Tuesday, February 17, 2004

GIANT SUCKING SOUND: ASIA

The NYT reports this morning that Japan, too, is exporting to the world through China. The $124 billion in US imports from China, of course, are not all from Chinese companies (47 percent of Chinese imports are transactions between a multinational and one of its subsidiary companies). American, Japanese, Taiwanese and European based multinationals, who have flooded China with foreign direct investment in recent years, are using China's cheap labor and favorable export environment as a platform for selling to the US.

While American companies have tended to send their higher value-added processes to China, importing intermediate components for assembly in the US (witness Dell), the Japanese are keen on guarding their firm-specific assets in technology and proprietary manufacturing techniques. Japanese workers will still be "designing the main components that distinguish electronic products," the so-called brain jobs." However, the article notes that Chinese engineers are closing the taltent gap, indicative of the offshoring of white-collar jobs in the US that is now sparking blowback in the US.

The NYT quotes a Citigroup analyst in Japan who claims to have the answer to jobs shifting overseas, be it from Japan or the US: "Job creation via deregulation is key." Intereseting position (more on Citigroup here).

Rather than international trade based on classical comparative advantage--that is, where two countries specialize production based on relative efficiency and trade for the good at which they are less efficient--we may be witnessing the beginning of international trade based on absolute advantage, whereby the lowest cost producer will dominate no matter what the relative efficiencies. This would be quite a different world than most advocates of free trade describe, and a world that would call for markedly different approaches to trade policy.

With a college educated labor force in China approaching the size of the total US population, it's plain to see that whatever technical advantage the US economy currently has is likely to erode quite rapidly. Yikes.

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