transferred gradually from developed economies or emerging economies to them. In this paper, we have taken reference from relevant previous studies, tried to strike a balance among the universality, the timeliness and the operability of the study, and considered the particularity of each economy and other factors such as the geographical balance to define the next wave of emerging economies as those developing economies whose economic development levels are not high, but economic growth is relatively rapid; whose impacts on the world economy are not strong, but the degree of their economic openness is relative high; whose potentials for the future economic growth and the industrial competitiveness are relatively prominent.2 In detail, these economies do not belong to advanced countries, nor the lest developed countries; their economic growth in recent 10 years is much higher than the world average level and some even surpassed the growth rate of all other types of economies; the level of per capita income belongs to the medium and upper level or the medium and lower level; their economies have relatively high openness. Countries complying with these standards include Viet Nam, Indonesia, Malaysia, Thailand and Philippines in Asia, Honduras, Panama in Latin America and Costa Rica, Nicaragua in North America. They will very likely become new highlights to show the rapid growth of the world economy in a certain field, and play noticeable promotive roles in the steady growth of the world economy. This paper has analyzed the economic status and the industrial competitiveness of the next wave of emerging economies represented by these countries. 2. The State of National Economy From the perspective of population size, the population size of the next wave representative emerging economies was generally smaller, occupying a small proportion of the world’s population. In 2011, the total population of the next wave of emerging economies listed above was about 550 million, 7.9% of the world’s total population (For details, see Table 6.1). Among them, the population of Indonesia was the largest, about 240 million; Philippines was the second largest with a population of about 95 million; Viet Nam was the third with a population of 88 million; compared with the Asian countries, the population size of countries in Latin America and North America was much smaller as Honduras had a population of around 8 million, the relatively largest one, while Nicaragua about 6 million, Costa Rica about 5 million 2

Although the concepts of the “next wave of emerging economies” or the “potential emerging economies” are more and more used, there is no universally acknowledged and clear definition, even the connotation and denotation of the “emerging economies” have great disputations. The research purpose of this paper does not aim to conduct specific discussions on these concepts, but to generalize some developing countries and regions that have potentials for growth or conduct possibly extensive competition and cooperation with China at parts of industrial fields.

168 Table 6.1 The population size of the next wave representative emerging economies in 2011 (Unit: million persons)

L. Wu and Z. Jia Country Viet Nam

Population number 87.84

Country Honduras

Population number 7.75

Malaysia

28.86

Panama

3.57

Thailand

69.52

Costa Rica

4.73

Indonesia

242.33

Nicaragua

5.87

Philippines

94.85

Total

545.32

Data Source World Development Indicators (WDI) of the World Bank

and Panama about 4 million, the smallest one. In general, the population size of these countries was small, accounting for a small proportion of the world’s population. From the perspective of GDP, the GDP of the next wave of representative emerging economies rose gradually, while the economic growth of some individual economies was extraordinarily rapid. From 2000 to 2011 (For details, see Fig. 6.1), the economic growth of Indonesia was the fastest with its average annual GDP reaching up to $391.67 billion; Thailand was the second with $208.3 billion, followed by Malaysia with $165.85 billion, Philippines with $117.76 billion and Viet Nam with $65.59 billion. Comparatively, the average annual GDP of the next wave of emerging economies in North America and South America was generally ranked behind, among which, Costa Rica was the highest only with $24.2 billion, Panama with $17.99 billion, Honduras with $11.1 billion and Nicaragua with $6.78 billion, the lowest. Nevertheless, it does not mean that the economic status of the next wave of emerging economies in Latin America is not as good as that of the economies in Asia. The reason for this phenomenon possibly lies in the relatively smaller population and country size as the economic aggregates generally have a positive correlation with the population size. Therefore, their economic aggregates are relatively smaller. From the perspective of the average annual growth rate of population, the indicators of the next wave of emerging economies all presented a trend of declining year by year. From 2000 to 2012 (see Fig. 6.2), the growth rate of population of Thailand slumped the most obviously with the average annual growth rate only at 0.87; Viet Nam followed with a growth rate of 1.13; Indonesia’s was at 1.15, Philippines’s at 1.87 and Malaysia’s at 1.91. Compared with the next wave of emerging economies in Asia, the growth rate of population of Latin American and North American countries was faster as a whole. Among them, Honduras recorded the highest growth rate of population, reaching up to 2.01. The figure shows that the growth rate of population of Honduras basically maintained at around 2%. The second was Costa Rica, at 1.72; Panama’s at 1.71 and Nicaragua’s at 1.35. From a long-term point of view, under the condition that technologies and innovation have no qualitative improvements, the general decline of the annual growth rate of population may lead to the disappearance of population dividends in these countries. Therefore, the decline of the annual growth rate of population is not beneficial for the growth

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Fig. 6.1 The change trend of the GDP of the next wave of emerging economies

Fig. 6.2 The change trend of the annual growth rate of population of the next wave of emerging economies

of their national economies. However, from the perspective of current development trend, with their increasingly improved economic strength, the decline of the growth rate of population conversely promoted the rise of indicators such as the Per Capita GDP and the Per Capita Income.

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From the perspective of GDP growth rate, the indicators of the next wave of emerging economies were generally higher than the world average. From 1991 to 2011, the average growth rate of the global economy was 2.69% (see Figs. 6.3 and 6.4). The average growth rate of the GDP of medium-and-high-income countries was 5.04%, and that was 4.98% for medium-and-low-income countries, 5% for mediumincome countries, 4.85% for low-and-medium-income countries, 4.18% for lowincome countries and 2.1% for high-income countries. The average growth rate of the GDP of the next wave of emerging economies was obviously higher than that of the world’s GDP. Among them, Viet Nam recorded the highest rate of 7.35%, and for Panama, Malaysia, Indonesia, Costa Rica, Philippines, Honduras and Nicaragua, it was 5.97%, 5.88%, 4.91%, 4.79%, 3.84%, 3.7% and 3.28% respectively. Although the Per Capita GDP of high-income countries has always been higher than the world average level in recent 20 years, their growth rates of GDP have been lower than the world average level. The rapid development of medium-income countries and emerging economies has contributed a lot to the growth of the world economy, especially in recent 5 years. Compared with the Southeast Asian Financial Crisis in 1997, the outbreak of the international financial crisis at this time seemingly had less negative impacts on the next wave of emerging economies in East Asia, while it had larger impacts on the next wave of emerging economies in Latin America, North America and South America. During the Southeast Asian Financial Crisis in 1997, due to less impacts on the economies and other reasons such as the geography, except that the GDP growth rate of Honduras declined by 2%, the GDP growth rate of other three countries in Latin American region basically maintained normal, while the GDP growth rate of the next wave of emerging economies in Asia all slumped, even to the negative level, among which, the GDP growth rate of Indonesia slumped from 4.7% in 1997 to

Fig. 6.3 The change trend of the GDP growth rate of different types of countries

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Fig. 6.4 The trend of the GDP growth rate of the next wave of emerging economies

−13.1% in 1998 and that of Thailand from −1.4% in 1997 to −10.5% in 1998. However, although the 2008 global financial crisis had noticeable negative impacts on the economic growth of all countries in the world, the impacts on countries in Latin American region seemed larger. From 2008 to 2009, except that Panama could maintain a positive GDP growth rate despite a decline of 6.2% year on year, the GDP growth rate of other three countries turned to the negative level from the positive, not advancing but regressing. However, the 2008 financial crisis had relatively less impacts on countries in East Asia. Except for Malaysia and Thailand whose GDP growth rate turned to the negative, the growth rate of GDP of other countries in the next wave of emerging economies maintained positive, among which, the GDP growth rate of Viet Nam only dropped by 1 percentage point and kept a rapid growth rate of 5.3% in 2009 after the outbreak of the global financial crisis. From the perspective of the Per Capita GDP, the indicators of the next wave of emerging economies increased rapidly, approaching or having already reached the world average level. According to the updated statistics from the World Bank (see Figs. 6.5 and 6.6), from 1991 to 2011, the Per Capita GDP of 6 types of countries in the world maintained a trend of growth, while the Per Capita GDP of high-income countries has always been far higher than that of the world average. Although the Per Capita GDP of high-income countries once dropped to $36,822 in 2009 as the global economy was suffered from multiple negative impacts of 2008 global financial crisis and the European Debt Crisis. With the stability and improvements of the global economy, it reached $41,063 in 2011, far higher than the world average of $10,035. Compared with the world’s Per Capita GDP, the Per Capita GDP of the next wave of emerging economies increased more rapidly. In 2011, the Per Capita GDP of Malaysia reached $9,977 and that of Panama was $7,498 and Costa Rica $8,647, all approaching or having already reached the world’s

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Fig. 6.5 The change trend of the Per Capita GDP of different types of countries

Fig. 6.6 The change trend of the Per Capita GDP of the next wave of emerging economies

Per Capita GDP. Additionally, although the Per Capita GDP of Honduras, Nicaragua, Indonesia and Philippines were still relatively low, these countries have maintained a good growth momentum as they were less affected by the financial crisis of this time. In sum, the annual growth rates of population in the next wave of emerging countries generally presented a trend of decline, but the GDP of these countries maintained a robust growth rate noticeably higher than the world average. The growth rates of some countries were even higher than that of all other types of countries. Under the joint effect of the two factors, the necessary result must be that the Per Capita GDP and the general people’s living standards in the next wave of emerging economies

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173

will increase significantly and so it did. According to the analysis described above, the Per Capita GDP of the next wave of emerging economies is approaching or has already reached the world average level, which has laid good economic foundation for the continuously stable development and progress of these economies. 3. Foreign Economic Relationship From the perspective of the comparison of total foreign trade volume, the next wave of emerging economies basically maintained a trend of rise year by year and some economies saw a rapid development in foreign trade (see Fig. 6.7). Among these countries, Viet Nam recorded the quickest growth in foreign trade, with a volume of $35.08 billion in 2000 increased to $220.3 billion in 2011, an increase of more than 5 times. It had close relations with the recent economic reform of the government of Viet Nam. The establishment of the socialist-oriented market economic system was confirmed in the 9th National Congress of the Communist Party of Viet Nam in 2001. The 10th National Congress of the Communist Party of Viet Nam in 2006 proposed pushing forward the all-round reform to enable Viet Nam to get rid of the less developed status as early as possible. After the 20-year reform and innovation, Viet Nam recorded a quick economic growth. Its economic aggregates have increasingly expanded, and the structure of its three industries has tended to be in coordination, and its opening-up level has been continuously improving. Basically, it has formed a pattern with the state-owned economy playing a dominant role and multiple economic sectors jointly developing. In 2010, its GDP more than doubled on the basis of that in 2000. It has set up trade relationships with 150 countries and regions in the world, which is the reason for its rapid growth in foreign trade. Indonesia, Thailand and Nicaragua also had quick growth in their foreign trade with the volume increased by 2.68 times, 2.37 times and 2.02 times respectively. Philippines recorded the lowest increase in its foreign trade with the volume increased only by 0.54 times in 12 years. Its average annual foreign trade volume basically maintained at around $100 billion. The reason may lie in the fact that it has a longterm reliance on the export of traditional commodities such as mineral products and raw materials, the prices of which were affected greatly by the volatility of international bulk commodities. Although Philippines has strengthened its industrial transformation and upgrading in recent years and increased the exports of mediumand-low-end technology products such as garments, electronic products, handicrafts, furniture and fertilizers, the increase of foreign trade as a whole was still not obvious. From the perspective of economic openness, the next wave of emerging economies generally had a high degree of economic openness, maintaining at over 50%. Commonly speaking, if a country’s foreign trade dependence degree (FTDD) is between 30 and 100%, then the country shall be included into countries with the medium level of FTDD. The statistics (see Fig. 6.8) show that the FTDD of the next wave of emerging economies generally exceeded 50%. Among them, the FTDD of Viet Nam, Honduras, Malaysia, Panama and Thailand exceeded 100%, and other three countries including Costa Rica, Nicaragua and Philippines also exceeded 50%. Indonesia recorded the lowest FTDD with its annual average at 58%. This illustrated that the next wave of emerging economies, due to their small national

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Fig. 6.7 The comparison of the total foreign trade volume of the next wave of emerging economies

Fig. 6.8 The comparison of the economic openness degree of the next wave of emerging economies

territorial areas, population sizes and economic scales, generally adopted the exportoriented economic development strategy and had a high level of economic openness and a high dependence on international commodity markets. The advantage of this development strategy is the strong domestic demand of their international trade partners, which is also the driving force for the continuous increase of their foreign trade and national economies; the disadvantage is that this development mode is greatly affected by the volatility of external environment. As the domestic demand of their main trade partners—the developed countries, decreased sharply due to the recent international financial crisis and the European debt crisis, these countries’ export trade and national economies were inevitably hit. From the perspective of FDI net inflows, the capability of the next wave of emerging economies of attracting FDI net inflows was continuously enhanced.

