Virtual Learning Resource Centre

The chinese century: The rising chinese economy and its impact on the global economy, the balance of power, and your job


by Oded Shenkar, Wharton School Publishing, 2005.


China is not just an emerging economy on its way up, preceded by Japan and the Asian "tigers". China’s rise has more in common with that of the United States – we are witnessing the sustained and dramatic growth of a future world power. China’s rise will transform global politics, the global economy and societies worldwide, especially the United States. Now is the time to understand and prepare.

(Reviewed by Kevin Barham in June 2006)

(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.

We aim to give enough information to enable readers to decide whether a book fits their particular concerns and, if so, to buy it. There is no substitute for reading the whole book and our reviews are no replacement for this. They can give only a broad indication of the value of a book and inevitably miss much of its richness and depth of argument. Nevertheless, we aim to open a window on to some of the benefits awaiting readers of management literature.)


China is not just an emerging economy on its way up, preceded by Japan and the Asian "tigers" (South Korea, Taiwan and Hong Kong) and soon to be joined by India. China’s rise has more in common with the rise of the United States a century earlier. What we are witnessing is the sustained and dramatic growth of a future world power.

Oded Shenkar, a professor of global business management at Ohio State University business school and a China expert, believes that the dislocations brought by China’s advance are not cyclical and temporary, but represent a fundamental restructuring of the global business system. China has "unmatched resources, remarkable business savvy, an increasingly formidable bargaining position, and aspirations to match". Within 20 years – possibly far sooner – China will have the world’s largest economy. The impact of a rising China on both developed and developing countries will be enormous. It will transform global politics, the global economy and societies worldwide, especially the United States. A new world is taking shape, a world where the US may no longer lead and many jobs are not safe. Now is the time to understand and prepare and to develop strategies and responses to meet the challenge.

Back to the top

China in the global economy

China, as Shenkar describes, is already the world’s second largest economy and is growing at a faster rate (perhaps 7-8%) than any other major nation. It is on course to surpass the US as the world’s largest economy within two decades. China’s economy faces some serious problems such as a crumbling banking system, an inefficient service sector, and a large disenfranchised element of the population, but these obstacles will slow rather than stop its economic march.

China is already the dominant global player in many industries, especially those that are labour-intensive (toys, bicycles, shoes, luggage). Its burgeoning exports of textiles and garments have led it into trade disputes with both the US and the EU. China, however, is not content to remain a low-tech, labour-intensive economy and is already active in technology sectors. It builds half of the world’s microwaves, one third of its TVs, a quarter of its washers, and one fifth of its refrigerators. Unlike Japan and Korea, it will not let go of its labour-intensive segment but will leverage its dominance there to fund a major push into knowledge-intensive industries that will drive the future world economy. It is this combined push that make China a leading economic power and that will pose unprecedented challenges to its global competitors.

China has a population of 1.3 billion people. The attractiveness of this huge domestic market gives it tremendous bargaining power in requesting technology transfer as a condition for foreign investor entry. Firms such as General Motors have had to transfer technology that is close to their core capabilities.

This vast pool of human resources includes not only labourers but also growing numbers of engineers, scientists and technicians. China is modernising its education system and is also counting on an eventual influx of Chinese students returning from abroad lured back by the opportunities of a fast-growing economy.

China is not alone. It is the hub of a cluster of complementary and integrated economies who make up "Greater China" – Hong Kong, Taiwan, Singapore and the vast Chinese Diaspora among the business elites of Southeast Asia and who are active around the globe. These economies possess complementary and synergistic attributes of capital, skill, knowledge, people, and market savvy that can deliver development at a magnitude and pace never before seen in a developing economy. Greater China’s bargaining power is immense – it is already the biggest market for virtually all other Asian nations.

China has a huge trade surplus with the US, and the China lobby in America (including firms like Boeing) is very powerful. The four highest US import categories from China are all technology-related. The US is therefore the most vulnerable to Chinese imports. (In contrast, Japan has a large trade surplus with China. The European Union has a smaller deficit in its trade with China which runs a surplus with most EU countries.)

The US is a "chronic importer" and has maintained a trade deficit with the rest of the world for 25 years. At 5% of GDP, this is the largest trade deficit in the world. Its deficit with China is the largest and the fastest growing.

