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Competing with China?
Saturday, 18 February 2012 08:09

As a recent returnee to Australia from Asia, I am constantly asked whether Australia and other Western countries can still compete with China.

What is the answer?  In fact, this question basically rests on fallacious foundations, as I discuss in this article.

Let's first take a look at Australia's merchandise imports from China.  Two of the top four items are clothing, and prams, toys, games and sporting goods.  In fact, these are mere lower skilled, labour intensive products.  Same goes for the other top four items, telecom equipment and parts, and computers.  China merely assembles these goods, it has very little input into the design and production of high quality components which mainly come from the US, Japan, Korea and Taiwan.

So here you have the China manufacturing story.  At this stage, China is mainly specialised in the production of lower skilled, labour intensive goods, products at the bottom of the scale.  It is true that Australian and other Western countries can no longer compete with China for these types of products.  At the same time, our consumers benefit from much lower prices thanks to the lower costs of production.

But to understand the full story, you must look at exports to China from Australia and other Western countries.  Australia's main exports to China are natural resources (like iron), international tourism (Chinese tourists now spend more money in Australia than tourists coming from any other country) and higher education (China sends the highest number of students to Australia).

Australia has a "comparative advantage" in all of these exports, and gains greatly from this trade whereby we sell China high value added goods and services, in return for buying China's lower value added products.  A similar story could be told for other Western countries.  Here are just a few examples -- the US and Europe sell China planes, Germany sells sophisticated capital equipment, France and Italy sell luxury products, and so on.

So it makes little sense to think in terms of competing with China.  We are both specialising in different sectors, and gain from this trade.  In fact, the gains from trade are greatest when trade is between countries which are different.  It is countries like Bangladesh or Cambodia that compete head-to-head with China for clothing exports.

Should Australia be worried about anything in its trade with China?  Yes, most emphatically.  We should be most concerned with those countries which are competing with us for China's market.  Australia has developed a very good reputation as a natural resource exporter, but we are not the only country exporting natural resources to China, and additional competing supplies will come on stream in the near future.

Australia is a favoured tourist destination for Chinese tourists.  But again, our tourist industry must be competitive to secure return visitors, and it must make the right product pitch.  Chinese tourists seem to be more interested in night life and shopping, than the mysteries of the outback.  They also demand very high quality service.  Australia also has to remain a competitive destination for international students.  The Philippines, a country with the world's third largest English speaking population, is now emerging as a competitor for English language training.

So the main challenge for Australia is remaining competitive as a supplier to Chinese markets, rather than competing with China.  And being competitive means having the right product quality and price, as well as strong cross-cultural skills to understand our customers.

But trade's comparative advantage is a dynamic concept.  For example, in the post-war period, Japan rose from being a low-tech producer of transistor radios to a very high-tech producer.  China is now on the same upward path with its high investments in research and development, and education.  High schools students from Shanghai beat Australian students hands down when it comes to literacy, numeracy and scientific ability, and they are increasingly competent in foreign languages, something which is regrettably a rarity in Australia.

In short, the race is never fully won, as Japan is now finding out.  Korea is quickly catching up to Japan, and its enterprises like Samsung and LG are more competitive than Japanese enterprises in the some sectors.  Australia has a lot of work to do to stay ahead of the curve.  But this work should never mean protectionism.  It must mean skills, ideas, innovation, entrtepreneurship and efficiency.  It is up to us.

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