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Fig. 6.9 The change trend of FDI net inflows of different types of countries

Fig. 6.10 The change trend of FDI net inflows of the next wave of emerging economies

In the group of 6 types of countries, the FDI net inflows of high-income countries have always been at the top level (For details, See Figs. 6.9 and 6.10) and reached $980.03 billion in 2011. This had close relations with the stable political and economic environment of developed countries, the improved systems, the favorable credit environment and infrastructure. Additionally, medium-and-low-income, medium-income and medium-and-high-income countries were also the main forces to attract FDI net inflows. Their levels of absorptive capacity for FDI were obviously higher than that of low-and-medium-income and low-income countries. As for specific countries in the next wave of emerging economies, Indonesia was the top one in recent years, attracting up to $18.16 billion of FDI net inflows in 2011. The second was Malaysia, attracting $12 billion. Although the FDI net inflows

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attracted by Thailand and Viet Nam declined a little bit, they reached $7.78 billion and $7.43 billion in 2011 respectively. However, Philippines recorded a lower level of attracting FDI net inflows which was only $1.87 billion. It possibly had relations with the instability of its domestic political situation. In Latin American region, Panama attracted the most FDI net inflows of $3.26 billion, while Costa Rica attracted $2.18 billion, Honduras $1.04 billion, Nicaragua $970 million, ranking the lowest. Compared with the next wave of emerging economies in Asia, countries in Latin America have less scales and market capacity. This may be one of the reasons for the relatively less FDI net inflows they have attracted. From the perspective of the proportion of FDI net inflows against the GDP, the proportion of FDI net inflows of the next wave of emerging economies generally presented a trend of increase year by year (For details, see Fig. 6.11). Although the proportion of FDI attracted by each country against its GDP declined a little bit as countries were affected by the 2008 international financial crisis, the proportion has again risen since 2009, presenting a trend of a stable increase as a series of actions launched by those countries came into force. Figure 6.11 shows that the proportion of FDI net flows of Panama against its GDP has maintained a relatively high level and reached the highest level of 12.2% in 2011 after the financial crisis, which was the second highest only after the 17.1% reached in 2006. Panama is a country without the heavy industry. Its industrial foundation is weak with industries mainly concentrated in food processing, clothing processing, paper making and leather. The service industry is its economic priority, mainly focusing on finance, trade and tourism. After Panama fully took over all lands, constructions, infrastructures and all management rights of the Panama Canal from the USA at the end of December 1999, its reliance on foreign capital, tourism and trade became heavier. Therefore, its proportion of FDI net inflows against its GDP has always been relatively high. The proportion of Viet Nam, Honduras and Nicaragua was relatively higher with annual average at 5.7%, 5.6% and 5.2% respectively. The proportion of Indonesia was the lowest with annual average at 0.72%. Nevertheless, it did not mean that its capability of attracting foreign capital was relatively weak. According to the analysis above, the FDI net inflows attracted by Indonesia always remained at the No. one place in recent years and Indonesia is one of the countries with the most rapid GDP growth. The reason for its extremely low proportion of FDI net inflows against the GDP is very likely that its GDP growth rate is much larger than the growth rate of FDI net inflows. Additionally, parts of African countries have achieved good performance in their economic development. They may become a member of the next wave of emerging economies. However, as affected by long-term political turmoil and ceaseless wars, the national economic growth of some African countries was very slow, or even receded. Their development prospect was instable. Take the change trend of the Per Capita GDP (see Fig. 6.12) as an example. The Per Capita GDP of 9 countries among 35 African countries, which were Seychelles, Mauritius, Gabon, Botswana, Tunisia, Algeria, Namibia, Morocco and Libya (South Africa is excluded as it is one of BRICS countries), were higher than that of China in 2005 before the outbreak of

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177

Fig. 6.11 The proportion of FDI net inflows against the GDP of the next wave of emerging economies

Fig. 6.12 The comparison of the Per Capita GDP between China and part of African countries from 2000 to 2011

the international financial crisis. However, in 2011, African countries with the Per Capita GDP higher than that of China only included Botswana, Mauritius, Gabon and Seychelles (due to the chaos caused by wars, the 2010 and 2011 data of Libya are missed). As the availability of data of most African countries is relatively worse or the sample spacing is relatively shorter, it is difficult to conduct a more detailed analysis on African countries in this paper. In general, although some African countries recorded relatively a rapid economic development, their advantageous industries are mainly concentrated in primary products, crude oil and mineral products with single industrial structure. Basically, they do not possess a comparative advantage with regard to the production factors of capital and technology, so there are no more unnecessary details in the subsequent studies of this paper.

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In sum, we have conducted an analysis on the development of the next wave of emerging economies from the aspects of population size, macro economy, foreign trade and the attraction of foreign capital. The results include: the population size of the next wave of emerging economies is generally smaller with a small proportion against the world’s total population, and the annual growth rate of population has presented an obvious trend of decline year by year; however, the total GDP has been rising up year by year. Some individual economies recorded extremely rapid economic growth with the GDP growth rate much higher than the world average level and some even higher than that of all other types of countries. With a smaller population size and its annual growth rate declining, added by the increase of the total GDP and its relatively faster growth rate, the inevitable result must be that the Per Capita GDP of the next wave of emerging economies has risen up quickly, approaching or having already reached the world average level. From the perspective of the foreign economic relationship, the foreign trade volume of the next wave of emerging economies has basically maintained a trend of increase year by year, and some economies recorded a rapid development in foreign trade. The degree of economic openness is generally high measured by the FTDD, maintaining at over 50%. The capability of the next wave of emerging economies to attract FDI net inflows has been continuously enhanced, and the proportion of FDI net inflows against domestic GDP has generally increased year by year.

6.2 Characteristics of the Industrial Structure of the Next Wave of Emerging Economies In this part, we have conducted an analysis on the characteristics of competitiveness of the next wave of emerging economies from two aspects. One is to analyze the characteristics of industrial structure of the next wave of emerging economies based on the proportion of three main industries including the agriculture, industry and service industry against the GDP; the other is to calculate the international market share and the Revealed Comparative Advantage (RCA) of foreign trade commodities of the next wave of emerging economies from the angle of foreign trade to deeply explore the characteristics of competitiveness of each industry corresponding to trade products. 1. Analysis Based on the Industrial Structure of Three Main Industries The three main industries of the next wave of emerging economies were sorted by their proportion against the GDP, which showed that the proportion of the service industry was the highest, followed by that of the industry, and then that of the agriculture was the lowest (For details, see Figs. 6.13, 6.14 and 6.15). During the period from 2000 to 2011, the average proportion of the agriculture of the next wave of emerging economies against the GDP was 12.9%; the average proportion of the industry was 34%, while that of the service industry was the highest at 53.1%. Compared with the agriculture and the industry, the service industry of the next wave

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Fig. 6.13 The proportion of agriculture against the GDP of the next wave of emerging economies

Fig. 6.14 The proportion of industrial added value against the GDP of the next wave of emerging economies

of emerging economies had the highest proportion and a more obvious industrial advantage. On one side, as these countries’ national economy and population size are relatively small and their territorial areas are not large, therefore, the proportion of the agriculture is relatively low; on the other side, the national economy of these countries basically lacks the support from the heavy industry, therefore, tourism, processing trade, financial consultation, information and logistics are the main driving forces for their economic growth. In general, in the national economy of the next wave of emerging economies, the proportion of each industry presents a situation that the service industry is the highest, the industry the second and the agriculture the lowest. From the analysis of the trend of the proportion of the agriculture against the GDP, it is found that the overall proportion of the agriculture in the next wave of emerging economies has shown a trend of gradual declining. Except for Malaysia

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Fig. 6.15 The proportion of the added value of service industry against the GDP of the next wave of emerging economies

and Thailand, the overall proportion of the agriculture in other countries during the period from 2000 to 2011 declined despite the fact that such trend was not obvious. From the analysis of the trend of the proportion of the industry against the GDP, it is found that the proportion of the industry of the next wave of emerging economies was mixed. The proportion of Costa Rica, Honduras, Malaysia, Panama and Philippines showed a trend of declining, while that of Indonesia, Nicaragua and Viet Nam showed an upward trend and that of Thailand basically remained unchanged. From the analysis of the trend of the proportion of the service industry against the GDP, it is found that the proportion of each country’s service industry in its national economy was obviously high, presenting a moderate upward trend in general. During the period from 2000 to 2011, the proportion of the service industry in Panama was the highest, up to 76.6%, which had relations with its special geographic location and historical factors. Considering that Panama is closely connected with USA in terms of both establishments and trade, when Panama started to use the US dollar as its circulation currency from 1907, it is the first country regarding the US dollar as its legal tender except the USA. Its pillar industry is the service industry with focus on finance, tourism and trade. Costa Rica was the second highest with the proportion reaching up to 63.1%, and the proportion of Nicaragua and Honduras was 58.4% and 57.5% respectively. In Asian countries, Philippines recorded the highest at around 53.7%; while Viet Nam was the lowest at around 38.2%. In general, the proportion of the service industry of the next wave of emerging economies in Asia was lower than that of emerging countries in South America and North America. The structural adjustments in their service industry have a lot of room for progress in the future. 2. Analysis Based on the Industrial Structure of Foreign Trade Products Trade data of relevant countries’ export to the USA and of the USA are utilized to fulfill the objective. The selected commodities are in line with the classification

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181

Table 6.2 The international market share of products of the next wave of emerging economies in 20113 Costa Rica

Malaysia

Thailand

Indonesia

Philippines

Panama

Nicaragua

1

0.0001

0.1958

0.0868

0.0002

0.0146

0.0000

0.0109

2

0.0005

0.1742

0.0069

0.0043

0.2741

0.0071

0.0316

3

0.0002

0.1139

0.0048

0.0041

0.3688

0.0134

0.0149

4

0.0001

0.1168

0.0018

0.0055

0.5973

0.0253

0.0024

5

0.0000

0.0013

0.0000

0.0004

0.8857

0.0000

0.0000

6

0.0023

0.0088

0.0001

0.0023

0.1652

0.0000

0.0348

7

0.0011

0.0082

0.0000

0.0004

0.0000

0.0000

0.0276

8

0.0042

0.0436

0.0706

0.0042

0.0000

0.0004

0.1542

9

0.0043

0.0655

0.0995

0.0040

0.0003

0.0016

0.1950

10

0.0024

0.0189

0.0374

0.0013

0.0003

0.0008

0.0092

11

0.0008

0.0022

0.0268

0.0021

0.0251

0.0004

0.0124

12

0.0006

0.0007

0.0116

0.0011

0.0210

0.0033

0.0221

13

0.0000

0.0003

0.0071

0.0018

0.0545

0.0034

0.0551

14

0.0000

0.0000

0.0006

0.0001

0.0050

0.0002

0.0072

15

0.0013

0.0012

0.0016

0.0006

0.0063

0.0012

0.0090

16

0.0002

0.0001

0.0000

0.0000

0.0000

0.0000

0.0001

17

0.0007

0.0002

0.0000

0.0001

0.0001

0.0003

0.0007

18

0.0012

0.0003

0.0163

0.0001

0.0120

0.0011

0.0021

0.0025

0.1330

0.0005

0.0905

20

0.0003

0.0003

0.0097

0.0001

0.0112

0.0009

0.0000

21

0.0000

0.0013

0.0271

0.1410

0.0594

0.0040

0.0000

0.0006

0.0000

19

22

0.0001

0.0158

0.0260

Data Source data sorted according to the UN comtrade database. The formula of international market share is: the market shares = the total export volume of a product from a country in 2011/the total import volume of the product of the USA in the same year. Here, where is blank in the Table means that there was no such type of commodity exported to the USA from the country in 2011. As there were no data of export products from Viet Nam and Honduras in the UN comtrade database in 2011, there was no report in the table. The commodity classification is based on the HS Code 1996 version (For details, see Appendix One). It is the same for the next table

of HS code (1996 version) which has a total of 22 categories and 98 chapters. For details, see the following Tables 6.2 and 6.3. Table 6.2 shows that due to their small economic scales, the market shares of the export commodities to the USA from the next wave of emerging economies in 2011 were generally low. But from the perspective of specific classifications, the market share of primary products and low-end manufactured products were 3

As relevant trade data of Viet Nam and Honduras were not yet complemented in the UN comtrade database in 2011, therefore, in the above table, the international market share and the RCA index of the two countries were temporarily not calculated.