As a global leader in technology and innovation and a net technology exporter, the US suffers most from China’s lax regime of intellectual property protection. We are now in a global economy and pirated and counterfeit products now reach multiple markets. The rate of violations is increasing.

Some argue that the US-China trade imbalance results from the different stage of development reached by the two countries (from agriculture to manufacturing to services) and that the trade gap will diminish once China progresses. The argument is flawed – China, unlike Japan and the tigers, intends to retain its labour-intensive advantage as it moves into more sophisticated products. The range of products on which it competes will grow still further.

Over half of China’s global exports come from foreign multinationals that have set up there to supply their home and global markets. Many of these are American firms – compared to other developed economies, especially the EU, it is relatively simple to shut down operations in the US, shift them to China and start exporting back into the US.

China is under pressure from the US to revalue its currency (the yuan) to make Chinese products more expensive in the US. China rejects such pressure as intervention in its internal affairs and is unlikely to yield. The yuan revaluation is also opposed by many US manufacturers who import components or finished products from China.

China’s pressure on US markets will only grow stronger. More and more US firms are likely to shift production to China realising it is the only way to stay in business. The tide of Chinese exports will continue to grow. Although China’s imports to the EU are a relatively small proportion of its total imports and half its Japanese imports, once Chinese exports grow and begin to challenge strategic and influential industries such as motor vehicles, sentiment may change, although it will remain subdued as long as European exports remain strong and the more influential EU nations such as Germany have a relatively small deficit. Japan is especially vulnerable to China’s ascent because its competitive advantage lies in manufacturing and its economy has stagnated for over a decade. China is the only economy with which it runs a significant trade deficit.

China’s impact on developing economies is particularly hard. They trail behind China in the competition for foreign investment and China’s edge in cheaper labour, a modern infrastructure and scale benefits is now sufficient to erase the proximity advantages of countries like Mexico. For developing economies in Asia, the Chinese impact is more ambivalent. Although they lose foreign investment to China, it is becoming an engine of growth for the entire region and a complement to or even a substitute for developed country markets.

China’s impact will produce numerous aftershocks for the world: rising prices for the energy and commodities that China is consuming, severe dislocations for employees and communities in regions and industries unable to compete, waves of immigrants pushed out of regions (e.g. Central America) by the devastation of their labour-intensive industries, and eventually a new geo-political order in which China takes a leadership role.

China is fast becoming the world’s factory. The next phase will see subcontracting of entire operations to China with the foreign firm maintaining oversight, branding and marketing. When they export back, however, they will face competition from a new breed of Chinese manufacturers that export under their own brand name and in some instances set up production in the US or elsewhere.

China will become increasingly dependent on its exports to fund its imports of capital goods and to prevent a social time bomb exploding triggered by unemployment. Given the scale of its economy, China’s export drive will bring about the commoditisation of many product markets that previously relied on brand name and differentiation. With China as the cost leader, foreign manufacturers will have to meet or beat the Chinese "pricing floor" that rests not only on cheap labour and subsidies, but also on massive use of counterfeiting and piracy to circumvent development costs.

This leaves industrialised countries a limited number of options – to procure components from a Chinese producer to lower the cost of the final product, to move operations to China to lower cost further, to find another production base such as India or Mexico (but which rarely offer the same combination of benefits as China), or automate or otherwise increase productivity – but most productivity savings have already been extracted. They can try to shift from fiercely competitive entry level into technology-intensive product lines but many of their competitors will have the same idea. Or, they can exit the business completely and redeploy their resources elsewhere.

The flood of Chinese imports into the US is creating unprecedented pressures on American manufacturers. The author expects job security to return to centre stage in employer-employee negotiations in the US and a reversal of the decade old-trend away from unionisation. There may also be severe pressures toward protectionism which will do heavy damage to the global economy. A trade war, however, will produce grave consequences for all. The question is not how to stop the tide of Chinese imports, but how to remain competitive in the Chinese century.

Back to the top

The middle kingdom: China’s historical legacy

China’s economic and business scene is deeply anchored in past traditions and their perceived lessons. The Chinese are very proud of their Imperial legacy seeing themselves as the longest surviving world civilisation. It sets an extremely high level of ambition for China today. The aim is to restore the country’s position as a leading civilisation and to become a world leader, not just a regional leader. While Imperial China invented many products that changed the world (e.g. gunpowder, printing), it did not develop the mindset and structure to establish generalised principles of science, so the country lacked a sustainable innovation stream. The lesson drawn is that success in breeding innovation is of limited value without the ability to sustain and apply it in the real world.

