Quality matters: Everything is (not) made in China

Lionel Fontagné, Guillaume Gaulier, Soledad Zignago 28 March 2008

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The economic transformations induced by globalisation have prompted reactions in developed countries that sometimes seem hysterical: One American author wrote a book about her attempt to go one year without a product manufactured in China. “What to do when everything is ‘Made in China’?” asked a newspaper headline. Others worry that the relocation of production will leave no jobs remaining in developed economies. Are such fears warranted?

At a glance, the data seem to lend support to them. Nearly the whole spectrum of products, as classified by international statistical measures, are covered by Chinese exports. Out of 5,041 products traded at the international level in 2004, 4,898 were exported by China, compared with 4,932 for Germany. It would seem that the North and South export the very same bundle of products. But there is considerable variation in prices (unit values) within product categories, as documented in Peter Schott (2004)’s seminal paper on US imports.1 We have recently shown that this is true more broadly (Fontagné, Gaulier & Zignago 2008). Using a classification of world trade in more than 5,000 products, we find that on average, Japanese unit values are 2.9 times higher than for China, for the same products shipped to the same markets within the same year (2004). Similarly, US export unit values are on average 2.4 times higher than for China.

North and South export the same products according to the statistical categories, but they do not ship the same varieties of these products. Countries at different levels of development do not compete directly since they are not positioned in the same market segment: competition is taking place at the level of the differentiated varieties. The implications of this simple stylised fact are considerable, for both economic theory and economic policy.

Quality in theory

According to theories of international trade based on comparative advantage, different countries should have different bundles of exported products. And most theories of intraindustry trade predict that countries enjoying greater productivity will ship low-price varieties. Both predictions conflict with the empirical evidence. As it turns out, advantages in terms of productivity result in exports that have higher – not lower – prices (Baldwin and Harrigan 2007). Exporters to a given market do not specialise in a limited subset of products in coherence with their factor endowments but specialise in a wide range of products. In short, there is not endowment-driven specialisation across products, but on the contrary, endowment-driven specialisation across varieties within products.

Such a shift in our understanding of international specialisation should prevent us from drawing hasty conclusions regarding the competitive pressures that high-income countries face from emerging economies. If varieties exported by Germany and China are too different to be in direct competition, then workers in the two countries do not compete in production of the same varieties. And if the different varieties are not very substitutable, there will be only a weak link between trade and factor prices.

Quality in practice

This insight into international specialisation improves our understanding of the dynamics of North-South competition and leads to three policy conclusions for developed economies.

  • We observe that recent shifts in world market shares actually mirror this dissimilarity in the specialisation of countries at different levels of development within products and across varieties. This underlines the importance of detailed analysis. These shifts profoundly differ among market segments, and different countries will be differently affected. The popular view that the South is gaining market shares inexorably is too oversimplified; it cannot support sound policy conclusions on the consequences of emergence for advanced economies.
  • There are specific policy concerns regarding the hi-tech sector. Presumably, this is the very last refuge of industries of advanced economies or at least the last place where rents are extracted. Advanced economies have been hard hit by growing competition from emerging economies. For instance, the US market share for the top market segment of hi-tech products dropped from 29% in 1995 to 19% in 2004. Europe and Japan also experienced declines over the same period, though not as large.
  • We identify a specific pattern of Europe’s specialisation that may allow it to better resist the competitive pressure of the South. As illustrated in Figure 1, the EU recently managed to defend or even to slightly increase its position in the upper market segment of the standard goods (as opposed to hi-tech goods). This performance contrasts with that of Japan and the United States, which declined as China made rapid progress in the bottom segment of the market.

Figure 1. World market shares (intra-EU excluded) for standard manufactured goods, by market segment (1995 and 2004, percent)

Our evidence calls for further analysis of the distributive impacts of such specialisation across varieties: the need to climb the ladder of vertical differentiation of products may profoundly impact European economies. A first and obvious channel is changes in production techniques. Instead of producing a standard consumption good with blue collar workers, capital and raw materials, firms at the top of the ladder need a combination of highly skilled designers, market analysts and engineers. Such a shift in production technologies may well have an impact similar to biased technical progress and be detrimental to low-skilled, less adaptable workers. Exporters in emerging economies may not threaten the relative position of unskilled labour in Europe through direct competition in product markets, but indirectly through the labour market effects of up-market positioning strategies adopted by European firms in response to international competition.

Conclusions

China’s export performance is indeed impressive, and in one sense it is appropriate to say that everything is made in China. But while China may be exporting under nearly as many product headings as Germany, the differences between varieties within a product category are tremendously important. Both economic theory and policy need to account for this pattern of specialisation.

References

Baldwin, Richard and James Harrigan (2007). "Zeros, Quality and Space: Trade Theory and Trade Evidence," CEPR Discussion Papers 6368, June.

Fontagné, Lionel, Guillaume Gaulier, and Soledad Zignago (2008). "Specialization across varieties and North-South competition." Economic Policy 23(53) : 51-91.

Schott, Peter K. (2004). “Across-product Versus Within-product Specialization in International Trade.” Quarterly Journal of Economics 119(2): 646-677.

Footnotes

1 Since prices are not directly observable in trade statistics, unit values (total import value divided by the quantity imported) are used in this type of work.

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Topics:  International trade

Tags:  China, quality, international specialisation, exports