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Table 6.3 The RCA of various products of the next wave of emerging economies in 2011 Costa Rica

Malaysia

Thailand

1

0.21

20.26

16.84

Indonesia 0.11

Philippines 0.38

2

0.89

18.02

1.34

2.71

3

0.34

11.79

0.93

2.55

4

0.24

12.08

0.35

5

0.03

0.13

6

3.88

0.91

7

1.83

8 9

Panama

Nicaragua

0.02

1.46

7.07

6.89

4.21

9.51

12.89

1.99

3.45

15.40

24.40

0.32

0.01

0.27

22.83

0.00

0.01

0.01

1.42

4.26

0.00

4.63

0.85

0.00

0.22

0.00

0.00

3.69

7.16

4.51

13.70

2.64

0.00

0.41

20.57

7.28

6.78

19.32

2.51

0.01

1.50

26.00

10

4.04

1.96

7.25

0.83

0.01

0.82

1.22

11

1.39

0.22

5.19

1.30

0.65

0.41

1.66

12

0.96

0.08

2.25

0.68

0.54

3.21

2.94

13

0.05

0.03

1.38

1.13

1.41

3.30

7.34

14

0.00

0.00

0.11

0.05

0.13

0.18

0.96

15

2.18

0.12

0.30

0.39

0.16

1.12

1.21

16

0.32

0.01

0.00

0.02

0.00

0.04

0.02

17

1.18

0.02

0.01

0.07

0.00

0.25

0.10

18

1.97

0.03

3.17

0.07

0.31

1.10

0.28

0.26

25.81

0.28

2.33

19

3.47

20

0.45

0.03

1.87

0.08

0.29

0.87

0.00

21

0.04

0.13

5.26

88.45

1.53

3.84

0.00

0.62

0.00

22

0.01

9.93

Data Source data sorted according to the UN comtrade database

relatively higher. On one side, as these economies are mostly developing countries with relatively small economic aggregates, therefore, their proportion in the export trade to American markets is relatively small; on the other side, in current trade with the USA, these economies mostly are positioned at the low end of the industrial chain of international trade. The export cargoes are mainly concentrated in primary products or labor-intensive and low-end processing products. For examples, the top four export products from Malaysia are mainly concentrated in the 1st to the 4th category, including live animals—1, vegetable products—2, animal or vegetable fats & oils—3 and food, beverages and tobacco—4, among which, products in the first category (live animals and animal products) were ranked at the No. 1 place, accounting for 19.6% of the import of such kind of products in American markets in 2011; in the export products from Philippines, commodities with relatively high market shares were mainly concentrated in the 2nd to the 6th category (vegetable products, animal or vegetable fats & oils, food, beverages, mineral products and chemical products), among which, the exported mineral products accounted for 88.6% share of the

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American market of the same year; the top export commodities from Nicaragua were mainly concentrated in the 8th and the 9th category (leather, fur products, bags and suitcases, wood and articles of wood and manufacture of plaiting materials), among which, the export of wood and articles of wood and manufacture of plaiting materials accounted for about 19.5% share of the American market. For the purpose of comparing the comparative advantage of corresponding industries of trade products, in this paper, we have calculated the Revealed Comparative advantage (RCA) index of each trade product (For details, see Table 6.3). The Revealed Comparative advantage (RCA) index, put forward by Balassa (1965), is one of the most persuasive indexes to measure the competitiveness of a country’s product or industry in international markets. Balassa held the view that the comparative advantage of a country i over a industry or trade in products can be demonstrated by the share of a industry or this product in the total export of this country divided by the total export volume of the industry or the product in the world trade: RC Aia =

X ia /X it X wa /X wt

In the formula, RC Aia represents the comparative advantage of the country i over a industry or a product. X ia represents the export volume of a industry or of the product of the country i at t period, X it represents the total export volume of the country i at t period; X wa represents the total export volume of a industry or of the product in world markets at t period, X wt represents the total export volume in world markets at t period. Commonly, RC Aia > 1 represents that the export proportion of such product in a country is greater than that in the world, which means that the product of this country has a comparative advantage in international markets, or has international competitiveness to a certain degree; RC Aia < 1 represents that the product has no comparative advantage in international markets with relatively weak international competitiveness; RC Aia closing to 1 represents that all countries’ comparative advantage over this product has no difference. The results of Table 6.3 show that among the exported commodities to the USA from the next wave of emerging economies, the RCA of primary products and of low-end manufactured products were more obvious. This conclusion is basically in line with the one got from Table 6.2. Among the exported commodities to the USA from Malaysia, the top four with greater RCA were all products in the 1st to the 4th category, among which, the products in the 1st category had the greatest RCA of 20.3; the exported commodities to the USA from Thailand with the greatest RCA were the products in the 19th category (weapons, ammunition and parts and components) with the RCA at 25.8. This result is highly consistent with the occupancy rate of such kind of commodities in American markets; the top five exported commodities to the USA from Philippines with the greatest RCA were the products in the 2nd to the 6th category, among which, the products in the 5th category had the greatest RCA of 22.8. This result is highly related to and consistent with the market share in the Table 6.1; the exported commodities to the USA from Panama with an obvious RCA were the products in the 3rd and 4th category, among which, the products in

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the 4th category had the greatest RCA of 24.4; the exported commodities to the USA from Nicaragua with an obvious RCA were the products in the 8th and 9th category, among which, the products in the 9th category had the greatest RCA of 26.0. Based on the above analysis, it is easy to find out that the exported commodities to the USA with revealed comparative advantage from the next wave of emerging economies have a highly positive correlation with their occupancy rate in American markets. Furthermore, mostly exported commodities are concentrated in the low-tech industry or manufactured products of the medium-and-low-tech industry. In sum, from the perspective of the industrial structure of the three main industries, the proportion of the service industry in the national economy of the next wave of emerging economies is the highest, followed by the industry, and the proportion of the agriculture is the lowest. Furthermore, the proportion of the tertiary industry in Asian countries is obviously lower than that of countries in South and North America. This demonstrates that the overall industrial structure of the next wave of emerging economies is relatively reasonable except that some individual countries still have space for their improvements such as Viet Nam in which the proportion of the agriculture is relatively high, while that of the service industry is relatively low. Therefore, Viet Nam shall properly increase the proportion of its service industry and decrease that of the agriculture in the future. From the perspective of corresponding industries of foreign trade products, whether the international market share or the RCA index, all show the fact that primary products and low-end manufactured products among the exported commodities to the USA from the next wave of emerging economies have comparatively higher competitiveness. This result is basically in line with the Comparative Advantage Theory on foreign trade. It is because these countries as a whole have a low capability in technology R&D and innovation, and lack the heavy manufacturing industry as well as the R&D capability in precise instrument and high-tech products. These lead to a higher proportion of their primary products and low-end manufactured products exported to the USA. Additionally, even if some countries could export part of products with higher technology content, it possibly has a relation with the transfer of manufacturing industry implemented by developed countries in international vertical trade. In general, the industrial structure of the next wave of emerging economies has tended to be more reasonable. However, the competitiveness of exported commodities is still concentrated in primary products and low-end manufactured products.

6.3 The Industrial Competitiveness Comparison Between the Next Wave of Emerging Economies and China Commonly speaking, countries with a closer economic development level have a more strong competitive relationship; on the contrary, the larger the difference of economic development level is, the stronger the complementary relationship is. The characteristics of industrial structure of the next wave of emerging economies and

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their development paths, to some extent, are similar to China’s industrial development at the early stage of opening-up and reform. China’s exports in international trade have been experiencing the development journey from primary products and low-tech products to medium-and-low-tech products, then to medium-and-high-tech and high-tech products. China’s industrial structure has been continuously adjusted and optimized along with the change in the structure of trade. At the early stage, preferential conditions such as the low labor cost, plentiful energy resources and loose natural environment enabled China to occupy advantageous positions in the fields of international trade, export processing and low-end manufacturing for a long time. However, with the improvement of economic and social development level and the continuous increase of prices of production factors including labor, raw materials, energy and land, the comparative advantage China has possessed for a long time by relying on low factor costs has been gradually losing. Furthermore, with more and more developing countries having involved into the international division of labor, many industries started to be transferred from China to the next wave of emerging economies. At this time, we have conducted a comparison study on the industrial competitiveness between China and the next wave of emerging economies. It is not only beneficial for the acceleration of China’s industrial structural adjustment to eliminate the backward low-end industries, but also has far-reaching significance in promoting the overall international competitiveness of China’s industries. 1. Vertical Comparison of the Industrial Competitiveness between China and the Next Wave of Emerging Economies Taking reference from the industry classification methods of the Organization for Economic Cooperation and Development (OECD), Jiang and Lu (2010), Qiu et al. (2012), Chen and Xu (2012), we have classified the manufacturing into four categories in this paper, which are the low-tech industry including food and beverages, wood processing, textile and clothing, leather processing and paper making and printing; the medium-and-low-tech industry including petroleum processing, plastics and rubbers, non-metal minerals, base metals and metal rolling; the mediumand-high-tech industry including chemistry and chemical engineering, non-classified machinery and equipment, electrical equipment and appliances, motor vehicles and non-classified transport equipment; and the high-tech industry including medicine, office and computer, wireless communication equipment, medical and precise optical instrument, aerospace equipment manufacturing. In this part, we still regarded the American market as international markets and selected the import and export data of the USA, China and the next wave of emerging economies during the period from 2000 to 2011 from the UN comtrade database to conduct comparison studies on the change of industrial competitiveness, industrial transfers and industrial development trends between China and the next wave of emerging economies. From the perspective of the low-tech industry competitiveness of various countries (For details, see Fig. 6.16), China’s low-tech industry competitiveness basically maintained at around 2 during the period from 2000 to 2011. The lowtech industry belongs to China’s traditional advantageous industry. But since

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Fig. 6.16 The comparison of the low-tech industry between China and the next wave of emerging economies from 2000 to 2011 (measured by the revealed comparative advantage)

2003, the competitiveness index of this industry declined to below 2. Although it rose up to over 2 in recent two years, we still can find that the competitiveness advantage of the low-tech industry in China has been disappearing, and part of the industry is possibly being transferred to other foreign countries with low costs. Compared with the next wave of emerging economies, except Malaysia, China has not had an obvious competitive advantage in this field. Among the next wave of emerging economies, the RCA of the low-tech industry of Honduras was basically within the range from 3 to 6 in other time except that the index was lower than 2 in a few years; as for Nicaragua, the competitiveness of its low-tech industry was within the range from 2 to 6 in other time except for 2003 and 2005, which means the country had a more obvious competitive advantage than China; as for Viet Nam, the competitiveness of its low-tech industry was not obvious before 2006, but after 2006, it was basically within the range from 2 to 5 with an obvious rise of its advantage. Currently, the sign that part of the low-tech industry has been transferred to countries like Viet Nam is comparatively obvious. A quite part of the low-end manufacturing in China such as shoes, textiles and processing is gradually being transferred to the next wave of emerging economies like Viet Nam. The reasons for this include: firstly, these products are mainly labor-intensive products with low added value and technology content. They lack core technologies and self-owned brands, and win international markets by means of cheap prices and the expansion of quantity. In China, the exports of this industry are mainly traditional low-end or medium-and-low-end products which have large inputs of the resource factor, the great losses of material resources and low contributions to the progress of science and technology. Therefore, it is hard for this industry to continue under the bigger resource and environment pressure. Secondly, with the rapid development of China’s economic development and the accelerated pushing ahead of the urbanization process, the “Lewis Turning Point” started to appear in China. The era with

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unlimited supply of labor forces is going to end. The population dividends are gradually disappearing with a significant rise of the labor cost.4 Recently, recruitment difficulties and salary surges have frequently appeared in China’s coastal areas, which already forced part of small-scaled and labor-intensive enterprises to be closed off. Enterprises with larger scales and parts of foreign-owned enterprises started to be transferred to Southeast Asian countries with a relatively low human resource cost. Thirdly, as cheap and low-end manufactured products are heavily affected by the market environment of different countries, therefore, under the current international economic conditions, a large number of trade surpluses will easily lead to deliberate obstruction and revenge from trade partners as well as trade protectionism and trade frictions. In the end, based on China’s development stage and the status quo, the transfer of the low-end manufacturing to the next wave of emerging economies is a natural process of the adjustment of industrial structure, industrial optimization and upgrading. From the perspective of the medium-and-low-tech industry competitiveness of various countries (For details, see Fig. 6.17), the competitiveness of China’s medium-and-low-tech industry during the period from 2000 to 2011 was lower than 1. However, before 2004, it was at over 0.5. After that, it declined year by year to 0.38 in 2011. The trend is in line with part of characteristics of a declining industry. This illustrated that China did not possess the comparative advantage in this industry and its international competitiveness showed a trend of declining year by year. Compared with the next wave of emerging economies, despite the fact that most countries had not obvious competitiveness in this industry, the index was higher than 1 in a few years. For examples, as for Viet Nam, it was basically at over 0.5 before 2003. After 2003, it dropped a little bit and then rose up again till to 0.87 in 2011; Philippines seemed having a more obvious competitive advantage in this industry with the index over 1 in five years; nevertheless, in general, the competitiveness of this industry between China and the next wave of emerging economies seemed similar without obvious differences. China is faced with problems from two aspects. On one side, labor costs and prices of raw materials have risen up due to the tight supply of resources; on the other side, part of domestic manufacturing is confronted with the overcapacity problem and the falling prices of products. These problems are extremely serious in the steel and iron industry. The scarcity of iron ores and the supplied steel products exceeding demand make the steelmaking unprofitable, and many steel and iron enterprises in China are worrying about their survival. Furthermore, as the medium-and-low-tech industry includes the high-energy-consumption and high-pollution industry such as the petroleum and chemical engineering, therefore, the problems of big waste of resources and environmental pollution are more prominent. Additionally, as China has been in a state of low factor prices for a long time, the use costs of land, labor, 4

The recent statistics from National Bureau of Statistics of China show that in 2012 the working age population of China aged 15–59 appeared an absolute decline for the first time, decreasing 3.45 million people compared with last year. This means that the inflection point of China’s population dividends appeared in 2012, which will exert significant influence on the economic growth.