The period of "foreign humiliation" in the 19th and early 20th centuries created strong suspicions among the Chinese about the motivations of foreign nations and multinational firms. Although China has reluctantly turned to multinational firms to extract skills and knowledge, it drew the lesson that it should not become dependent on others and that technology was a key ingredient of independence. This translated into an emphasis on technology transfer by all means possible to achieve the scope and depth required for the development of independent research and technology capabilities.

China’s bureaucracy, a legacy of its early Communist era, is here to stay for reasons of control and political power, but the government has learned that bureaucracy needs to be distanced from technological and economic activities if the country is to progress. The fall of the Soviet Union has brought home the risk of a political meltdown caused by economic underperformance.

The reform period since 1978 has been one of trial and error in which the leadership has been ready to give up some of its traditional ways as long as it could achieve some Imperial success – economic prosperity under an unquestioned regime. Tiananmen Square showed that even the reformists in the party were not about to relinquish control and that democracy, which in the Western mind is associated with economic progress, was not about to happen. Nonetheless, to build the infrastructure (human, educational and organisational) to support complex production, China has been ready to put aside ideology. Deng Xiaoping said it didn’t matter what the colour of the cat was as long as it was able to catch mice.

The vision of China’s leadership is to become a world power that will ultimately replace the Soviet Union as a counterbalance to American power. The vision does not include a transition to democracy. China has already defied Western assumptions about the essential correlation between a democratic system and economic progress. Side by side with continuing liberalisation, the Chinese state and its bureaucratic apparatus will continue to wield enormous power in guiding the Chinese economy.

China will soon be ready to move to the next level, from subcontracting to development and design and further to branded production. At home, Chinese firms have become formidable competitors to foreign multinationals and the best are ready to move into global markets. They will increasingly come from knowledge-intensive industries.

Back to the top

China’s unique challenge

The rise of China is not like that of other Asian countries such as Japan and the "tigers". In the author’s view, its ascent is distinctive and has more in common with the rise of the USA in the 20th century. The repercussions of its climb are equally monumental. It is not just its enormous population, nor its huge economy, nor its growth rate, although the combination of these factors is special to China. China’s exceptionality is its special legacy, different institutions, "sky-high aspirations" and unique combination of resources, capabilities and bargaining power.

It also about timing – China is ascending during a dramatic acceleration of globalisation, the emergence of powerful multilateral institutions such as the World Trade Organisation (WTO) where the US is less able to impose its will, and increasing pressures associated with economic restructuring in major industrialised countries especially the US. This "unprecedented constellation of events" will force nations, firms and individuals to question accepted assumptions and develop new strategic responses.

China is the only Communist nation to achieve rapid, sustainable economic growth. It is the only emerging economy with an authoritarian regime that seeks (but finds it increasingly difficult) to maintain tight control on individual freedoms and expression even as it frees ever-larger segments of economic activity. It yearly pulls in more foreign investment than all other developing economies combined. It also receives technology transfers at a pace, scope and depth never before seen in a developing country. Among all emerging economies of the past 50 years, China is by far the most ambitious in its goals and the most determined to fulfil them.

China should not be compared with Japan. China’s challenge is driven by strong pressures to provide employment so it is unlikely to replicate the Japanese strategy of transferring production to (and creating jobs in) the US.

China is also different from India. China is globally competitive in a range of industries while India is gaining in a narrower range (especially software). India has complementary strengths to China and trade between the two countries is booming, with India supplying competitively-priced inputs (e.g. steel) to China, bolstering its capacity and cost structure. India may eventually begin to absorb investment and growth from China.

Back to the top

China’s technological ambitions ("from socks to arcraft")

China’s goal is not just to catch up with the other industrialised powers but to overtake them.

While China’s plentiful human resources are a competitive edge they can also be a disincentive for the productivity improvements that often drive innovation. China is also seriously short of both basic researchers and applied scientists.

