China Herald: Is moving up the value chain a good choice for China?

Sara Hsu

Typically China´s economic challenge is seen as moving from manufacturing to domestic consumption and services. Financial analysts Sara Hsu looks at the experience in Japan and the US and wonders in the Diplomat whether that is a smart move.

Sara Hsu:

China is attempting to restructure its economy, reorienting the manufacturing sector toward the production of more technology-intensive goods and expanding the service sector in order to move up the economic ladder from a middle-income country to a high-income country. Premier Li Keqiang stated in his Work Report at the National People’s Congress in March that China needs to rebalance away from investment and trade and toward domestic consumption and service industries. This is in line with the Fisher-Clark theory of structural change and a very common view that as economies modernize, they must shift from a focus on primary industry (agriculture), to secondary industry (manufacturing), to tertiary industry (services). Yet could moving up the value chain be a mistake for China?

Contrary to common belief that to move up the economic ladder a nation must transition out of a focus on manufacturing to a stronger emphasis on services, we proffer the cases of the United States and Japan. The U.S. and Japan have service sectors that contribute close to 70 percent of GDP and manufacturing sectors that represent about 20 percent. Manufacturing has moved abroad to places like China and Vietnam, where labor has been far cheaper, while the services sectors in these countries have become increasingly sophisticated and skill-intensive. Both the U.S. and Japan are now mourning the loss of manufacturing jobs overseas, as sources of economic growth have diminished and economic inequality has widened.

More in the Diplomat.

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