Theflyingfactory

AsiahasbuiltawebofeconomicinterdependencewhichChinawouldbeilladvisedto
unravel
TheEconomist,Nov15th2014
IN1999ANDYCHAN,amiddleagedHongKongbusinessman,setupacompanyinShenzhen,justover
theborderontheChinesemainland,makingprettysetsofbathsoaptofillAmericanChristmas
stockings.Theyweresoldat$10apieceatretailerslikeWalmart.Hisfirmmadeandshippedthem,by
thehundredsofthousandsineachsteelcontainer,forjust$4.Inthefirstfewyearshisfirmmadea
bomb.Hepaidhisworkersapittance,290yuan(then$35)amonth,andimportedhisrawmaterials
fromMalaysiafornexttonothing.ButthenChinasexchangeratesoared,hisworkerswagesrose
almosttenfold,theauthoritiesstartedenforcingovertimerulesandcompetitionturnedbrutal.The
businesscollapsed.Nowheisataxidriver.YoucantdothisbusinessinShenzhenanymoreunlessyou
breakthelaw.YouhavetogotoSouthEastAsia,hesaysbitterly.
HardasitisonMrChan,tradeinEastAsiaisruthlesslyopportunistic.SinceJapanesemultinationalsput
theFlyingGeesemodelofmanufacturingintopracticeinthe1980s,Asianfactorieshavemigrated,via
thecontinentsmiracleeconomies,toChinaandSouthEastAsia.Fuelledlargelybyforeign
investment,theyareonapermanentquestforcheaperlabourandgreaterefficiency.Ascitiesalong
Chinasthrobbingcoastlinearepricedoutofthemarket,inlandlocationssuchasChongqing,orlower
wagecountrieslikeVietnamandCambodia,havebecomethenewgoslings.
Buttheimageofflyinggeeseisnolongerasfittingasitoncewas,becausetheproductionapparatushas
becomemorelikeaspidersweb,withcomponentsflittinginalldirectionsandgoodscrossingand
recrossingborders.VictorandWilliamFung,ownersofLiandFung,aHongKongbasedcompanythat
helpsorchestratethesesupplychains,havesaidthatthisnetworkhasrippedtheroofoffthefactory.
Supplierscannowbeanywhere.Intheirbook,CompetinginaFlatWorld(writtenwithYoramWind),
thetwoFungsusetheexampleofapairofshortstheymadeforanAmericanretailer.Thebuttonscame
fromChina,thezipsfromJapan,theyarnwasspuninBangladeshandwovenintofabricanddyedin
China,andthegarmentwasstitchedtogetherinPakistan.Yeteverypairofshortshastolookasifit
weremadeinonefactory.
Tangledweb
Asaresult,EastAsiahasbecomeoneofthemostinterconnectedregionsintheworld.TradeamongEU
nationsremainsevenmoreextensive,buttheyarepartofasinglemarketwhereasEastAsiahasonlya
tangleoffreetradeagreements.AsPremachandraAthukorala,aneconomistbasedinAustralia,points
out,networktradehasbeenthemostdynamicpartofworldmanufacturingexportssincethe1990s.
TheshareofEastAsiandevelopingcountriesincreasedfrom14%in199293toover30%in200708,
withChinathemaindrivingforce(seechart1).
SuchisthepullofChinawithinthisnewFactoryAsiathatthecurrenciesofmostcountriesinthe
regionnowtracktheChineserenminbimorecloselythantheydotheAmericandollar,reckonArvind
SubramanianandMartinKessler,formerlyofthePetersonInstitute.Yetforallitspower,Chinaisstill
onlyapartofthespidersweb,notthecentreofit.Whatmakestheregionuniqueisthatyouhavea
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tightfitbetweenregionalandglobalintegration.Thesupplychainislinkedtofinalgoodsmarketsinthe
UnitedStatesandtheEU,saysRazeenSallyoftheLeeKuanYewSchoolofPublicPolicyinSingapore.
Globaltradehassloweddowninthepasttwoyears,andin2012EastAsiantradewiththerestofthe
worldforthefirsttimemadenocontributiontogrowth.Yetdespitethelingeringfalloutfromthe2008
globalfinancialcrisisthenetworkeffectisstillgoingstrong.Exports,especiallytoAmerica,haveshown
signsofpickingupthissummer.SudhirShetty,theWorldBankschiefeconomistforEastAsiaandthe
Pacificregion,expectstheemergingcountriesinhisareatogrowby7%thisyear,farfasterthan
anywhereelseinthedevelopingworld.
Chinasslowinggrowthrateremainsaconcern,butthetenmembersoftheAssociationofSouthEast
AsianNations(ASEAN),includingIndonesia,thePhilippines,SingaporeandVietnam,aretryingtomake
theirregionmoreselfsustaining.NextyearASEANplanstoestablishaneconomiccommunitya
singlemarkettomakenetworktrademoreseamless.
ButChinasassertivenessoverdisputedterritoriesintheSouthandEastChinaSeashasputitat
loggerheadswithimportanttradingpartnerssuchasVietnamandJapan.Asyettheeconomiccostshave
beenbearable,buttherisksarehigh.
JamesReillyoftheUniversityofSydneythinksthatChinasnewposturingisarevivalofanoldpractice
knownaseconomicstatecraft,meaningitisdeployingitswealthforstrategicforeignpolicypurposes.
Thispracticeinvolvesbothcarrotsandsticks.InAsiathecarrotshaveincludedpipelines,railwaysand
trunkroadsthatChinahasprovidedaroundtheregion,mainlytosupplyitsowneconomywithraw
materials,butwithwiderbenefits,especiallyforitspoorerneighbours.