To overcome these hurdles, China is leveraging a huge wave of foreign investment, learning from the global technology leaders while making sure their advanced knowledge is shared with indigenous companies and often turning a blind eye when the technology is "borrowed". It is introducing fundamental changes to its education and research infrastructure and is enticing students to come back from abroad. It is using its built-in advantage of not having sunk investment in second-generation technologies to leapfrog industrialised nations, and is investing heavily in areas such as biotechnology and nanotechnology. As the world’s leading developer and exporter of technology, the US has more at stake in the technology game than most industrialised nations and the most to lose from uncompensated use of technology through mandatory transfer, counterfeiting and piracy.

China has a long and contradictory record in technology. Despite its impressive record for invention (printing, gunpowder, the compass, etc), Imperial China’s failure to develop formal science prevented continuous technological development and the diffusion of its inventions into the economy. During the early Communist period it was the military establishment that did the bulk of the research work, concentrating on showcase projects devoid of economic or commercial considerations. The start of reform in 1979 brought home the reality that, after decades of Communist rule and the "lost decade" of Mao’s "Cultural Revolution" (1966 onwards), China was now further behind the developed world than ever.

China began its technology upgrade by importing whole production lines from the West, mostly based on old-line technologies that Western firms were happy to part with. China soon discovered that it was insufficient to import a production line without making fundamental changes to the way the technology was utilised. It learned that it needed to shift from a perception of the enterprise as a collection of narrow technical skills to one that emphasised integrative and synergistic capabilities. It has gradually retreated from importing complete production lines, replacing them with technology licensing and transfer, consultation and service agreements, computer software, joint venture production, and cooperative production.

Thanks to the increased attractiveness of its domestic market, China was able to obtain technology on an unprecedented scale for a developing country, culminating in the establishment of R&D centres, the "epitome of technology transfer". China was also able to leverage its "seller’s market" environment to pitch one investor against another and even to agree to multiparty exchanges. Chinese automotive companies, for instance, have simultaneous joint venture agreements with rival foreign competitors (such as Guangzhou Automotive with Honda and Toyota), something the latter have never agreed to elsewhere. This allows the Chinese partner to learn best practices from both competitors and be the only partner which has access to all the others.

To bolster the transfer of technology, China has offered special preferences and incentives, especially in high-priority areas such as silicon chips. Those firms who were ready to transfer more cutting-edge technologies were rewarded with permission to locate in the most desirable areas, preferential governance and equity terms, tax holidays and duty exemptions, and preferential access to the domestic market.

Domestic players are now emerging in the most advanced areas. In electronic chip manufacture, China is "awash" with start-ups, often funded and given expertise by Taiwanese firms, but quickly evolving into full-fledged operations from design to sales.

The priority given to technology-intensive foreign investment is a direct result of China’s failure to establish, so far, an effective indigenous network of technological innovation. There are signs that indigenous capabilities are developing. The new R&D centres established by foreign firms have already generated dozens of patents by Chinese scientists but China has a long way to go before it is an innovation hub.

To ensure that China gains the most important technological capability – the ability to do its own research – it has made the establishment of R&D centres on Chinese soil a major priority. A major factor in General Motors beating Ford was its willingness to establish an R&D centre in Shanghai and transfer up-to-date technology to it. Firms with China-based R&D centres include Oracle, Siemens, Nokia, IBM and Hewlett-Packard.

China’s problem is not hardware or software but "humanware". It realises that without upgrading its human resource base, it is pointless investing in modern equipment and processes. To improve its "humanware", China is undertaking a fundamental reform of its educational system, including the importation of content in science, technology and management from abroad. It is also making a major effort to bring home the many scientists and engineers who left the country to study abroad. The aim of this repatriation (the "return of the turtles") is to gain cutting-edge capabilities, change the organisational culture within Chinese research organisations and enterprises, and create a potent combination of foreign and domestic knowledge.

Although Chinese firms are far from mastering the innovation process, they are busy upgrading their R&D capabilities, increasing the numbers of R&D personnel and scientists and engineers. They aim to transcend their role as "factory to the world" and become well-rounded firms able to design and develop products and sell them under their own name. So far, a few Chinese firms such as Haier and Huawei Technologies have established recognised brand names abroad. More will follow.

As long as Chinese bargaining power remains strong, it will find ways to make foreign investment conditional on technology transfer. It will also continue to tolerate expropriation of technology through piracy and counterfeiting. This has been critical in keeping development costs down and is one explanation why Chinese firms are often able to sell products at very low cost.

