Since 2008, the big worry with the China export sector has been the fall in international demand and the ability of Chinese firms with thin margins to stay in business and keep employing folks. In the short term, this is still a concern.

In the long term, however, the drop-off in global demand may actually be a good thing for China industry. So says Professor Ang Yuen Yuen, who teaches at Columbia University (SIPA).

Excellent article. Here is her thesis:

When China’s labor-intensive industries emerge from their metamorphosis, we should expect to see firms that are larger, that invest more in product innovation and design, and that hold more sway over business and trade policies.

If the short-term worry has been about export demand and employment, the long-term economic development plan in China has been all about moving up the value chain and capitalizing on innovation.

Professor Ang notes that wage differentials between China and much of the rest of Asia are already significant. The days of cheap China workers (and cheap labor-intensive products) may be over:

“It’s a dying business,” said the owner of a garment factory I met in Zhuhai, a city in Guangdong province. Like many in his line of business, he is packing up. Lured by abundant cheap labor, investors flooded to Zhuhai two decades ago. Gone, it seems, is the heyday of T-shirts, toys, plastic flowers, tiles, hooks, springs, and the like. Today, the costs of manufacturing such items are lower in countries like Bangladesh and Vietnam than in Guangdong.

Apparel production is a prime example of China’s declining competiveness in markets dependent on low-cost labor. According to a study by the US consulting firm Jassin O’Rourke, labor costs in China are higher than in seven other Asian countries. The average cost for a worker is $1.08 per hour in China’s coastal provinces and $0.55-0.80 in the inland provinces. India was in seventh place, at $0.51 per hour. Bangladesh offers the lowest cost, only one-fifth the price of locations like Shanghai and Suzhou.

Textiles is a textbook sector that is usually used by economists when talking about economic development and the rise from labor-intensive manufacturing to a knowledge-based economy. Textiles was prominent in most of my graduate classes that dealt with growth theory, economic development, and trade theory.

Wages have been going up in China for quite some time, of course, particularly in the South. I started having clients complain about costs in Shenzhen/Zhuhai/Dongguan at least five or six years ago, and the trend has accelerated in recent years.

So this trend had been going on for some time, and then these industries were hit by the effects of the Great Recession, when demand from places like the U.S. went right over the cliff. The result:

For Chinese manufacturers, a long-term trend of rising costs coupled with a short-term export slump were unprecedented challenges. But the government and entrepreneurs are not idly sitting by as competitiveness slips. These adverse conditions have inadvertently propelled a long-delayed restructuring of China’s labor-intensive industries. As costs surge, Chinese producers are seeking higher value, new niches, and more influence over policymaking.

Sounds good. Of course, Professor Ang does not dwell on the short-term pain, but it should be noted that a lot of exporters went under and a lot of people lost their jobs.

It is fascinating, though, to see how Chinese industries are maturing and becoming more competitive. Professor Ang focuses on competitiveness, R&D, and a more aggressive approach to government relations:

Larger firms are more capable of pooling resources for research and development, which is the key to China’s aspirations to climb the value ladder.

Compared to producers in the US and Europe, those in China are weakly organized and passive.

This could change. As surviving firms gain in size, Chinese businesses may exercise more bargaining power vis-à-vis the Chinese government and foreign firms. Exercising a louder voice in politics at home and abroad could mean reduced uncertainty for Chinese exporters.

We’ve all been spending our time reading about Foxconn and local labor conditions, minimum wage hikes, the Honda strike, etc. All of this paints a picture of a rapidly-changing manufacturing sector, a transition that is obviously causing some short-term pain for many folks.

Professor Ang’s comments suggest that there is a bigger picture here that should be kept in mind, and that once the painful adjustment is over, China firms will find themselves in much better shape than before, and even better able to compete globally.