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Fig. 6.17 The comparison of the medium-and-low-tech industry between China and the next wave of emerging economies from 2000 to 2011 (measured by the revealed comparative advantage)

environment protection and capital are relatively low. It also indirectly leads to the result that China quickly becomes the largest emitter of carbon dioxide gas in the world. According to the statistics, China’s losses (property and health losses) in 2011 caused by the environmental pollution were at 2.35–2.82 trillion yuan, about 5–6% of the GDP of that year.5 Looking forward, the healthy and sustainable development of China’s national economy must ask for the elimination of the industry with highenergy consumption, high pollution and low technology content, and encourage and support the inputs and R&D for the high-tech industries such as new energy, energy saving and environmental protection, communication technology and biomedicine. From the perspective of the medium-and-high-tech industry competitiveness of various countries (For details, see Fig. 6.18), the competitiveness of China’s medium-and-high-tech industry during the period from 2000 to 2011 was very obvious. Since 2003, the RCA index has been all above 1 and basically shown an upward trend year by year. This industry is a typical emerging industry with advantages. In the next wave of emerging economies, the RCA index of the medium-and-high-tech industry was seldom over 1. During the period from 2000 to 2011, the competitiveness of the medium-and-high-tech industry of Honduras, Indonesia, Nicaragua and Viet Nam did not exceed 1, while that of Costa Rica, Malaysia, Philippines and Thailand was only over 1 in one year. It illustrates that China generally has obvious international competitiveness in this industry and has shown a upward trend of gradual strengthening. From the perspective of the high-tech industry competitiveness of various countries (For details, see Fig. 6.19), the competitiveness of China in this industry was only over 1 in 2000 and 2001. After 2001, the index basically remained at the range from 0.7 to 1. It seemed that China did not have an obvious competitive 5

Liang (2012).

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Fig. 6.18 The comparison of the medium-and-high-tech industry between china and the next wave of emerging economies from 2000 to 2011 (measured by the revealed comparative advantage)

Fig. 6.19 The Comparison of the high-tech industry between China and the next wave of emerging economies from 2000 to 2011 (measured by the revealed comparative advantage)

advantage in this industry judged from the smaller index. But from a longterm point of view, this industry must belong to China’s potential advantageous industry. Among the next wave of emerging economies, the index of Costa Rica exceeded 1 in 5 years, and 3 years for Indonesia, 4 years for Viet Nam and 5 years for Thailand. From the comparison of the number value, the competitiveness of the next wave of emerging economies in this industry seemed higher than that of China. But from the long-term development trend of the industry, years in which their competitiveness was over 1 were mainly before 2005 and the advantage in recent few years was not obvious with the index even below 1 in most years.

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2. Horizontal Comparison of the Industrial Competitiveness between China and the Next Wave of Emerging Economies In order to further analyze the annual competitive advantage of the four major industries between China and the next wave of emerging economies in recent few years, we have calculated the RCA of each industry and sorted by years as follows (For details, see Table 6.4). Based on the results of Table 6.4, it is found that in 2011, China’s low-tech industry remained a traditional leading advantage in the four major industries, but compared with most countries in the next wave of emerging economies, except for Costa Rica and Indonesia, this kind of advantage instead became China’s disadvantage. However, in the medium-and-high-tech industry, China’s RCA index not only exceeded 1, but basically surpassed the index of the next wave of emerging economies in this industry to a larger extent. In the medium-and-low-tech industry, compared with China, Costa Rica, Nicaragua and Philippines had an obvious advantage in this industry, while other countries had a less comparative advantage. In the high-tech industry, the RCA of Costa Rica, Panama and Thailand were higher than that of China, which was partly due to the fact that the high-tech industry of developed countries was transferred to these countries. The study result of other years is similar with that in 2011. In sum, we have reached conclusions as follows: (1) although China still has an advantage in the low-tech industry, part of this advantage is weakening. As China has been confronted with problems such as the scarcity of natural resources, the significant rise of labor costs, the continuous trade surpluses, the pressure of foreign exchange appreciation as well as its requirements for the adjustment and upgrading of its industrial structure, some low-end manufacturing industries have already been transferred to the next wave of emerging economies such as Viet Nam, Malaysia and Indonesia. With the transfer of these industries, the next wave of emerging economies has been relying on their advantages such as the low cost of production factors and gradually expanding their competitive advantage in the low-tech industry. (2) In the field of the medium-and-low-tech industry, both China and the next wave of emerging economies do not have an obvious advantage. China’s international competitiveness in this industry has shown an obvious trend of gradual declining. For China, it is a typical declining industry. This industry includes petroleum and chemical engineering, plastics and rubber, non-metal minerals, base metals and metal rolling which basically belong to the high-energy consumption and high-pollution industry or the industry with relatively low technology contents. As the overcapacity in this industry is very serious, which has not only increased the cost of environment protection, but also brought about huge difficulties and pressures to domestic environmental governance, therefore, we shall gradually upgrade this industry in the process of adjusting the industrial structure, or otherwise, it is hard for this industry to escape the fate of elimination. (3) In the field of the medium-and-high-tech industry, China’s competitive advantage is very obvious, and basically has shown a trend of rise year by year. It belongs to the emerging industry with advantages. However, as for the next wave of emerging economies, this industry is where their disadvantage is as the competitiveness index of most countries did not exceed 1. Furthermore, there

Industrial classification

2.10

2008 Low-tech industry

0.01

0.84

1.93

High-tech industry

2007 Low-tech industry

0.76

1.86

2006 Low-tech industry 5.36

0.04 0.05

Medium-and-high-tech industry 1.19

0.95

0.46

High-tech industry

Medium-and-low-tech industry

0.03

Medium-and-high-tech industry 1.26 2.05

1.33

0.42

2.51

0.03

0.76

High-tech industry

Medium-and-low-tech industry

0.36 0.48

0.40

1.96

2009 Low-tech industry

Medium-and-low-tech industry

4.12

0.82

Medium-and-high-tech industry 1.18

0.11 1.01

Medium-and-high-tech industry 1.19

1.76

0.38

High-tech industry

Medium-and-low-tech industry

1.97

0.78

2.04

High-tech industry

2010 Low-tech industry 2.55

0.54 1.18

0.38

Medium-and-low-tech industry

1.62

4.05

0.02

0.11

0.04

3.55

2.02

0.15

0.63

1.77

5.63

0.17

0.13

0.25

3.13

0.00

0.33

0.29

4.56

0.80

0.07

0.07

5.39

0.07

0.00

0.04

6.41

0.07

0.29

0.28

1.37

1.73

0.49

0.18

0.16

1.47

0.08

0.42

0.29

0.87

0.01

0.01

3.25

0.18

0.22

1.73

0.64

0.09

0.03

0.18

0.19

2.73

4.17

0.23

0.07

0.39

4.48

0.51

0.65

0.28

2.23

0.25

0.12

0.35

3.70

0.02

0.90

0.60

2.30

0.28

0.60

0.80

2.82

6.35

0.10

0.02

0.83

4.56

0.01

0.09

0.17

3.73

0.04

0.50

0.68

2.25

0.54

0.07

0.76

3.87

1.10

0.08

0.27

4.91

1.49

0.51

1.32

1.02

0.31

0.33

0.77

0.64

2.75

0.00

0.15

0.62

1.08

0.35

0.33

1.22

2.56

0.31

0.78

0.82

2.82

2.25

2.32

0.56

0.55

3.24

5.09

0.36

0.13

3.48

0.14

0.15

0.84

4.37

0.09

0.25

0.87

3.38

(continued)

0.32

1.17

0.29

0.65

2.00

0.00

0.04

0.13

2.34

0.91

0.51

1.41

2.05

0.11

0.96

0.74

2.19

3.17

0.00

0.10

4.40

China Costa Rica Honduras Indonesia Malaysia Nicaragua Panama Philippines Vietnm Thailand

2.16

Medium-and-high-tech industry 1.23

2011 Low-tech industry

Year

Table 6.4 The comparison of RCA of the four major industries between China and the next wave of emerging economies from 2006 to 2011

6 The Industrial Competitiveness of the Next Wave … 191

0.78 0.00

0.08 0.32

0.07 0.21

0.06 0.17

0.00 0.01

2.08

0.38

1.05 1.38

0.27

0.51

0.00

1.91

0.31

0.11

0.01

0.32

0.95

0.45

Medium-and-high-tech industry 1.16

1.36

High-tech industry

0.14

0.07

0.48

Medium-and-low-tech industry

0.05

China Costa Rica Honduras Indonesia Malaysia Nicaragua Panama Philippines Vietnm Thailand

Industrial classification

Data Source data sorted according to the UNcomtrade database. In the table, we lack Honduras’s trade data of 2008, 2010 and 2011 and Viet Nam’s data of 2011

Year

Table 6.4 (continued)

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is no trend for them to surpass China in recent few years. Hence, it is hard for this industry to be transferred to the next wave of emerging economies in a short time. (4) In the field of the high-tech industry, although China does not have an obvious advantage, it has basically maintained a steady promotion in recent 10 years. Therefore, from the long-term point of view, this industry must belong to China’s potentially advantageous industry. As for the next wave of emerging economies, although their competitive advantage in this field exceeded China in a few years, this may be related to the fact that developed countries transferred part of the manufacturing of high-tech products to these countries, and then these countries re-export these products through vertical specialization and processing of international trade.

6.4 Conclusions In sum, the economic development of the next wave of emerging economies is rapid and the overall industrial structure is relatively reasonable. But the industrial competitiveness as a whole is not strong. There is optimization space for their industrial structure adjustment. 1. From the perspective of economic development degree, the population size of the next wave of emerging economies is not large and the annual growth rate of population size generally presents a trend of declining. However, the GDP of these countries has maintained a robust growth with its growth rates higher than the world average. The growth rates of some countries were even higher than that of all types of countries. Under the joint efforts of the two factors, the Per Capita GDP and the general people’s living standards in the next wave of emerging economies have been significantly improved. The level of the Per Capita GDP is approaching or has already reached the world average level, which has laid good economic foundation for the continuously stable development and the progress of these economies. From the perspective of foreign economic development degree, the foreign trade volume of the next wave of emerging economies has basically maintained a trend of increase year by year, and some economies recorded a rapid development in foreign trade. The degree of economic openness is generally high measured by the FTDD, maintaining at over 50%. The capability of the next wave of emerging economies for attracting FDI net inflows has been continuously enhanced and the proportion of FDI net inflows against domestic GDP has increased year by year. These illustrate that the next wave of emerging economies has a higher level of economic openness, gradually increased capability of attracting foreign capital, and continuously promoted economic strength. 2. From the perspective of the industrial structure of the three main industries, the proportion of the service industry in the national economy of the next wave of emerging economies is the highest, followed by the industry, and the proportion of the agriculture is the lowest. Furthermore, the proportion of the tertiary

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industry in Asian countries is obviously lower than that of countries in South and North America. This demonstrates that the overall industrial structure of the next wave of emerging economies is relatively reasonable except that some individual countries still have space for improvements such as Viet Nam in which the proportion of the agriculture is relatively high, while that of the service industry is relatively low. Therefore, Viet Nam shall properly increase the proportion of the service industry and decrease that of the agriculture in the future. Additionally, the reasons for this industrial structure possibly lie in the smaller national economies, population sizes and territorial areas as well as the lower proportion of the agriculture; meanwhile, as these countries lack supports from the heavy industry and the high-tech industry, therefore, their national economies heavily rely on the service industry such as tourism, financial consultation, processing trade, information and logistics. As a result, they present a characteristic of relatively reasonable industrial structure as a whole. 3. From the perspective of the competitiveness of corresponding industries of foreign trade products, whether the international market share or the RCA index, all show the fact that primary products and low-end manufactured products among the exported commodities to the USA from the next wave of emerging economies have comparatively higher competitiveness. This result is basically in line with the expectation of the Comparative Advantage Theory on foreign trade. The reasons for this lie in the fact that these countries have a low level of their overall technology R&D and innovation, and are lack of inputs and capability of R&D in precise instrument and high-tech products. They do not have the support of the heavy manufacturing industry, but have plentiful of cheaper labor forces, land resources and mineral resources which endow them a certain degree of comparative advantage in the fields of primary products and low-end manufacturing over the USA. Even if some countries can export part of products with higher technology contents, it possibly has relations with the transfer of manufacturing industry implemented by developed countries in the international vertical trade. In general, the domestic industrial structure of the next wave of emerging economies has tended to be reasonable. However, the industrial competitiveness of exported commodities is low, and the exported commodities are mainly concentrated in primary products and low-end manufactured products. 4. Compared with the next wave of emerging economies, China: (1) has remained the advantage in the low-tech industry. But part of this advantage has been weakening. The next wave of emerging economies has been relying on their domestic advantage of low-cost production factors and gradually expanding their comparative advantage in the low-tech industry; (2) has the same weak competitiveness in the medium-and-low-tech industry with the next wave of emerging economies. Furthermore, China’s international competitiveness in this industry has presented a trend of obvious declining year by year; (3) has an obvious competitive advantage in the medium-and-high-tech industry and has presented a trend of rise year by year, while the next wave of emerging economies has weak competitiveness in this industry as this industry seems to be their weak industry; (4) has basically maintained a steady promotion in the high-tech industry.