Back to the top

The "$2 Rolex": counterfeiting and piracy

Many industries are heavily reliant on intellectual property rights (IPR) to protect huge development costs and brand-building expenditure. Intellectual property rights underlie the lead of the US, and to a lesser extent Japan, the EU and other developed economies. The US was itself once a violator of property rights but became a champion of IPR after its legal system matured and it became a major producer of copyrighted knowledge itself.

China may too become a defender in due course but this will not occur until its firms have become technology leaders. In the meantime China obtains a free ride on the technology and reputation of legitimate, mostly foreign manufacturers which is tolerated and often supported by Chinese authorities (especially at local level).

Piracy and counterfeiting cause enormous damage to IPR owners. Foreign firms may lose $20 billion annually in China. In some product categories, fakes have taken over from the original as market leaders (motorcycles, cell phones, DVDs, shampoo, Windows XP software, etc.) Over half the pharmaceuticals sold in China are counterfeit. Electronic chips and automotive parts are fair game too. Quality is often dubious. Nonetheless, piracy and counterfeiting remove a steep barrier to new entrants and allow those falling behind to catch up on the cheap. Cost reductions can even sometimes outweigh the savings from lower wages. The US, as the number one new technology producer, is the most vulnerable.

As the author points out, China is not the only country to violate IPR. But it is the scale, scope and brazenness that set China apart and create a huge impact. China has developed a legal framework for IPR protection which largely complies with international standards and conventions but the framework still has many holes and enforcement is a big problem.

Counterfeiting and piracy have spread to the global arena where bogus goods now represent 7% of global trade and are growing, incurring $300 billion in yearly losses to legitimate producers. Yamaha estimates that 100,000 China-made copies of its motorcycles make their way into overseas markets each year.

China’s piracy climate is expected by many observers to get worse. Firms will have to figure out how to compete in an environment where legal protections are lacking and where their technology and trademarks are "up for grabs". Avoiding a Chinese presence does not prevent piracy and counterfeiting – "if it can be copied, it will." A foreign firm with a Chinese presence may actually be in a better position to monitor violations and pressure the Chinese authorities to take action. Opting for a wholly owned subsidiary usually reduces the extent of technology leakage. IPR protection should be part of the business plan of any company that intends to do business in China.

Back to the top

The business challenge

Businesses, says the author, should prepare for the Chinese century by understanding the nature of the coming change and assessing the impact on industry, firm and individual employees. This must include a willingness to re-evaluate the very raison d’?tre of the organisation, questioning not only practices and routines but also the fundamental assumptions underlying the business model. Firms must rethink their entire value chain – this will likely lead to new business models or to an outright exit.

Among industrialised countries, the US has so far been the hardest hit. It takes the bulk of China’s exports but has been relatively unsuccessful in exporting into China’s growing market. In the meantime, the EU and Japan are feeling the pressure of a rising China which coincides with the restructuring of their economies. China weighs more heavily on developing nations who lack the capabilities to redeploy into areas not threatened by Chinese competition.

The EU is holding its own – so far. Its deficit with China is less than one third that of the US. There are several reasons for this superior trade performance in the China market. Europeans heavily subsidise sales with credits and gifts. European firms are more conscious of exports while the smaller US enterprises see them as a temporary stopgap to ride domestic downturns. Some European firms have no qualms (according to the author) about paying bribes. European political leaders intervene on their firms’ behalf while US leaders bash China on human rights. European markets are more closed and fragmented making it more difficult for Chinese firms to penetrate them. Europe also has Eastern Europe as a lower-cost base in its backyard (which gives it a bigger advantage than Mexico does to the US).

The US is burdened by its superpower status – Chinese officials worry that the US will use trade sanctions to make a political point but know that Europeans "won’t let anything stand in the way of a deal". The Chinese can balance their trade with the US because of the trade deficit – they have huge reserves of dollars they can’t spend in the US but which go toward buying Japanese and European goods. So far the EU has tried to act in unison with regard to China but this hides the divergent interests of those members with a substantial trade deficit with China (the UK and the Netherlands) against those with only a small deficit (Germany).

In Japan, China’s impact was held back by price insensitivity, high brand consciousness and a fragmented retail and distribution network. With the rising cost pressures of a deflationary economy and the growth of large Japanese discounters, Chinese products are now penetrating the market. On the other hand, Japanese firms realise that China can be a vital part of their bid to remain competitive. They are sharpening their R&D competencies and building the supply chain necessary for China-based manufacturing.