Butthereisalsocoercion,evenifthisisoftencounterproductive.In2012,forexample,Chineseofficials
indirectlyencouragedaconsumerboycottofJapanesegoodsasJapanreasserteditsclaimtodisputed
islandsitcallstheSenkakusandtheChinesecalltheDiaoyus.Customsofficialstightenedupinspections
ofJapaneseimports.YetJapandidnotbackdown.Instead,itgotclosertoneighboursintheregionwho
alsoobjectedtoChineseaggressiveness,saysMrReilly.InthesameyearChineserestrictionsonbanana
importsfromthePhilippinesledtoabacklashamongFilipinosthatbroughttheircountrycloserto
America.
LastsummerChinesebusinessesinVietnamwereattackedbylocalsafteraChineseoilfirmputarigin
contestedwaters
BonnieGlaseroftheCentreforStrategicandInternationalStudies,athinktankinWashington,says
Chinamayevenbepursuingeconomicintegrationtostrengthenitsleverage.Chinasstrategyisto
weavetogetheranetworkofeconomicinterdependence.Itisusingthecentralityofitspowerto
persuadeothernationsthattochallengeChinaonterritorialissuesissimplynotworthit.Butits
neighboursarenotsittingplacidlyby.LastsummerChinesebusinessesinVietnamwereattackedby
localsafteraChinesestateownedoilfirmputanoilriginwatersthatbothcountrieslayclaimto.
Sincethen,Americanofficialssay,itsalliesintheregionhavebecomesomewhatkeenertomoveinto
AmericaseconomicorbittokeepChinaincheck.JapaneseinvestmentinChinafellto$9.1billionin
2013,from$13.5billiontheyearbefore.AtthesametimeJapansinvestmentinASEANmorethan
doubled,to$23.6billion.Myanmar,untilrecentlyasatrapofChina,isopeninguptotheWest.
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EveninSingapore,whichhasabigethnicChinesecommunityandseesitselfasaculturalbridge
betweeneastandwest,Chinasconducthasraisedeyebrows.SimonTay,chairmanoftheSingapore
InstituteofInternationalAffairs,saysitstreatmentofcountriessuchasVietnamshowsthatpolitical
integrationhasfailedtomatchtheeconomicsort.Thepostwarperiodhasprovidedasenseofstability
thathasenabledAsianstomindtheirownbusinessliterallythebusinessofbusiness,hesays.There
isuneaseaboutaChinacentricregion.
SomeeconomistssayChinasassertivebehaviourmayalsobeawayoftestingwhetherAmericas
economicpowerintheregioniswaning,asmanyofitsleadersbelieve.TheythinkthattheChinesemay
wanttoreestablishtheoldhierarchicalsysteminwhichtheywereclearlyincontrolbutatthesame
timefeltasenseofnoblesseoblige.
TwostrikinghintsofthiscameduringXiJinpingsfirstvisitsasChinaspresidenttoASEANcountrieslast
yearandtotheIndianOceaninSeptemberthisyear.Onbothtourshespokeofhisdesiretocreatea
maritimeSilkRoadthatwouldbuildportinfrastructureandestablishshippingcooperationwith
smaller,friendlynationslikeCambodiaandSriLankaalongancienttraderoutesestablishedwhenChina
wastheundisputedhegemonicpower.HealsoannouncedthecreationoftheAsianInfrastructure
InvestmentBank,arivaltotheJapandrivenAsianDevelopmentBankbutwithdeeperpocketsatleast
$50billioninstartupfunds.
Yetforallitsswagger,Chinaisnotimpregnable.Itseconomicgrowthlooksincreasinglyunsustainable,
andmostofitspeoplearestillrelativelypoor.Thoughthereisamiddleclassboomincoastalcities,the
countrysaverageGDPperpersonissomewherebetweenthatofthePhilippinesandMalaysiaandstilla
longwayfromSouthKoreaorJapan.TheCommunistPartyknowsthat,toalargeextent,itslegitimacy
restsoncontinuingtoimprovelivingstandards.
Fromsilktoservices
Thatmeanstakingeconomicreformfurtherandincreasingthevalueofgoodsandservicesproducedin
China,hopingtoemulatethesuccessofSingaporeandHongKong,whichgeneratefarmorevaluefrom
servicessuchasbankingthanfromsellingmanufacturedgoods.MrXihasmadereformstotheservice
sectorapriority.HemustalsobecastingawaryeyetoNorthAmericawhererobotics,3Dprinting,mass
customisationandothernewtrendscouldputpressureonAsiasfactorymodel.
Therearesomepromisingalternativestomanufacturing.LastsummershugeIPOofAlibaba,aChinese
ecommercefirm,underscoresthepotentialofdigitalbusiness.Tencent,anotherChineseinternet
company,hasmorerevenuesandprofitsthanFacebook.LisaHansonofNikoPartners,aSiliconValley
basedtechconsultancy,sayscompanieslikeTencenthaveturnedChinaintoaworldleaderinonline
gaming.
Oneofthebesttoolsforpromotingeconomicreformistousefreetradeandforeigncompetitionto
forceoverprotectedserviceindustriestomodernise.JiangZemin,thepresidentatthetime,understood
thatwhenhetookChinaintotheWorldTradeOrganisationin2001.Japansprimeminister,ShinzoAbe,
hasoftenmadethesamepointwhenjustifyinghisdecisiontojointheTransPacificPartnership,afree
tradegroupingledbyAmerica.ThebigquestioniswhetherMessrsXiandAbearepreparedtouse
PacificwidetradepactstomaintainthatreformistzealandwhetherAmericahasthepoliticalwillto
accommodatethem.
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