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Although the competitive advantage of the next wave of emerging economies surpassed that of China in this field in a few years, there is a long journey ahead for them to really gain core competitiveness in this field.

References Chen, Fenglong, and Xu Kangning. 2012. Home market size and total factor productivity of China’s manufacturing sector. China Industrial Economics 5. Fan, Aijun. 2002. Empirical analysis about comparative advantage of China’s export. China Industrial Economics 2. Fan, Gang, Chi Hung Kwan, and Zhizhong Yao. 2006. Analyzing the foreign trade structure based on technological distribution of traded goods. Economic Research Journal 8. Jiang, Jing, and Yao Lu. 2010. Production factors’ price and international competitiveness of chinese industry: based on ISIC two-digit classification. Statistical Research 8. Liang, Jialin. 2012. Former Deputy Director of the State Environmental Protection Administration: China’s losses in last year due to environmental pollution exceeded 2 trillion yuan. Economic Information Daily, Mar 13. Qiu, Bin, Longfeng Ye, and Shaoqin Sun. 2012. An empirical study on the impact of GPNs on China’s manufacturing industry’s upgrading in global value chain—an analysis from the perspective of export sophistication index. China Industrial Economics 1. Wei, Hao, Risheng Mao, and Erzhen Zhang. 2005. The comparative advantage of manufacturing product export and trade structure in China. The Journal of World Economy 2. Yang, Rudai, and Shi’e Zhu. 2010. A study on the structure and competitiveness of China’s foreign trade: 1978–2006. Finance and Trade Economics 2. Yang, Zihui, and Tian Lei. 2013. A study on the synchronization of China’s economy with the world economy. The Journal of World Economy 1. Zhang, Xianggan. 2011. Industrial restructuring: China’s experiences and international comparison —Summarization of the 2010 annual conference of China industrial economic association. China Industrial Economics 1. Zhang, Yuyan, and Tian Feng. 2010. Definition of emerging economies and their role in the global economic landscape. International Economic Review 4.

Chapter 7

Impacts of Trade Protectionism on the Pattern of International Division of Labor Zhou Deng

With the emergence of neo-trade protectionism since the 1980s, some countries have adopted a variety of trade protection measures as their important means to protect their domestic industries and seek revenge on other countries. Trade protection has become a tumor which is hard to be removed in the process of global economic integration. Although global economic integration and trade liberalization are the overall trend for the global economic development, and trade protection will not alter the basic pattern and its development direction of international division of labor, policy makers in developed countries have tended to implement more strict trade protection measures after the financial crisis so as to divert their domestic problems caused by the economic slowdown and the high unemployment rate, while some developing countries, for the purpose of protecting the development of their domestic manufacturing industry, also have adopted more strict import policies; meanwhile, non-economic factors having impacts on the development of free trade have existed for a long time. All these have caused negative impacts on the optimization of the pattern of international division of labor to some extent.

7.1 Trade Protection Will Not Alter the Overall Trend of the Pattern of International Division of Labor As affected by various factors, trade protectionism has been on the rise in recent 10 years. It showed the trend for further strengthening and diffusion after the financial crisis and may not totally disappear in a fairly long period in the future. Trade protection must be an integral part of world economic activities. However, there is no country or region which actively closes its door to the outside, breaks away from Z. Deng (B) Institute of Industrial Economics of Chinese Academy of Social Sciences, Beijing, China © Social Sciences Academic Press 2022 B. Jin and Q. Zhang (eds.), The New Trend of Global Industrial Division of Labor and China’s Responses, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-5674-4_7

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global economic integration due to the reason of trade protection, and returns to the economic development mode of self-support and self-sufficiency after it opened up its door and integrated into the global economy; nor any country or region can implement a long-term policy of absolutely restricting the import and export and totally prohibit the cross-border circulation of commodities. This illustrates that although the international trade has done a certain degree of harm to some domestic industries without comparative advantages, the advantage free trade has brought about is much greater than its disadvantage. Governments of all countries committed to the development of their domestic economies have always adhered to such trade policy that facilitates the integration into the global economy and the participation in the international division of labor by importing high-quality and scarce products manufactured abroad and exporting their products with comparative advantages. As a result, economic globalization and trade liberalization are the long-term trend for the development of the global economy. It is the overall development trend for the system of international division of labor, in which the global manufacturing industry, especially the labor-intensive manufacturing industry, has been transferred to developing countries, while developing countries have upgraded their industries to improve their status in the international division of labor. Although trade liberalization was impeded after the financial crisis, trade protectionism did not, have not and will not pose any fundamental impact on the long-term trend. Firstly, economic globalization and trade liberalization are the overall trend and the international division of labor must be further deepened. The main reasons for the emergence and strengthening of the international division of labor come from two aspects. One is the environmental condition for the emergence of the international division of labor. Different comparative advantages formed due to different natural conditions, population sizes and technological levels in each country and region facilitate the industrial division of labor in each country and region so as to reduce the overall production cost; the other is the technological condition for the international division of labor. The emergence of multinational companies, the profound development of economic globalization as well as the breakthrough and appliance of information technologies make it possible for the cross-border labor division and coordination with a low cost and high efficiency. The environmental condition for the emergence of the international division of labor has existed for a long time, while the technological condition has been increasingly strengthened in recent years. The technological progress has caused the continuous declining of costs in information exchanges and ocean transportation. Thus, the economic benefits of cross-border labor division and cooperation have been increasingly improved. Parts and components of some complex products such as large aircrafts can be supplied by factories located in decades of countries and assembled in one factory, then sold to all over the world. Even for some electronic products with a comparatively simple structure, their parts and components are from suppliers in several countries. Under the overall trend of economic globalization and trade liberalization, the improved technological condition for the international division of labor will further consolidate the development direction of the international division of labor established based on the

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Comparative Advantage Theory. Trade protection will not possibly have a fundamental influence on such development direction. For example, the export of China’s iron and steel industry suffered from serious impacts of extremely strict trade protection from several European and American countries in 2009. The USA imposed the combined investigation of anti-dumping and anti-subsidy targeted at Chinese iron and steel products for a consecutive 6 times in one year, involving steel strands for concrete structures, steel bar gratings, wire decking, steel strands, seamless carbon steel, alloy steel standard pipes, line pipes and pressure pipes, covering almost all steel products exported from China to the USA. Besides the USA, the EU made the final anti-dumping ruling on seamless steel pipes from China with a tariff up to 39.2%; Argentina made the final judgment of a minimum import price on pipe accessories and roller chains exported from China. Meanwhile, Turkey also conducted the anti-dumping investigation on link chains exported from China; Canada conducted the anti-dumping and anti-subsidy investigation on the oil country tubular goods (OCTG) exported from China; Mexico conducted the anti-dumping investigation on China’s seamless steel pipes; Australia re-initiated the anti-dumping investigation on hollow structural steel originally produced in China. Columbia initiated the anti-dumping investigation on pipe fittings exported from China. According to the actual situation, the exports of steel products to the USA, Canada, Mexico, Australia and the EU have been seriously blocked since 2009. The export value of steel billets, rough forgings and rolled steel declined by 39.3% and 64.3% respectively. In 2010, the export amount of steel billets, rough forgings and rolled steel picked up significantly by 263.9% and 65.3% respectively. In 2011 and 2012 (from January to September), the export of steel billets and rough forgings declined, while the export of rolled steel continued to rise. Generally, the decline in export amount of China’s iron and steel industry is the result of the joint effort made by the global economic weakness due to the financial crisis, the structural adjustment of Chinese domestic industry and the rise of protectionism in global trade. It is not totally caused by the enhanced trade protection of major importers. Currently, China’s iron and steel industry still has had a remarkable comparative advantage in international markets. In the context of the declining export, the iron and steel output in China has continued to increase. Furthermore, after the elimination of backward production capacities and steadily pushing forward the industrial upgrading, the international competitiveness of China’s iron and steel industry has been actually improved. In the future, iron and steel products will still be China’s major export products. Additionally, as the international division of labor has more and more manifested in the relationship between enterprises, and among branches and agencies within an enterprise, multinational companies have become an important carrier of the international division of labor. In this context, the abuse of trade protection will firstly hurt the interest of multinational companies. The revenge behaviors of those victimized countries usually target at multinational companies’ business in first place, while these multinational companies are possibly from the countries which initiated trade protection. As the major parts participating in the international division of labor have been changed, each country has to consider the interest of its multinational companies while implementing trade protection. Thus, multinational

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companies, while promoting the profound development of the international division of labor, have become an important force to restrain trade protection. Secondly, the actions that developed countries have strengthened trade protection will not slow down the step of transferring the manufacturing from developed countries to developing countries. On one side, the transfer of manufacturing from developed countries to developing countries is the inevitable choice when each country brings its comparative advantage into play. Developed countries have greater advantages in technologies, capital and high-end talent resources, and possess more world famous brands, technology patents and standards, while developing countries have greater advantages in common labor forces and more preferential policies on land and tax. Therefore, according to the Comparative Advantage Theory, developing countries shall undertake the transfer of the manufacturing from developed countries. On the other side, the vertical disintegration of industrial organizations has provided conditions for the transfer of international industries and weakened the impact of trade protection on the transfer of industries. As the business of multinational companies has been continuously stripped, production processes with relatively low profits such as the manufacturing will constantly be transferred to developing countries, while those processes with relatively higher profits such as design and final assembly will be kept at the inside of enterprises. Although this has worsened developing countries’ disadvantageous status in the international division of labor to a certain degree, it has also provided opportunities for developing countries in technology importing and economic development. If developing countries are able to undertake a large number of outsourcing projects, then late-mover countries which have implemented the technology catch-up and independent strategies need not to break through the whole production process, but only to pool all efforts in mastering core parts. As multinational companies’ dominant position in the international division of labor has been increasingly enhanced, the international transfer of industries is the result of the strategic selection of multinational companies in many cases. The establishment of international production connections is not necessarily through external markets. The way to realize the international division of labor shifts from the labor division of the international trade purely relying on external markets to a diversified pattern with the coexistence of external and internal markets. Trade protection puts fewer restrictions on transactions in an enterprise’s internal market than that in the external market of the enterprise. Furthermore, multinational companies are able to avoid trade protection through some temporary measures such as the adjustment of internal labor division to weaken the impacts of trade protection on the international industrial transfer for which multinational companies serve as carriers. Thirdly, global and regional trade organizations will weaken the impacts of trade protection on free trade. The World Trade Organization (WTO) has played an important role in promoting the realization of free trade with non-discrimination, market openness and fair trade among its state members. Except for the WTO, there are hundreds of regional organizations with various types in the world. These organizations also have played key roles in the process of realizing regional trade liberalization. Recently, amid various types of regional organizations, there are more and more organizations initiated and led by developing countries with increasingly

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enhanced impacts on global trade and the world economy (see Table 7.1). This has reflected that developing countries’ status in international trade has been constantly improved. For example, although the Asia–Pacific Economic Cooperation (APEC) established in 1989 was initiated by developed countries such as the USA, Australia, Canada and Japan, it has already developed into a regional trade organization with the most developing countries participating in and having the largest influence. Since its establishment, APEC has committed to promoting economic cooperation and economic and trade contacts among countries and regions in the Asia–Pacific and surrounding areas, and set up a regional market with a higher liberalization degree. After the financial crisis, amid the international environment with a rise of trade protectionism, the major goal of the 20th APEC Leaders’ Informal Meeting held in 2012 was to promote the establishment of closer economic relations in the region, while eliminating trade barriers and bottlenecks. The communiqué of this meeting declared that before the end of 2015, all parties of the APEC shall avoid setting up new barriers for investment and goods and services trade, and shall not implement new export restriction measures as well as measures violating the rules of WTO in every field including the measures for stimulating exports. Fourthly, trade protection among developing countries will not impede the deepening labor division and collaboration among developing countries. As more and more developing countries have participated into global economic integration as well as the system of the international division of labor, the competition among them in international markets has been fiercer. Thus, trade protection among developing countries has been increasingly upgraded, especially the frequently-occurring trade protection targeting China. As developing countries usually produce products with low technology contents and low added values, and their comparative advantage is concentrated in cheap labor forces, land costs and lower requirements for the environmental protection, therefore, trade protection among developing countries mainly targets at low-end manufactured products and raw material products. They are confronted with similar development and trade environment. Although the competitive relationship among them exists, the economic cooperation relationship rather than the hostile relationship among them is the overall development trend. Firstly, developing countries have established regional trade organizations to strengthen connections with each other and deal with challenges together, which will reduce the negative impacts of trade protection on each country’s economy within the regional range. Cooperation, not hostility, is the overall trend for developing trade relationships and labor division relationships among countries. China is making efforts to participate into these regional trade organizations mainly formed by developing countries such as the OAU, ASEAN and LAS. These efforts will strengthen China’s trade contacts with relevant countries. By setting up the dialogue mechanism and gradually eliminating trade protection measures on these countries, both China and these countries can better develop their own industries with comparative advantages and competitive advantages. Secondly, more frequent foreign direct investment among developing countries has enhanced economic exchanges and mutually dependent relationships among countries. This is also an important guarantee for the reduction of trade protection among developing countries. Take China as an example.

