The Relativity Of Comparative Advantage Of Low Labor Cost And The Absoluteness Of Technological Advantagesthe Relativity Of Comparative Advantage Of Low Labor Cost And The Absoluteness Of Technological Advantages

The Relativity of Comparative Advantage of Low Labor Cost and the Absoluteness of Technological Advantages

Introduction:

Under the atmosphere of globalization of economy, the opportunities for the manufacture enterprises of fewer technologies located in less developed countries and areas to survive and develop have emerged. The opportunities are not kindly offered by the competitive world leading producers but created by “Comparative Advantages of Low Labor Cost”.

Analysis of the Relativity of Comparative Advantage of Low Labor Cost:

For example, in China, during the recent twenty years, the words of comparative advantages have been repeated for hundred times either in a lot of local government reports or in some newspapers. Actually, the comparative advantages in China are of low labor cost most of the time. Compared with the labor cost in Europe and North America, the labor cost is much lower in China. And another important factor to make the low labor cost to be an advantage is of the technology. In China, the comparatively matured industrial technology that is not advanced but meets the requirements, and the reachable basic education resources that equip the labor with the necessary technologies to process have converted the low labor cost into an advantage. Therefore, in Africa, there are a lot of countries with low labor cost, but their low labor cost cannot be a comparative advantage because they are without the comparatively matured industrial technology and the reachable basic education resources.

However, from the above explanation, it can be seen that low labor cost also delivers another piece of information that low labor cost is of basic technology and education. This is the limits of a low labor cost that it can only deliver basic or non-advanced process not only for manufacture industry but also for service industry. For manufacture industry, China can be a very good example, in the south of China, especially in Guangdong province, a lot of factories located there employing a great number of workers, most of whom are from countryside. The products of these factories are most of light-industry products, such as garments, shoes, bags, toys, home electronic devices, and etc, most of which are for OEM for export. “Made in China” all over the world has been an explicit evidence for this. The reason for this is that the local matured industry technology and the labor with necessary education.

For the service industry, India can be cited. Many of the global top companies have set their calling centers in India to deliver the customer inquiry service. Even the leading accounting firm, for example, PricewaterhouseCoopers allocates its individual income tax calculation work over to its Indian office to process but leave the advisory work with higher margin at its New York office to process. The reason for this is that the local labor is more and better western educated.

From above example, it can be seen that none of them are enjoying a complete margin of the product or service but a very limited margin. The largest benefit from the comparative advantages in both countries is of the great numbers of employment opportunities.

Meanwhile, with a dynamic view over the world, the other developing countries once make the basic industrialization and the education available, a competition of comparative advantages will be on show. This will cut off the current limited margin and the employment opportunities from the current comparative advantages. Therefore, the current comparative advantages could be the future disadvantages compared with same competitors.

China’s regions have experienced a process of re-formation of their comparative advantages since the reform. The eastern region continues to be comparatively advantaged in physical and human capital, while the central and western regions remain comparatively advantaged in natural resources and labor forces. The market-oriented reform has motivated the regional economic development to follow comparative advantages in each region through adjusting its industrial structure. However, the traditional forge-ahead strategy still plays a role to a certain extent. That is, the market development has not reached the extent to which resources are efficiently allocated. In the reform period, the regional disparity of returns to capital has converged owing to its high mobility, whereas the regional disparities of returns to human capital and labor have been large and have widened due to the institutional obstacles preventing workers from migrating freely.

The objective of the reform and opening-up is to lend a sustained impetus to long-run economic growth by exerting comparative advantages of regions. Free mobility of factors is the prerequisite to implementing the strategy of comparative advantage, and tends to reduce regional disparities in returns to factors. In order to benefit from the accession of WTO, China needs to continue adjusting its industrial structure and developing markets of products and factors.

According to the ETA classification system, of the 1631 SITC manufactured commodities where China enjoys comparative advantage in the world market, 660 commodities are unskilled labor intensive(ULI), 600 are technology intensive, 334 commodities are human capital intensive and 94 are natural resource intensive. The maximum advantage for China in 2003 lies in the category of ULI manufactured goods. In comparison with 2000, the number of technology intensive commodities registers an increase while that in the category of ULI fall in 2003.

China’s comparative advantage in terms of factor Intensity based on ETA

For the 600 commodities classified as technology intensive using the ETA system, a further delineation into medium and high technology is undertaken using the hwwa matrix. 49 commodities are thereby identified as high technology and 210 as medium technology intensive manufactures.

China’s comparative advantage in terms of factor intensity based on WDI

Interpretation of the Absoluteness of Technological Advantages:

The comparative advantages in China do not only help the local enterprises to survive and develop but also attract the overseas top companies, especially the manufacturers, to move its production base into China to leverage the local comparative advantages to increase its margin. Although the machinery