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Competition on quality key to export growth

Author  :  Li Kunwang, Jiang Wei, Song Ligang     Source  :    Chinese Social Science Digest     2014-07-18

China transformed from a relatively closed economy to an international trade giant during its more than 30 years of reform and opening-up, leading the terms “Made in China” and “Processed in China” to take the world by storm.

But high-speed growth hasn’t been matched by high quality and efficiency. Although China has grown into a global trade heavyweight, it punches below its weight in the international division of labor and value chain. China’s trade structure, quality of products and trade profitability have never quite approached the world’s elite level, suggesting it still has a long way to go in becoming an all-round trade power.

As China joins the ranks of middle-income countries, some factors underpinning fast economic growth are undergoing changes. These include but are not limited to decreasing efficiency of investment, rising prices of energy and raw materials, shifting population structure, narrowing advantages in cheap labor and mounting external pressure exerted by the global economic imbalance.

This extensive export development model is increasingly difficult to sustain, meaning China must alter its development model and strategy in foreign trade.

Following the advancement of economic development, there is an ever-growing demand for high-quality products. It is therefore unadvisable to foster competitiveness of products on price alone because low-price competition is not a long-term option to facilitate exports. Only by constantly improving product quality and competing on quality can sustainable export growth be achieved.

Economists interpret “product quality” as a concrete incarnation of a given product’s use value. Simply put, quality refers to whether a product is “good or bad.”

A review of existing literature reveals that limited research has been conducted into the quality of China’s exports. Although a number of scholars from home and abroad have explored changes to China’s trade structure and technical upgrading in recent years, none has determined whether or not the quality of exports has improved.

With theoretical development in the field of international trade, the vertical product difference model has received more and more attention. In recent years, some scholars have incorporated quality difference into the New-New Trade Theory, also known as the Firm Heterogeneity Trade Theory, and coupled differences of productivity with those of quality.

Researchers concluded that the more productive firms are, the easier it is for them to afford high costs needed for producing high-end products. As such, they can export higher-quality products at higher prices.

Empirically, many scholars have probed changes in the quality of exports and influencing factors. As far as China is concerned, some researchers have found that the country has seen a sharp decline in the quality of export products since its entry into the World Trade Organization (WTO) in 2001.

Yet neither theoretical nor empirical investigations offer further explanation for China’s comparatively low quality of exports.

China’s economy is flourishing, so why has its quality of exports slumped rather than show any sign of improvement? Why is staggering export growth accompanied by decreasing product quality?

To answer these questions, this study will give a microscopic explanation about why and how the quality of China’s exports is slipping from the standpoint of exporters. There is only one similar reference available: a 2011 study by Roberto Alvarez and Rodrigo Fuentes on quality differences between new and existing exporters in Chile.

The duo discovered new Chilean exporters enter the market through non-price competition. Their product quality is higher than that of established exporters, thus pushing the quality of Chile’s exports to an increasingly high level.

This research would come to a completely opposite conclusion, thereby manifesting the particularity of China’s exports and meanwhile enriching existing studies. Taking the entry and exit of exporters as a point of departure, it will investigate how new exporters impact the quality of Chinese exports.

New exporters played a key role in China’s export boom and influenced the increment of the country’s export growth.

However, a large number of new exporters are not good at maintaining export relationships. Indeed, only 30 percent are able to survive amid stiff competition in the market. Most are price competitors supplying low-quality exports, withdrawing from the market shortly after their entry and consequently driving down the overall quality of Chinese exports.

If they manage to stay, it should be noted, the average level of quality of their exports will quickly converge to the market’s average level.

In addition, differences in strategy of entry are remarkable between enterprises of different ownership types and new exporters from different regions.

Private firms and those based in eastern China prefer to resort to price competition when making their way to the market.

It is therefore logical to conclude that many private enterprises from eastern regions are to blame for the declining quality of Chinese exports given they flooded the international market after China joined the WTO.

One reason for this export growth pattern is that Chinese exporters overemphasized the means of price competition while overlooking the non-price competition strategy that favors high-quality products generating long-term benefits.

Through the entry and exit mechanisms of exporters, this study reveals dynamic changes to China’s export growth and product quality. In light of the influence of new exporters on the quality of exports, it can be inferred how Chinese export enterprises enter the market, especially regarding non-price competition affects the performance of exports.

Furthermore, we can gain a clearer understanding of the deficiencies or mistakes in the current Chinese export pattern, thus providing inspirations for adjustment and transformation of the export growth model.

As the report of the 18th National Congress of the Communist Party of China proposed clearly, China should “ensure development is based on improved quality and performance, increase motivation for pursuing innovation-driven development, create new favorable conditions for developing the open economy and sustain long-term development.”

This will require China to not only balance domestic and foreign markets, but also strike a balance between quantitative expansion and quality improvement.

Chinese export enterprises, on the other hand, should reflect on their price competition model and how it influences their presence in the international market in an effort to phase out the traditional price competition strategy in favor of non-price competition.

Specifically, they should attach more importance to the quality of their products, increase input in research and development and employ quality-centered competition strategies to earn higher trade benefits.

Only when more enterprises begin to access the international market by based on quality competition can China’s export scale and quality be enhanced and can the country catch up with real trade powers.

 

Li Kunwang is vice-dean of the School of Economics at Nankai University; Jiang Wei is a PhD student at the Department of International Economics and Trade at Nankai University; and Song Ligang is an associate professor at the Crawford School of Public Policy at the Australian National University.

 

Translated by Chen Mirong

Revised by Tom Fearon

Editor: Yu Hui

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