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Table 7.1 Regional organizations mainly formed by developing countries Regional organizations

Major participating countries

Group of 77

132 countries including Argentina, Brazil, India, Indonesia, Iran, Cambodia and Cuba

Asia–Pacific Economic Cooperation (APEC)

21 countries and regions including Australia, Canada, China, Hong Kong (China), Indonesia, Japan, South Korea, Malaysia, Mexico, Philippines, Russia, Taiwan (China), Thailand and the USA

Caribbean Community

15 countries including Antigua and Barbuda, Bahamas, Barbados, Dominica, Jamaica, Haiti, Guyana and Grenada

League of Arab States (LAS)

6 countries Including Kuwait, Qatar, United Arab Emirates, Bahrain, Oman and Saudi Arabia

Organization of African Unity (OAU)

53 countries including Algeria, Central African Republic, Egypt, Liberia, Nigeria, Kenya, Zambia, Angola and South Africa

Association of Southeast Asian Nations (ASEAN)

10 countries including Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Singapore, Thailand and Viet Nam

Organization of American States (OAS)

35 countries including Argentina, Bolivia, Brazil, Canada, Chile, Cuba, Costa Rica, Guatemala, Haiti, Jamaica, Mexico, Panama, Peru, the USA, Guyana and Venezuela

Cooperation Council for the Arab States of Gulf (GCC)

8 countries including United Arab Emirates, Oman, Bahrain, Qatar, Kuwait, Saudi Arab, Jordan and Morocco

Shanghai Cooperation Organization (SCO)

6 countries including China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan

By the end of 2010, the stocks of China’s foreign direct investment to Asia (except for Hong Kong (China), Macao (China), Japan, South Korea and Singapore), Latin America and Africa reached $76 billion, accounting for 23.95% of the total FDI, and increased over $60 billion compared with that in 2005, especially for the stock of the FDI to Africa. It increased by 7 times in five years with the rate only after that of the Oceania.1 Correspondingly, the total actual FDI China attracted in 2010 from Asia (except for Hong Kong, Macao, Japan, South Korea and Singapore), Africa and Latin America was $16.5 billion, accounting for 15.60% of the actual amount of the FDI, and increased $3 billion compared with that in 2005. In the end, trade protection to emerging industries that developed countries have implemented will not prevent developing countries from developing emerging industries and optimizing their status in the international division of labor. Since the new 1

The stock of China’s FDI to the Oceania increased by 12 times in five years, which was mainly affected by the increased investment in Australian mining industry.

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century, especially after the financial crisis, developed countries have strengthened their domestic industrial policies and launched one after another the industry technology roadmaps at national level and the development direction for industries with key supports. As an integral part of a basket of policies for promoting the development of emerging industries, trade protection to departments in emerging industries and related products has also been enhanced, and measures of trade protection such as technological barriers and green barriers have been extensively applied in emerging industries. These have caused negative impacts on developing countries’ efforts in developing emerging industries and improving their status in the international division of labor. For example, since 2008, the Chinese photovoltaic industry has been suffered from extremely strict trade protection policies of European and American countries. However, the technology roadmaps of some emerging industries such as the next generation of electronic information, biology, new energy and new energy vehicles have not yet been confirmed, and their consumption markets have not yet become mature. Therefore, all economies including developing countries have the opportunity to grab the commanding heights of future industries. For instance, elements and segments of the traditional automobile industry such as core parts, key patents, technological standards, rules of processes and product brands are almost controlled and produced by automobile enterprises in developed countries, thus enterprises in developing countries have no chance to realize a breakthrough; while for the R&D and production of new energy vehicles, developing countries have possessed the technological strength and production capacity at parts of key fields, which have reached or even surpassed the level of developed countries. Therefore, although developed countries have mastered more basic knowledge and generic technologies in the field of emerging industries than developing countries, developing countries have more advantages in the aspects of markets driven by domestic consumption, government advance procurement and the formulation of supportive policies than those of developed countries. It is foreseeable that the development direction of the international division of labor in emerging industries will not be a simple pattern in which developed countries monopoly the technology-intensive and high-end segments such as R&D and marketing, while developing countries only can undertake the laborintensive and low-end segments such as the manufacturing. On the contrary, developing countries will undertake more high-end segments in value chains based on their advantages in manufacturing. For examples, China has made remarkable achievements in technology R&D and market exploration of fields like mobile communication, digital television and cross-platform digital transmission. These achievements include: the TD-LTE-Advance Standard based on the TD-SCDMA became an international standard, which promoted the international competitiveness of China’s communication industry in the era of 4G; the standard for High Definition Televisions independently developed by Shanghai Jiao Tong University and Beijing Tsinghua University was already publicized nationwide. Compared with traditional industries, Chinese enterprises have gotten a head start in the international competitiveness of emerging industries with a quick promotion. Enterprises in the field of emerging

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industries such as Huawei, Lenovo and Zhongxing are becoming the most competitive enterprises in China. In 2012, the USA’s government conducted several rounds of investigation on Huawei and Zhongxing, which seriously affected Chinese enterprises’ steps of going global. But it also reflected the promotion of these enterprises’ international competitiveness. It is clear that the rise of developing countries in the field of emerging industries has formed a system of the international division of labor in which developed and developing countries are interwoven in value chains. This system is helpful for eliminating the impacts of general trade doctrines and curbing the abuse of new trade protection measures such as technological barriers.

7.2 Adverse Impacts of Trade Protection on the Deepening of the Pattern of International Division of Labor Although trade protection will not alter the overall trend of economic globalization, many countries have expanded their limitations on imported commodities since the financial crisis. As trade protectionism is prevailing worldwide with increased frequency of trade frictions and trade wars, the resulting damage has been deepened and caused serious impacts on the already-declining world economy. Trade protectionism may reverse globalization in short periods and hurt countries participating in economic globalization, especially those big exporters of physical products and terminal products. It may possibly worsen the low-price and disorder competition in developing countries, impede developing countries’ importing of foreign capital and the cross-border flow of labors, and cause adverse impacts on the profound development of the international division of labor and the optimization of the pattern of labor division. Additionally, the emergence of some non-economic adverse factors has enhanced the uncertainty in the development of international trade. Firstly, global trade protection has intensified the low-price and disorder competition among developing countries. As developing countries have mainly exported products concentrated in the low end of value chains and adopted the low-cost and low-price strategy for a long time, thus it is easy for them to carry out malignant competition for the purpose of grabbing international markets. The consumers’ confidence in developed countries fell after the financial crisis, which further posed huge pressures on developing countries to reduce their prices of exported products, while the declining of prices led to the worsening of trade conditions as well as trade disputes. Since the emergence of new trade protectionism, new trade protection measures such as technological barriers and green barriers have been extensively used. This has posed even greater price reduction pressures on the export manufacturing of developing countries and further worsened the low-price and disorder competition in low-and-medium-end markets. For example, according to relevant reports of American think tanks, if developed countries in Europe and America levy a tariff of $30 per ton on carbon dioxide which is equal to a 26.1% tariff on all Chinese export products, this will cause a 20.8% drop of exports in Chinese manufacturing

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industry and a 3.7% drop of China’s GDP. As a result, if developing countries like China want to maintain their growth rate of export and guarantee the role of export in driving their national economies, they need to further squeeze the manufacturing cost and reduce the export price. Therefore, the low-price and disorder competition in international export markets could be further worsened due to the use of new trade protection measures. Secondly, trade protection has impeded the introduction of foreign capital in developing countries. The optimization of the pattern of international division of labor is established on the basis of the transfer of international industries. The foreign investment of multinational companies and the introduction of foreign capital in developing countries can promote developed and developing countries to bring their comparative advantages into play in the international division of labor. As developed countries fell into a financial crisis after the financial crisis, multinational companies have adopted more prudent foreign investment strategies while removing back part of their manufacturing industry to adapt to the adjustment of their domestic industrial policies and trade policies. According to the statistics from the UN Conference on Trade and Development, the global FDI flows were $1.66 trillion in 2008, a 15% decrease year on year. Meanwhile, the cross-border mergers and acquisitions also decreased by 29%. Foreign investment willingness of multinational companies in major developed countries was also weakened. The proportion of enterprises planning to increase their investment amount decreased from 32% in 2007 to 21% in 2008, while the proportion of enterprises planning to cut investment increased from 10 to 16%. While the FDI amount from developed countries dropped, many countries relaxed restrictions on the access of foreign capital to cope with financial challenges, and carried out fierce battles for winning the transfer of international industries and FDI capital. This has further increased the difficulty for developing countries to attract foreign capital. Take China as an example. During the period from January to August in 2009 when the influence of the financial crisis was the most severe, as affected by enhanced trade protectionism and the fierce competition on the introduction of foreign capital, the wholly foreign-owned enterprises newly approved for establishment in China were 14,131, decreased by 24.82% year on year; the actual use of foreign capital was $55.867 billion, decreased by 17.52% year on year. Thirdly, trade protection is not conducive to the cross-border flow of labors. The cross-border flow of labors is also a vital part of the international division of labor. The labor flow from developing countries to developed countries is helpful for developed countries to reduce their manufacturing cost, but it also poses impacts on domestic labors in developed countries. After the financial crisis, restrictions on the inflows of foreign workers and their employment, just as similar as the restriction on the imports of foreign products, became an important measure of developed countries to protect their domestic industries and the employment of their domestic workers. Governments of developed countries in Europe and America required their enterprises to firstly fire foreign employees when they have problems in managing, and firstly hire domestic workers when they plan to recruit new employees. Under the influence of a series of policies, the employment environment for foreign workers

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in developed countries was worsened. After the financial crisis, the phenomena that large batches of workers from developing countries returned back appeared. For example, the government of the USA required financial institutions that accepted the assistance from the government to firstly consider applicants with the US citizenship when recruiting new members, and control the proportion of foreign employees within 15%; the UK government was planning to set up a limit on foreign workers’ stay period in the UK; Germany companies such as BMW and Siemens started to fire foreign workers. Fourthly, regional trade organizations, for the sake of their own interest, have impeded the progress of the global division of labor. Regional trade organizations are established for promoting trade contacts within the regional areas, reducing and eliminating the influence of trade protection. However, among various types of regional trade organizations, especially among core members of organizations, for the sake of their own interest, trade protection could be possibly transformed from an action of an individual country into a collective action of many countries. For example, in order to facilitate trade exchanges among countries in East Asia, China, Japan and South Korea proposed the tentative plan of China–Japan–South Korea Free Trade Area (CJKFTA) in 2002. If the free trade area is established, it will cover a large market with over 1.5 billion of population, the largest free trade area in the world. The economic benefits of the three countries, even the entire Asia, will be greatly improved. However, for the purpose of curbing the East Asia, especially the promotion of China’s economic status, the USA actively pushed forward the TransPacific Partnership Agreement (TPP) in 2011, trying to strengthen its influence on the cross-border trade in the Asia–Pacific region. For some time to come in the future, the number of regional trade organizations similar to the TPP will grow and their function will be greater; in international trade disputes, the proportion of unilateral trade disputes will decline, while that of multilateral trade disputes will rise. Fifthly, the impacts of non-economic factors on free trade have increased. Although peace and development are the main themes of today’s world, political, military and religious factors affecting the peace and development are still a lot. Since the 2nd World War, the world has never been actually in peace for one day. The Middle East is an area providing petroleum energy for the economic growth of each country in the world, but at the same time it is also the most instable area in the world. Since the 1970s, more than 10 times of large-scale wars have broken up in this area, which has seriously affected the stability of the world energy price. Terrorism is prevailing in twenty-first century. Although the anti-terrorism wars launched by the USA achieved some setting goals, terrorism did not be rooted out. On the contrary, more serious hidden dangers are buried. Piracy is rampant in the Gulf of Aden and in the Strait of Malacca, which become important threats to the shipping in the Indian Ocean. The conflicts between China and Japan over the problem of Diaoyu Island were escalated in 2012 as Japan’s action of buying the Island seriously violated the consensus reached between the two countries before. The disputes between China and Japan, the 2nd and 3rd largest economies in the world as well as neighboring countries in East Asia, will cause far-reaching impacts on Asia, even on global trade.