In terms of future challenges, China has been moving from primary goods and basic manufactures towards more sophisticated sectors of manufacturing. Its share of the global electronics market has doubled in a decade and now exceeds 20%. In the automotive industry, China is fast becoming an outsourcing hub for components and is emerging as a viable exporter (Volkswagen and Honda are exporting Chinese-built cars). A new crop of national champions leads China’s drive in the technology-intensive sector (e.g. TCL in TVs, Haier in refrigerators, Lenovo in computers, Huawei in telecommunications, China Netcom in phone service).

These firms have learned the importance of continually shaving production costs and time and some are looking for cross-border acquisitions in Korea and elsewhere, further increasing the radius of China’s influence. Within a few years, Chinese consumer product makers will start their overseas push (Nice already locally outsells Unilever and P&G in detergents). Chinese service providers lag behind but can leverage the financial capabilities of "Greater China" in shipping and aviation, engineering services, and (eventually) R&D.

Firms need to prepare for the new reality that is about to dawn. The author makes some suggestions:

  • For labour-intensive industries, "the writing is on the wall". For many developed country firms, especially those lacking brand power or specialised capabilities, the best option is simply to exit the market and redeploy their resources.
  • A firm that doesn’t exit must devise a new game plan. It might explore product lines where it has specialised capabilities and labour is only a small part of total cost. Automation in itself may not be the answer – the Chinese are automating too when it make sense and their labour-cost advantage often compensates for lower automation.
  • One solution is to extend technological capabilities into related areas not only in manufacturing but also in higher growth services. Customisation can be a viable strategy for products that are small-batch, expensive, difficult to transport, or require shorter lead times than the Chinese production and shipping cycle.
  • Moving up-market no longer ensures survival as the Chinese are buying established brand names.

This leaves technological development and innovation (China’s "Achilles heel") – as long as a company can protect itself. A firm should assume that its technology and know-how are vulnerable whether it is in China or not. To reduce the risk, it might consider:

  • A technological solution (e.g. smart chips).
  • Operational procedures – sharing technology and know-how only to the extent necessary.
  • Governance – opt for a wholly owned foreign subsidiary, except where a Chinese partner can make vital and exclusive contributions.

With cost pressures likely to intensify, outsourcing can be a vital ingredient in any firm’s survival plan. It permits lowering of costs without sacrificing market presence and (with proper quality control) brand image. However, it grooms future competitors – although this can be partially offset by retaining core capabilities.

If a company chooses not to service the Chinese market, another supplier – possibly from China – will. If it wants to be there, a company must do its homework, understand how the Chinese environment works, and determine how to develop and protect a competitive advantage under different game rules.

Back to the top

China’s impact on job migration

The migration of jobs to foreign destinations, China included, is a hotly debated topic in the US and other industrialised countries. Job migration has occurred before in history so is there anything new about China?

Unequivocally yes, says the author. China’s enormous labour reserve, with pay scales radically lower in the hinterland than on the coast (the average income on the farm where over half of China’s population lives, is less than $25 per month), creates the equivalent of a country within a country. Instead of Vietnam or Bangladesh replacing China as a labour-intensive haven, Hunan will replace Guangdong. China’s population growth (it is now relaxing its one child policy) means it needs to create 15 million new jobs annually just to stay level and prevent an increase in the unemployment rate.

China – which comes to the global stage when communication and logistic advances as well as global market liberalisation facilitate the integration of production networks and supply chains globally – has no intention of playing the role of low cost, low value-added supplier. It will soon be competing for the higher value-added jobs once considered the preserve of the industrialised world.

China probably caused a net loss of 700,000 jobs in the US in 1992-99 and a net loss of 900,000 jobs in 1999-2010 is forecast. Manufacturing will bear 85% of these losses. Some industries will be severely hit, with two thirds of US workers in the textile and clothing industries forecast to lose their jobs. Textile workers in developing countries will be even worse affected.

So, asks the author, is your own job in jeopardy? He suggests that, if you are in manufacturing, there is a better than 50/50 chance your job is at risk. The impact of China implies not only a deepening but also a broadening of job losses with skilled, white collar jobs – especially knowledge-intensive ones such as R&D – increasingly migrating to China.

