OPINION

Export Machine

Many a headline has highlighted how rising costs in China are putting pressure on profit margins and reducing the competitiveness of the country's huge labor-intensive, exportoriented manufacturing industry.

However, a closer look at trade data shows that China's overall exports are still gaining market share. In 2011, Chinese exports grew by around 20 percent in U.S. dollar terms and 10 percent in real terms, compared to an increase in real global imports of around 7 percent.

Many multinationals including Nike, Coach and Topform have moved some of their production of garments and sneakers to Viet Nam, other Southeast Asian countries or the Indian subcontinent.

These high-profile cases, however, are not really representative, and it would be a mistake to conclude that they herald the demise of China's export success. The shift out of China is basically only happening in the production of simple garments and sneakers.

Simple garments and sneakers are among the most low-value-added, labor-intensive sectors, with relatively little need for equipment, infrastructure, supply networks and skills. As China is moving up the value chain, these least attractive and quite mobile sectors are the most obvious ones to go. Indeed, the manufacturing powerhouse of Guangdong Province has at times actively promoted the transfer away of "low value-added and polluting" industries.

Textile, garments and sneakers make up only about 15 percent of China's total exports. In other export sectors where equipment, infrastructure, supply networks and skills mattermore, there has been little or no transfer of production to other countries. Meanwhile, in sectors such as electronics, there is a shift of production within China from its traditional export-oriented manufacturing hubs along the coast to inland regions.

The main reason why the amount of manufacturing production that has left China has been very small is that the wage cost pressures have largely been offset. Gains in efficiency and labor productivity have been rapid. This has meant that, after their impressive fall between 1995 and 2004, increases in unit labor costs (wage costs per unit of product) have been modest and gradual in recent years.

Meanwhile, what is sometimes forgotten is that wages have also risen quite a bit in countries mentioned as alternatives to China, such as Viet Nam and Bangladesh. This is even more so with the higher raw materialm prices, which are by nature a global phenomenon. Moreover, China's advantages in infrastructure, clusters of suppliers, and deep labor markets are hard to overlook.

Factoring in the appreciation of the yuan, China's export prices have risen in U.S. dollar terms in recent years. Data on U.S. import prices are considered to be good because they are adjusted for quality adjustments. And they show that in January 2012, prices of U.S. imports from China were 5 percent higher than two years ago. Thus, China's export-oriented manufacturers have basically maintained price competitiveness in foreign markets, especially compared to other emerging markets.

What is more, despite the cries of pain of export firms and industry organizations, China's manufacturers have, overall, maintained their profit margins.

Average profits as a share of gross output in industry dipped in 2011 after peaking in 2010. But profit margins still compare favorably to the historical experience, suggesting, overall, that exporters have not had to sacrifice margins excessively to maintain price competitiveness. Thus, it is not that surprising that China's exports are holding up very well in global markets.

This is an article by Louis Kuijs, Project Director with the Fung Global Institute, a Hong Kong-based think tank

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