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7.3 Policy Suggestions on Tackling Trade Protection and on Optimizing the Status of International Division of Labor New trade protectionism prevailing in the end of the 1980s has caused adverse impacts on China’s export trade. After the financial crisis, developed countries, newly industrialized countries and part of developing countries all intensified trade protection to protect their domestic industries, ensure their domestic employment and release the pressure on governing bodies. Therefore, the world economy almost fell into the swirl of trade protection. During the period when the world economy fluctuated with a stagnant growth, China’s economy rose up quickly, outshining other countries amid the Asian Financial Crisis in the 1990s and the global financial crisis in 2008. After its entry into the WTO, China has deeply integrated into the world economy, and the status of its manufacturing as the “world factory” has been further strengthened. Almost all developed countries and more and more developing countries have regarded China as their most important rival in export trade. As a result, various types of trade protection policies have been targeting at China. Before the outbreak of the financial crisis, China had suffered from a total of 612 anti-dumping cases in the period from 1995 to 2008, accounting for 27.88% of the total amount of antidumping cases initiated worldwide in 14 years. South Korea, ranked at the second place, accounted for 6.83% of the world total, 21.05 percentage points lower than that of China. After the outbreak of the financial crisis, with the further heating up of global trade protectionism, the global trade environment became more unclear. According to the statistics from China’s Ministry of Commerce, a total of 20 countries and regions initiated a total of 107 investigations on China’s trade remedy measures such as anti-dumping and anti-subsidy measures, safeguard measures and special safeguards in 2009, and the amount involved reached $12 billion; in 2010, China was suffered from 66 investigations on anti-dumping, anti-subsidy and safeguard measures with the involved amount reaching $7.14 billion. It is foreseeable that during the period of the 12th Five-Year Plans and even longer periods, China will still suffer from the most trade investigations and be the most hurt country by trade protectionism. Since the beginning of the 11th Five-Year Plans, the Chinese government has striven to push forward the building of new industrialization, and adjusted the industrial structure nationwide to build a modern industrial system. The government has developed emerging industries, transformed and upgraded traditional industries, eliminated backward industrial capacities to control overcapacity. The priorities of policies have been adjusted from increasing scales and ensuring the growth rate to improve the quality and competitiveness. As the international competitiveness of its industries has been promoted, China’s capability to cope with trade protection has been enhanced, and its status in the participation in the international division of labor will be improved. The adjustment of the industrial structure and the declining proportion of products with low technology contents and low added values are helpful for eliminating the impacts of traditional trade protection measures such as tariff and anti-dumping on China’s exports; technological innovation, the occupancy

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of the high end of value chains and the cultivation of international brands are helpful for breaking through the impact of new trade protection measures such as green barriers and technological barriers on China’s economy. The upgrading of global trade protection is the objective environment in which China has transformed from a big industrial country to a strong industrial country. The improvement of China’s status in the international division of labor is also helpful for strengthening its industries’ capability to resist trade protection. The goal of coping with the upgrading of global trade protection is consistent with the goal of improving China’s status in the pattern of the international division of labor. Firstly, we shall wait for no time to upgrade the industrial structure and adjust the export structure. It is the objective trend in which the labor-intensive industry is transferred from developed countries to developing countries. China, as a big developing country with the most plentiful supply of labor forces in the world, will inevitably gain the impetus for development in this process. However, the process of the industrial transfer is limited, divided into several stages. Recently, Southeast Asian countries have acquired more and more orders for processing with supplied materials by relying on their cheaper labor costs, which has posed huge threats to China’s export-oriented and low-end processing and assembly manufacturing. Meanwhile, due to the high degree of product homogeneity, the labor-intensive industry is the one suffered from the most frequent trade protection. The development path of relying on the expansion of scales in medium-and-low-end segments is hard to be sustained due to the intensified competition on one side and the suffering of the most serious trade protection on the other. Therefore, China must not lose any time to upgrade and optimize its industrial structure, adjust the export structure, and improve the technological level of commodities as well as their international competitiveness. Only in doing so, China can cope with challenges from trade protection and promote its status in the international division of labor. Secondly, China shall actively take advantage of various multilateral international organizations and the dialogue mechanism to weaken the impact of trade protectionism. As a member of the WTO, China shall actively take part in multilateral trade negotiations of all kinds as well as the formulation and amendment of multilateral trade rules, make use of the effective multilateral trade rules to restrain and resist activities of new trade protectionism. A better international environment for trade can be built through communication and negotiation. Meanwhile, guided by the idea of pragmatic diplomacy, China shall strengthen international communication and coordination, and try to let western countries recognize China’s market economy status as soon as possible. Thirdly, China shall actively push forward the establishment of free trade zones with its major trade partners. The establishment and joining in free trade zones are beneficial for evading regional trade barriers. Furthermore, regional trade organizations can coordinate each country’s way and priorities for participating in the international division of labor, and achieve complementary advantages within their regions. China has already signed free trade agreements with Pakistan, New Zealand, Singapore and Chile, and is pushing forward negotiations on signing agreements of free trade zones with Australia, the GCC and Southern Africa Customs Union. China has

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achieved great progresses in co-establishing a free trade zone with South Korea. Free trade agreements signed with China’s major trade partners, especially with developed countries, are beneficial for effectively reducing trade conflicts within a small range, and creating a stable export environment. Meanwhile, they are also beneficial for optimizing the pattern of the international division of labor within the regional range. In the end, China shall establish an early warning and rapid response system for trade barriers. In the current context of a complex international trade environment, it is hard for an individual enterprise to accurately predict when trade disputes will happen, and to judge the level of harm. The reasons for this include: on one side, purposes for trade protection are more diversified, except for traditional purposes such as the protection of domestic industries and employment, political, military, national, religious and cultural factors are also included in. On the other side, there are a plentiful of trade protection measures. Non-tariff protection measures such as technological barriers, green barriers and labor standards have replaced traditional tariffs and subsidy policies to become major trade protection measures. Thus, trade protection measures are more hidden. As a result, the Chinese government shall set up an early warning mechanism and rapid response system for trade barriers from multiple perspectives with multiple layers and channels, publish regularly the early warning for export goods’ prices, help and guide domestic enterprises to break through the barriers of trade protectionism to realize the transformation from passive acceptance to active coping.

Chapter 8

Low Carbon Economy and the Global Industrial Division of Labor Xiaohua Li

In recent 100 years, a warming global climate system is now an indisputable fact and it has threatened the sustainable development of human society (the Intergovernmental Panel on Climate Change (IPCC), 2007).1 Climate change may well lead to some irreversible impacts. Approximately 20 to 30% of plant and animal species assessed so far are likely to be at increased risk of extinction if increase in global average temperature exceeds 1.5 to 2.5 °C (relative to 1980–1999); if the increase of global average temperature exceeds about 3.5 °C, model projections suggest significant species (40–70% of species assessed) around the world wound be deracinated (IPCC, 2007). The main cause of global warming is the emission of greenhouse gases (GHGs) and the increases of GHGs concentration led by human activities, especially the use of fossil energy, which has become the world consensus. Confronted with the seriousness and urgency of the global climate change, countries in the world have taken actions to establish a mechanism to cope with the global climate change, and facilitated the launch of a series of national policies. Those typically include: the United Nations Framework Convention on Climate Change (UNFCCC), adopted in 1992, aimed at reducing the impact of human activities on the climate system and coordinating actions of the international society to mitigate the climate change; the Kyoto Protocol, adopted in 1997 in Kyoto, Japan at the Third Session of the Conference of the Parties to the UNFCCC by representatives from 149 countries and regions, mainly contained the obligations of quantified emission reductions of GHGs (the Sustainable Development Research Group of Chinese Academy of Science 2009a, b, c).2 The most recent event was the 17th Session of the Conference of the Parties to the UNFCCC and the 7th Session of the Conference of the Parties to the Kyoto 1 2

IPCC (2007). The Sustainable Development Research Group of Chinese Academy of Science (2009a).

X. Li (B) Institute of Industrial Economics of Chinese Academy of Social Sciences, Beijing, China © Social Sciences Academic Press 2022 B. Jin and Q. Zhang (eds.), The New Trend of Global Industrial Division of Labor and China’s Responses, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-5674-4_8

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Protocol, closed on December 11, 2011 in Durban, South Africa. It was agreed in the resolution passed in the Session to establish the Ad Hoc Working Group on the Durban Platform for Enhanced Action (ADP) and implement the 2th commitment period of the Kyoto Protocol and initiate the Green Climate Fund. It is clear that the development of a low carbon economy serving as the basic approach to safeguard energy safety and cope with the climate change has been gradually recognized by more and more countries in the world (the Sustainable Development Research Group of Chinese Academy of Science, 2009a, b, c).3 The development of a low carbon economy must have profound influences on the development of the world economy by bringing about important transformations and adjustments to the development direction of industries. Although currently China has not undertaken the compulsory obligation to reduce the emission of carbon dioxide, the Chinese government made a commitment that carbon dioxide emissions per unit of GDP will be cut by 40–50% by 2020. Additionally, the global low carbon economy will pose impacts on Chinese industries through different mechanisms such as carbon tax and carbon emission rights trading. The current research on the low carbon economy mainly focuses on how to reduce carbon dioxide emissions to mitigate the impact of greenhouse effect on the earth so as to realize human beings’ sustainable development. This research includes concrete policies and mechanisms, or possible influences of concrete policies and mechanisms on economic development. If technologies are divided according to their contribution to economic growth and involved ranges, there are two types including the general purpose technology (GPT) and the specific technology (ST). The involved ranges of the GPT are wider and have extensive and far-reaching impacts on economies, representing changes which can alter lifestyles and behaviors of enterprises and business. GPTs possess three characteristics as follows: (1) universality: technologies with general purposes shall be diffused to most of fields; (2) improvement: technologies with general purposes shall be improved along with time to continuously cut costs of their users; (3) innovation and value added: technologies with general purposes shall make the process of invention and the production of new products more easier.4 The first two GPTs in the twentieth century are electric power and information technology,5 while low-carbon technologies are expected to be the GPTs in the twenty-first century, and will inevitably pose profound impacts on the whole economy and every aspect of social life. As the industry is the major department for energy consumption and carbon dioxide emissions as well as the major technological department to push forward the revolution of energy, therefore the development of low carbon economies will have the most obvious significance on the industry. However, as for what these impacts are, how the mechanism works and what the results are, necessary studies are always insufficient.

