Has China lost its low cost hub status?

Thu, 28 Nov Pre-Open

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China is a manufacturing hub. Ample presence of low wage laborers has made Chinese products competitive. In addition to that, artificially keeping the value of Yuan low makes the dragon nation an export hub. As a result, Chinese products have flooded the global markets. And India is no exception. Most low end manufacturing products are being imported from China. And this has affected the small & medium enterprises (SMEs) in India. Products manufactured by SMEs are in direct competition to the ones that are being imported from China. Thus, most SMEs are suffering and have gone into losses. This has impacted the livelihood of unskilled laborers.

Many are of the view that quotas or tariffs should be levied on Chinese imports. This may avoid dumping and protect the domestic industries. However, this may result in trade barriers amongst nations. Thus, Mr Nair, advisor to PM, is of the view that instead of spinning a regulatory web Indian units should increase their competitiveness. It may be noted that competitiveness comes not only from pricing but also from product differentiation. So, if Indian counterparts can manufacture products that are superior in quality it may find takers even if the pricing is slightly on the higher side. Something similar seems to be already happening in the Indian power equipment space. While the Chinese equipments are cheap and their turnaround time is also low, quite a few power producers prefer to stick with domestic counterparts for the want of quality.

As highlighted earlier, the main reason for Chinese competitiveness is low wage rates and artificially low currency. While low wage rates is a natural competitive advantage since it is a populous country; however keeping the currency value low to boost exports is a artificial advantage created by the People's Bank of China. Not to mention the export benefits that companies might be receiving there for earning foreign exchange.

However, it may be noted that Chinese competitiveness is limited to low end products which are labor intensive and not technology intensive. Thus, China is more of a threat to India and other emerging economies and not US which has manufacturing competitiveness in technology oriented products.

As a result, Indian SMEs have been largely impacted. Most workers have lost their jobs. Nonetheless, if the government ensures that there is skill development and better literacy, India can compete with China at least to some extent. This may pose a threat to Chinese supremacy. Another factor which indicates that China's advantage may wipe out in near future is the fact that wages in the dragon nation have been on a rise in recent times. As a result, manufacturing jobs have already started shifting to other low wage nations.

However, it may be remembered that the currency advantage is likely to stay with China as the government is unlikely to remove the peg. And as long as the peg is in place Chinese products will continue to flood global markets including India. Quotas and tariffs are the possible ways through which countries like India can avoid dumping from China.