Jobs not likely to be outsourced are those that require either face-to-face contact with a customer or involve social networking, do not involve pay that would be lower in an alternative location, have high setup barriers, and/or cannot be easily communicated via technology (examples are personal or legal services). Supply chain jobs in shipping, logistics and distribution will benefit from increased movement of goods and services across borders. Educators will be needed to train Chinese employees, tourism will benefit from an influx of Chinese tourists, and there may even be management jobs in China itself.

Back to the top

China and the retailers

The Chinese onslaught occurs at a time when the US retail sector has become dominated by giant retail discounters (Wal-Mart, Target, Best Buy, etc). China is both a beneficiary and a cause of this transformation. A similar trend is observed in Japan and, although Europe’s retail market is still fairly fragmented, changes are happening there too.

While Japanese prefer domestic products regardless of product superiority, Americans evaluate a domestic product more favourably only when it has superior qualities. The American market and the China production machine seem like a "match made in heaven". The "factory to the world meets the consumer of the world," as the author puts it.

The preponderance of Chinese goods from clothing and furniture to electronics and appliances on the world’s retail shelves shows how fast Chinese imports are capturing market share from domestic products and third-country producers. The trend has been especially pronounced in the US where China’s share of imports rose from under 3% in 1989 to 11% in 2003.

A key reason for China’s remarkably fast penetration of US markets is the increasingly dominant role of large retailers. This will continue to put pressure on manufacturers throughout the world. With Chinese dominance of apparel, toys and consumer electronics, fewer and fewer non-Chinese firms will have the scale, product scope, lead time, and price that the large retailers seek. The Chinese will depend on the large retailers until they are able to build their own distribution and brands so the fates of Wal-Mart and the Chinese industry will be closely linked for years to come.

The US consumer has shown an insatiable appetite for Chinese products – from bicycles and coats to TVs and DVDs. A consumer backlash is possible if the threat to US job security becomes more evident. But the author thinks it unlikely that the anti-Japanese "Buy American" campaign of the 1970s and 80s will return. With US foreign investment now higher than at any "Japan-bashing" time, major retailers relying on Chinese imports to maintain a price advantage, and major manufacturers dependent on Chinese outsourcing, an anti-China coalition of business and consumers is unlikely to emerge.

Back to the top

China rising: Two scenarios

The author makes it clear that China’s rise is a watershed event that will change the global landscape. China will become the dominant manufacturer and exporter in industries ranging from the labour intensive to the technology drive. Chinese-made cars will become a common sight on American and European roads, made-in-China jets will enter commercial aviation, and Chinese missions to space will be regular events.

China, then a world power, will be a broker and arbiter of global diplomatic affairs not only in Asia but the world over. It is only a matter of time before China becomes closely involved in the Middle East whose oil it needs. It may even take the lead in helping Africa out of its "economic quagmire".

China’s advance will not be linear. It will need to transform its banking sector, diffuse a social security crisis, and respond to growing discontent by laid-off and rural workers. (The author mentions, but skates over, China’s potential impact on pollution and the environment.) The leadership will walk a fine line between relaxing an autocratic political system and needing to retain effective control to maintain law and order and one-party rule. Fear of unemployment and resulting unrest will continue to feed the export drive but may also help to avoid a trade war as China seeks to build coalitions with vested interests in open trade – by, for example, enlisting the support of foreign manufacturers dependent on the Chinese market for exports or outsourcing, or the large retailers for whom it is an essential component of their business model.

The author proposes two possible scenarios:

  • An optimistic "soft landing" where China’s trade surplus gradually declines as labour and material costs rise and the country fails to catch up with strong US productivity and technology gains. Nonetheless, as this would develop over the long term, China would become much more efficient at directing capital and human resources and would become a more formidable competitor.
  • A "hard landing" where an economically belligerent China – desperate to create jobs at home – encounters rising protectionist sentiment in the US and other international markets, bringing the global economy down in the process.

Europe will play a critical role in how those scenarios unfold. So far the EU has shown more willingness to compromise on trade issues with China. When the two sides resolved a dispute over surging Chinese exports of textiles in 2005, China’s trade negotiator made a thinly veiled stab at the harder line taken by the US when he quoted an old Chinese saying: "If you respect me by an inch, I’ll respect you by a foot." How long the EU will be able to maintain its more accommodating stance as the Chinese century proceeds remains to be seen.

Back to the top