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The Sustainable Development Research Group of Chinese Academy of Science (2009b). Bresnahan and Trajtenberg (1995). 5 Desmet and Rossi-Hansberg (2009). 4

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8.1 Low Carbon Economy and Major Polices and Measures on Carbon Emission Reductions 1. Low Carbon Economy The concept of “low carbon economy” formally appeared in British energy white paper firstly “Our Energy Future: Creating a Low Carbon Economy” in 2003. However, concerns on the low carbon economy can trace back to the UNFCCC in 1992 and the Kyoto Protocol in 1997, or even earlier. The British energy white paper pointed out that the UK will cut GHG emissions by 60% of that in 1990 by 2050 and will fundamentally transform the UK into a country with the low carbon economy. In 2006, the “Stern Review on the Economics of Climate Change” had been released under the leadership of the former Chief Economist of the World Bank- Nicholas Stern, which proposed that one percent of global GDP per annum is required to be invested to avoid the losses of 5–20% of global GDP each year. It called for the transformation to the low carbon economy in the globe. The efforts that developed countries have made to develop economies, on one side, were indeed helpful for the reduction of GHG emissions such as the carbon dioxide gas, and for the prevention of climate change. But on the other side, developed countries have their own considerations. That is, when developed countries’ dominant status in the world economy are challenged by emerging countries, they can try to seize the opportunity of the low carbon economy and rebuild the international economic order by relying on their advantages in science and technology (Zhou 2010).6 Developed countries even link the climate change with trade under the excuse of restricting carbon emissions, and change the low carbon economy into a new excuse for their implementation of trade protectionism by imposing carbon tariffs. Since the breakout of the international financial crisis, developed countries led by the USA have identified the development of new energy industry and of low carbon economy as an important strategy to cope with the crisis and revitalize their economies. For example, the American Clean Energy and Security Act was passed by the US House of Representatives on June 22, 2009, which has authorized the government to impose carbon tariffs on countries which have refused to accept the standard for the reduction of pollutant emissions by 2020. The imposition of carbon tariffs for a country’s exported products into American markets depends on the comparable test of the USA with its emission reduction measures (Pan 2011).7 One of the important policy objectives for the USA to impose carbon tariffs and develop the low carbon economy is to maintain the international competitiveness of its industries and restore its leading status in the global economy (Jiang Heng).8 In 2009, the EU proposed involving the aviation industry into the carbon emission trading system. Since 2012, all international airlines of the EU and others entering the EU airspace have been attributed certain GHG emission limits. 6

Zhou (2010). Pan (2011). 8 Jiang (2011). 7

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Air carriers with total emission amount lower than their limits can sell the left part of their limits, while those exceeding their limits must buy the exceeded part. 2. Main Measures on Carbon Emission Reductions The United Nations Framework Convention on Climate Change (UNFCCC 2007) divided policy tools for the reduction of GHG emissions into: fiscal policy tools (carbon tariffs, resources and energy prices and their formation mechanisms), market tools (such as emission rights trading), resource-based emission reduction measures, regulations and the formulation of standards (efficiency standard and environmental protection standard), education on environment (public awareness), technological R&D (energy efficiency, alternative energy technology and carbon capture and storage technology); the United Nations Development Programme (UNDP, 2008) divided the carbon emission reduction policy tools into: laws and regulations and standards, taxes and charges, capital incentives, tradable licenses, voluntary agreements, informationized measures, R&D and non-climate policies. These international measures on carbon emission reductions can be divided into two types: market measures based on prices, and mandatory measures,9 of which the main contents are as follows: (1) Promotion of Low Carbon Technology R&D. The “A Strategy for American Innovation: Driving towards Sustainable Growth and Quality Jobs” in America (September 2009) and “A Framework for Revitalizing American Manufacturing” (December 2009), the British “Building Britain’s Future” (June 2009), the “New Growth Strategy” in Japan (December 2009) and the “New Growth Momentum Planning and its Development Strategy” in South Korea (January 2009) all regarded the low carbon economy and clean energy as the priorities for future industry development and important forces for revitalizing their economies. The “12th Five-Year Development Plan for National Strategic Emerging Industries” regarded the energy-saving and environmental protection industry and the new energy industry as China’s key strategic emerging industries for cultivation and development, the important tasks of which are to develop and industrialize key technologies. (2) Carbon Taxes. Carbon tax system was firstly implemented by Finland in 1990. Then other countries such as Sweden, Norway, Denmark, Slovenia, Italy, German, the UK and Swiss also levied taxes on carbon successively (Li 2010).10 Carbon taxes aim at the reduction of carbon dioxide emissions and impose taxes on fossil fuels such as coal, natural gas, gasoline and diesel according to their carbon contents or the amount of carbon emission (the Research Team of the Research Institute for Fiscal Science of the Ministry of Finance, China, 2009).11 The carbon tax system could force enterprises to internalize their costs caused 9

Zhou (2012). Li (2010). 11 The Research Team of the Research Institute for Fiscal Science of the Ministry of Finance, China (2009). 10

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by consuming fossil fuels and consider paying costs for emission reductions or pay taxes. Enterprises could determine their scales of emissions in line with their own technological characteristics and structures of costs. By levying taxes, the costs of consuming fossil fuels are driven up, so the goal of reducing the use of fossil fuels and carbon emissions is realized. (3) Emission Rights Trading. In order to reduce carbon emissions through marketized means, regulatory agencies created a new type of asset—carbon emissions allowances, which allows a given amount of GHGs within a year. Enterprises with excess emissions can purchase allowances from other enterprises or buy “carbon offsets” through their investment in emission reduction projects (McKinsey 2009).12 The UNFCCC and the Kyoto Protocol have provided three ways for developed countries to perform their obligations to reduce carbon emissions. First, the International Emission Trading (IEF): it allows developed countries with the obligation of carbon emission reductions to mutually transfer allowances; second, the Joint Implementation (JI): it allows a developed country to earn emission credits to offset its obligation of emission reductions by investing in other developed countries’ energy conservation and emission reduction projects; third, the Clean Development Mechanism (CDM): it allows developed countries to obtain certified emission reduction units by investing in developed countries’ emission reduction projects. All of these ways to perform obligations of emission reductions urged the emergence of a carbon trading market mainly engaging in the trade of carbon dioxide emission rights (Chen 2010).13 China’s “12th Five-Year Greenhouse Gas Emission Control Work Program” (guofa [2011] No. 41) also proposed implementing the pilot trial of carbon emission trading and explore the establishment of carbon trading markets. (4) Regulatory Polices. Mandatory measures such as allowance systems, mandatory technological standards, laws and administrative regulations are adopted to control the carbon dioxide emissions level and energy utilization efficiency. Many countries have set up their goals for emission reductions as well as corresponding standards to require enterprises to take actions for the realization of these goals.14 The Chinese government made the promise that by 2020, the carbon dioxide emission per unit of GDP will drop by 40–45% compared with that in 2005; the ratio of non-fossil fuel consumption to the primary energy consumption will reach around 15% by 2020. For the purpose of accomplishing the obligatory target, the Chinese government involved this obligatory target into its long-and-medium term planning for national economic and social development, and formulated relevant methods for statistics, monitoring and assessment. (5) Carbon Label. Carbon labels refer to the process to show quantized data of emitted amount of GHGs during the process of production on product labels to notify customers’ relevant carbon information of products. Originated in the 12

Hoffman and Twining (2009). Chen (2010). 14 Zhou (2012). 13

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UK, the carbon label has currently been the global trend. For examples, Walmart has required that its 100,000 suppliers must accomplish the carbon footprint verification of goods with labels on products; the International Organization for Standardization finished the draft of the International Standard ISO14067 for “carbon footprint of products” and will issue and implement it recently. Carbon labels will guide customers with concerns on environment problems to select commodities with low carbon so as to realize the goal of emission reductions.

8.2 Impacts of Low Carbonization on Competitiveness The process of using fossil fuels is accompanied with the emission of GHGs which have caused damage to the global environment. It is the negative externality of consuming fossil fuels. However, current energy prices have barely reflected the negative externalities. According to the estimates of the National Research Council, the hidden costs of energy in 2005 were as high as $120 billion which were even considered lower than the actual external costs.15 As the world reached consensus on the reduction of GHG emissions and more and more measures on carbon emission reductions have emerged and been extensively implemented, many countries in the world, especially developed countries, have already required enterprises to undertake their corresponding costs of carbon emissions. In previous years, the amount of carbon emissions was involved into the cost function of enterprises by posing impacts on energy consumption (A certain amount of fossil fuel consumption corresponded to a certain number of carbon emissions. Larger carbon emissions meant larger energy consumption which led to a higher energy cost in the process of production). With the implementation of policies to reduce carbon emissions, carbon emission rights have already transformed from a kind of public goods with unlimited access to a kind of commodity with price attribute. Carbon prices will change under the mutual effect of supply scales and market demand (see Fig. 8.1) so as to have influences on enterprises’ production costs and competitiveness, and guide enterprises’ investment and decisions on production (Figs. 8.2 and 8.3). 1. Carbon Value Chain The production of any product or service involves a quite lot of activities such as the purchase of raw materials, product design, the production of products and the allocation and sales of finished products. The process starting from the acquisition of raw materials to the allocation and sales of finished products is called a Vertical Chain.16 Raw materials are fed in and flow along the vertical chain to become finished products. Through some supporting activities, the value of finished products is created. Therefore, the process in which commodities and services are transformed from raw materials to finished products along the vertical chain is the value-added process. 15 16

Hidden Costs of Energy (2010). [The USA] Besanko, Dranove, and Shanley (1999).

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Fig. 8.1 Volumes and prices of EUA, CER and EUR secondary markets from 2008 to 2011

Fig. 8.2 Carbon dioxide flow in carbon value chainfull product life cycle

Fig. 8.3 Motives of enterprises to reduce greenhouse gas emissions

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Meanwhile, the value-creating process is also the one of energy consumption and carbon dioxide emissions. Every segment from production, utilization to after sale services and recycling is accompanied with the production of carbon dioxide, so we call it the “carbon value chain”. Existing research rarely observed the emissions of carbon dioxide and its impacts from the perspective of the full life cycle of products. Similar research includes concepts of embodied carbon and carbon footprint. The concept of Embodied Carbon was firstly put forward at a meeting of energy analysis working group of the International Federation of Institute for Advanced Study (IFIAS) in 1974. It refers to the amount of carbon dioxide emissions during the entire process of production of products or services including processing, manufacturing and transportation (Deng and Zhou 2011).17 Although the theory was said to have adopted the way of life cycle for evaluation (Liu et al. 2008),18 it did not cover the carbon emission situation in the whole life cycle of products as well as in the stages of utilization and after sales of products. The concept of Carbon Footprint derives from the concept of Ecological Footprinting. It represents the amount of gas emissions related to human production or consumption activities as well as the climate change. However, there is no consensus on how to measure the amount of carbon footprints. The spectrum of definitions ranges from direct carbon dioxide emissions to full life-cycle carbon dioxide emission. Therefore, carbon footprints are more a method or technology to determine and measure the carbon equivalent of GHG emissions (Xiaodi et al. 2010).19 Wiedmann and Minx (2007) defined the carbon footprint as “a measure of the exclusive total amount of carbon dioxide emissions that are directly or indirectly caused by an activity or is accumulated over the life stages of a product”. This includes activities of individuals, populations, governments, companies, organizations, processes, industry sectors, etc. Products include goods and services; all direct (on-site, internal) and indirect emissions (embodied, upstream, and downstream) need to be taken into account.20 In this paper, we have put the emphasis on enterprises and evaluated the impact of a low carbon economy from the perspective of carbon dioxide emissions in the full life-cycle of products including raw materials, production, transportation, utilization and recycling. 2. Low Carbon Value and Low Carbon Competitiveness of Enterprises In a traditional value chain, an enterprise’s profits come from the added value during the process of production. Marginal Revenue of an enterprise = Price-Marginal Cost, that is, M R = P − MC. Total Profits of an Enterprise = Total Sales RevenueTotal Costs, that is, π = p Q − T C. In order to simplify the analysis, we have assumed that the life cycle of products only includes two processes—production and consumption. If presuming a user’s cost is C u , the sales volume of products is a function of the user’s cost, then the higher the cost is, the smaller the volume is. 17

Deng and Zhou (2011). Liu Qiang et al. (2008). 19 Xiaodi, Dahai, and Xiaofei (2010). 20 Wiedmann and Minx (2007). 18

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That is, π = p Q(Cu ) − T C. Before enterprises paid attention to the externality of energy consumption, they only needed to care about the cost of energy consumption caused by raw materials for production and by customers in the process of using their products, and did not need to care about the cost of carbon dioxide emissions caused by their energy consumption. For example, as consumers would consider their expenditure changes caused by the difference of energy consumption in the whole service life of household appliances and automobiles, therefore enterprises would reduce users’ energy consumption occurring in the use process and regard it as an important means to improve their competitiveness. However, in the context of the low carbon economy, as governments start to levy on carbon emissions or adopt the carbon emission rights trading system, enterprises have to take the cost of emitting carbon dioxide into account in their profit function. If only the process of production is taken into account, then π = p Q − T C − C p , among which, C p refers to the carbon emission cost during the process of production. If enterprises emit more carbon dioxide, then they will be levied more carbon taxes, or need to buy carbon emission allowances from other enterprises or buy carbon offsets which mean to invest in carbon emission reduction projects (almost always in less developed countries) (Hoffman and Twining 2009).21 If enterprises emit less carbon dioxide, then they will be levied less carbon taxes, or enable to gain incomes by selling exceeding carbon emission rights. Thus, C p is negative. It is clear that in the context of the low carbon economy, “low carbon” becomes a new source for enterprises to gain new value. Particularly, with regard to those alternative energy technologies with poor economic benefits, enterprises can make profits by selling their carbon emission rights. If the use process of customers (mainly enterprise customers) is taken into account, then the total costs of customers not only include the price of products and the pure use cost, but also the cost of carbon dioxide which is set as Cuc (it is easier to understand if imaging a customer as a downstream enterprise). If the carbon emission Cuc is reduced during the use process, then the customer can gain resulting profits; otherwise, if the carbon emission Cuc is increased during the use process, then the customer’s profits are reduced. As a result, the carbon emission cost becomes an important factor affecting the purchase behavior of downstream customers, then affecting the production activities of upstream enterprises. In this context, enterprises’ profit function is π = p Q(C p , Cuc ) − T C − C p , ∂π/∂C p