China’s Comparative Advantage of Low Labor Costs: Think Again

globalbizComparative advantage is about nations leveraging their unique resource advantages. There was a time when, for China, that referred to cheap labor. There was once a notion that good manufacturing jobs were “shipped” to China because wages were so low. This narrative still bubbles up in today’s political rhetoric. However, today’s news also highlights that Foxconn, the World’s largest contract manufacturing company, is replacing 60,000 workers with robots. Wages in China do remain below those in other countries. However, the comparative advantage is no longer about cheap unskilled labor. In fact, China has produced about 60 million college graduates in the last ten years. At this rate, the World Bank predicts there to be up to 200 million by 2030. This is greater than the entire U.S. workforce. In short, they seek a comparative advantage based on human capital as opposed to generic labor. Cheap labor, in turn, may be replaced by capial investments (Foxconn seems to be on the leading edge in this trend). A question for a global strategy class might be how should other countries respond? Would an education arms race help or hurt comparative advantage?

Contributed by Russ Coff

1 thought on “China’s Comparative Advantage of Low Labor Costs: Think Again

  1. Two contradictory comments:

    1. I wonder if China has the necessary complimentary assets to the human capital they’re building to make this strategy work. In particular, I wonder about whether capital markets in China will get assets to those who can use them productively, now that that group of people will be more widely distributed across social backgrounds.

    2. I realize that it’s common practice, but I wonder how much it makes sense to talk about one thing called “comparative advantage.” I submit that the change in the availability of particular kinds of human capital China is contemplating will help some firms, hurt others, and have a negligible effects on others; to the point where considering the impact on something called national comparative advantage obscures most of what’s interesting about the situation.

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