Reshape the Global Value Chain

What would impact other major economies if China moved up the value chain?

In 1979, the first Special Economic Zone (SEZ) was created to attract FDI and set up factories. These factories were invested in by both foreign and domestic companies that wanted to use cheap labor and government support. Again in 1984 when the Economic & Technical Development Zone (ETDZ) was set up, it was clear that the government wanted to encourage more complicated industries such as steel production, assembly of automobiles, and many more. After that, many special zones were created such as High-Tech Industrial Development Zone in 1988, Free Trade Zone in 1990, Export Processing Zones in 2000, and Free Trade Port in 2020 (LaLonde, 2018). The Chinese Government had set up industrial chain clusters so that manufacturing could be the foundation for China’s prosperity. The next step is to join the production of high-tech products and services such as manufacturing semiconductors, big data center services, or construction of complicated infrastructure. Not surprisingly, out of 15 countries that have the highest GDP, more than half of them are allies with the United States of America. Japan and South Korea had been influenced by US policies, which is a major contribution to their success. Both countries have core technology advantages, use cheap labor and government support to differentiate from the market’s products. South Korea's main exports to China are electrical equipment and semiconductors, which account for almost half of total export goods (Heon, 2024). 3 Reshape the Global Value Chain Being independent of the importation of equipment and semiconductors not only means removing the financial burden but also means ensuring national security. China could save up to 80 billion dollars annually by investing in semiconductor manufacturing. This could also mean that the semiconductor market is being dominated by Taiwan, Singapore, Malaysia, and South Korea, which could see a big change. Currently, China only produces 9% of the chips it consumes with low valuable intellectual property (Hammer, 2020). To step up on the chips game, the industry would require a lot of resources and even some change in the geopolitics of some nations. The uncertainty of the trade war between the US and China brings out many unpredictable factors. Especially many reporters determined the 2024 US presidential election would be a very close race between two candidates. If former President Trump is elected again, he could fulfill his promise, which is raising the tariff on Chinese goods to 60%. This external factor would push China to move up the global value chain. Many economists argue that if China does that, the US and its allies’ power in the high-tech sector would be significantly changed. That’s why the US took many radical measures to contain the rise of China.

What should China do about it?

President Xi Jinping’s Made in China 2025 plan is a global game changer since China went from being a heavy consumer to setting a new standard for the world’s most advanced technology. Without the dependency on foreign electronic components and machinery, China could satisfy its tremendous domestic market and strengthen its military power. 4 Reshape the Global Value Chain There are many ways to acquire foreign technology to speed up development. Nevertheless, with human resources, all of this scientific knowledge is useful. Brain drain is still one of the biggest problems in China due to poor living standards, inadequate research facilities, and cultural differences (Levine, 2020). Many researchers choose not to come back after finishing their studies in the US or the UK. Better investment in the R&D department would partially fix the problem and attract more talent temporarily. For the long-term process, China should allocate more funds to some selective schools in that department, especially schools in the 981 plan. A study comparing the competitiveness in the semiconductor field between China and Malaysia has shown that there are many fields in which China is behind one of its biggest competitors in Asia (Gose, 2021). Research shows that despite the lower legislative environment for investors, China is still the most attractive country to invest in (UNCTAD, 2005). China should try to make an effort to keep the labor cost low and the currency rate low as well. 5 Reshape the Global Value Chain

In conclusion, while GDP is a sufficient tool to assess a broad economic perspective, it is not enough to accurately measure the productivity of a certain economy. Factors such as average working hours, labor force participation, and resource utilization have to be taken into account if a more detailed insight into productivity is needed, indicators such as GDP per hour or TFP should be assessed. China’s shift to high-tech manufacturing and services has the potential to reshape the global economic landscape. By using its industrial chain clusters and investing in research & development along with universities from the 981 plan, China aims to reduce reliance on foreign technology. However, challenges such as brain drain and not competitive offers for the qualified workforce could hinder its progress. To mitigate these challenges, China needs to invest in education, create favorable conditions for innovation, and introduce policies to attract talent.

References

Jones, C. I. (2016). The Facts of Economic Growth. In J. B. Taylor & H. Uhlig (Eds.), Handbook of Macroeconomics (Vol. 2, pp. 3-69). North-Holland.

Syverson, C. (2011). What determines productivity? Journal of Economic Literature, 49(2), 326-365.

Heon, J. (2024, August 22). Unpacking the Underlying Trends of South Korean Trade from July. Korea Economic Institute. Retrieved November 3, 2024, from https://keia.org/the peninsula/unpacking-the-underlying-trends-of-south-korean-trade-from-july/

LaLonde, J. (2018, August 16). China's Special Economic Zone Classifications — Belt and Road Advisory. Belt and Road Advisory. Retrieved November 3, 2024, from https://beltandroad.ventures/products-and-services/china-sez-classifications

Hammer, A. (2020). Exporting U.S. Innovative Capacity to China?: A Case Study of Semiconductor Manufacturing Equipment. In S. Kennedy (Ed.), China’s Uneven High-Tech Drive: Implications for the United States (pp. 37–41). Center for Strategic and International Studies (CSIS). http://www.jstor.org/stable/resrep22605.13

Levine, D. A. (2020). Made in China 2025: China’s Strategy for Becoming a Global High Tech Superpower and its Implications for the U.S. Economy, National Security, and Free Trade. Journal of Strategic Security, 13(3), 1–16. https://www.jstor.org/stable/26936543

Goes, P., & van Dijk, M. P. (2012). Global Competition in the Semiconductor Industry: A Comparative Study of Malaysian and Chinese Semiconductor Value Chains. In M. P. van Dijk & J. Trienekens (Eds.), Global Value Chains: Linking Local Producers from Developing Countries to International Markets (pp. 165–200). Amsterdam University Press. http://www.jstor.org/stable/j.ctt46mshk.10

UNCTAD (2005). World Investment Report 2005: Transnational corporations and the internationalization of R&D. Geneva: United Nations.