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China has defied concerns that rising labour costs and a slump in global demand after the 2008 financial crisis would erode its export competitiveness. It has remained the ‘factory of the world’ by moving up the value chain.

Yet this success has brought both fear and admiration, with concern that China’s newfound competitive advantage could come at the expense of others.

We expect the move up the value chain to accelerate, supported by four structural factors.

First, China’s size allows specialisation along the production chain, from processing to assembly, supporting a large supply-chain network while economies of scale, aided by robotics and automation, reduce costs. Second, besides exporting to developed countries China has used its understanding of emerging markets to sell there too, while also growing its own domestic market.

Third, it has invested in education and infrastructure, allowing inland provinces to join the global supply chain. The average time in education of China’s labour force has doubled to 8.3 years over four decades. Lastly, despite the move towards capitalism, government still has a role to play and Beijing has provided support through funding, training, R&D, fiscal and competition policies.

China’s accession to the World Trade Organization in 2001 boosted not only trade with developed countries but trade between emerging economies. That means every country in the production chain has greater opportunities to participate in the economic benefit.

Labour-intensive goods comprised 31 per cent of China’s exports in 2001; today they are just 22 per cent, while machinery and electronics account for more than half its sales abroad.

Smartphones illustrate China’s progress. Five years ago, Chinese brands were relatively unknown globally – seen, at best, as cheap but unpromising copycats. They had no competitive advantage at home, let alone abroad. Now, China’s global export market share – 12 per cent in 2001 – is 50 per cent, and that increasingly includes Chinese brands, not just production for foreign companies. China supplies most smartphones to India, the world’s fastest growing market.

So, is the fear of Chinese success justified?

There are beneficiaries. Globalising machinery and electronics goods production brings affordable items to consumers in all emerging markets. And those economies will be selling China components, besides raw materials, which may stimulate Chinese investment abroad as trade ties deepen.

So trade begets investment and growth – a virtuous cycle that means China’s move up the value chain and its greater outreach to emerging-market consumers benefits all countries involved.

For most other emerging economies, China’s rising competitive advantage in medium-tech goods – and items at the low end of high-tech – is unambiguously good.

There could be losers though. While China is not yet competing head-to-head with Japan, Germany and the US, its growing competitive advantage in medium-tech goods will put pressures on other producers, including Malaysia, Thailand, Mexico, Taiwan, and Korea.

If China gains market share, some economies must lose share. But if world trade is growing, their sales can still expand. This is not a zero-sum equation.

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