ANALYSIS OF CHINA’S COMPARATIVE ADVANTAGE FROM THE ADIDAS CASE

Introduction

Comparative advantage as the cornerstone of the theory of international trade， not only has an important theoretical significance， but also is the important basis of countries to develop foreign trade policy. China is relying on labor advantage to win the title of world’s factory. But with the trend of economic development，it only can be said that China is the world factory on comparative advantage of cheap labor support. Therefore， it is necessary to further understand the comparative advantages of China’s labor-intensive products， a positive response to avoid falling into the comparative advantage traps. This essay will discuss the problems with China’s comparative advantage together with the analysis of the current issues Adidas and finally give suggestions

Current issues

In Oct.2012， Adidas closed its only company-owned apparel factory in Suzhou， Jiangsu province， in a bid to improve efficiency in Chinese market. Workers at the factory suspect the closure might be caused by 400 to 600 yuan rising salaries from about 1，100 yuan （$175） before 2010. However，according to Chen Qi， an Adidas Greater China spokesman， there was no direct link between the closure and salary hike. The factory currently employs no more than 200 people. Adidas has opened more than 6，000 stores since it entered the Chinese mainland market in 1997. Boosted by strong sales， the company's revenues in China went up 14 percent in the first quarter of the year to reach $4.62 billion， while net profits rose 38 percent to $351 million.

Apart from Adidas， some American enterprise has adapted some changing strategy. According to the Wall street hournal， US branch company in China is taking measures to offset the increased cost of labor and export， even some are considering to move out of China. Ford will move 12000 jobs back to US from Mexico and China. Starbucks transfer its ceramic cup manufacture from China back to US.

From these cases above， it is necessary to discuss whether China still has comparative advantage in labor-intensive product.

Problems when judging

comparative advantage

Comparative advantage elements

In China when it comes to comparative advantage， people happen to coincide to say that China's labor price is low， so product cost will be reduced， resulting in commodity price’s competitiveness in the international market. However commodity consist multiple components， the comparative advantage should be judged by comprehensive elements instead of the individual one. Besides labor The influence factors of commodity prices include capital， resources and geographical factors. When expressing in function， commodity price P = （L， K， R， G）， i.e.， P = KL + K + R + G.P is commodity prices， L for labor， K for capital， R for resource， G for geographic elements.

Figure 1 illustrates the role of transportation cost. Assume that a value theorem was established and transportation cost increases with the distance （to upper right inclined）. When producer is in A area， the local transportation cost is zero， so the profits is （P - A 'A） > 0； When moving to the right， the rising transportation costs cut profits， to B area， （P - BM） = 0； When to C area， （P - CL） < 0， namely in C area， as the transportation cost more than the market price. As shown in graph， although production cost is lower in A than that in C， （AA '< CC'）， A area has cost advantage， but when into C area， due to transportation costs make LC > CC '， higher than the production cost in C， thus losing the cost advantage.

Range of comparison

It is necessary to compare with the developing countries not only with developed ones. Traditional discussions only emphasis on the comparison with developed countries which conclude that China has advantages in labor-intensive division of labor； for the less developed countries， China has comparative advantage in capital and technology intensive division of labor. But this analysis fails to consider countries at the similar developing levels with us. From the current trend of world economy and trade， Asia， Africa and Latin American countries generally apply open policy. In initial stage of economic development， they have resource-intensive and labor intensive products to participate international division of labor， so resource-based and labor-intensive processing trade on the global market faces fierce competition. Especially the surrounding developing countries have similar export trade structure with China. Currently， a fierce competition between China and Southeast Asian countries， the export industry is mainly concentrated in the textile and garment industry， and mechanical electrical equipment manufacturing industry. If we do not adjust and optimize the structure of China’s export products， the original part of the international market could easily be given to other developing countries.

Misunderstanding of quality

Elements of the comparative advantage not only depend on the extent of endowment， but also the efficient use of the elements. Labor， for example， is known abundance and cheap in China， but its productivity is not necessarily an advantage. It should be analyzed by quality namely the elements efficiency price： quality = price/efficiency of factor .Thus can be concluded Comparative advantage = quality * amount of factor

Misunderstanding of the phenomenon and essence

It is necessary to see through appearance to perceive the essence. It is due to that the comparative advantage source from two aspects： natural endowment and human factors， which consists both positive and negative aspects. That improve the factor abundance to create comparative advantage through the advance of technology is the positive as pect. However human factors sometimes bring negative affect. For instance， China’s low labor cost is to some extent due to the working overtime in poor conditions. In the short term， this advantage will make a difference but not in long run. For example， many countries have the moral issues in this regard to the Chinese launched an attack， which results the competitiveness of labor-intensive products of China declined.

Suggestions and recommendations

Poper understanding theory of comparative advantage

1） In the analysis of comparative advantage， it should be considered the comparative advantages of the various elements of the overall.

2） Comparative advantage has a comparable object comparison， not only developed countries， but also similar developing level ones with China， in order to predict accurately appropriate policies.

3） Correctly understand the connotation of comparative advantages. It is necessary to pay attention to the quality as well as quantity. China can improve education and technology investments such elements with real comparative advantage.

adjustment of the industrial structure

In new economy， to complete the target of economic development and implementation of comprehensive well-off society， industrial structure would have to advance with times. Therefore， we must speed up the adjustment of industrial structure from the low value-added to high value-added， in order to adapt to the needs of the domestic and international competition.

Improve education and technology

The advantage of abundant labor will not directly transfer into advantages of trade. Labor-intensive industries can not be long-term as the lead industry driving the domestic industrial structure upgrade. Conversion key is high-tech. Currently， Chinese manufacturing grows quickly， but the low value-added manufactured goods， is clearly insufficient competitiveness and in a very disadvantageous position in international trade. Especially in high-tech fields， even further behind. Developed countries have absolute advantages in life sciences and biotech， information tech， new material and other high-tech fields， which play an significant role in economic and trade activities through creation of intellectual property， possession， licensing and transfer huge economic benefits. Therefore， education and tech to enhance the premise is the key to rid the country of the traps of comparative advantage.

Summary

As can be concluded， it is easy to fall into the trap of comparative advantage to determine a country’s trade structure based solely on the resource endowment， and attempting to export with labor intensive oriented. Otherwise， from the Adidas case， it is indicated that China’s labor intensive comparative advantage is changing. So in order to adapt to the change and transfer it more efficiently into competitive advantage， measures above should be taken.

（作者系上海對外貿易學院 國際經貿學院本科學生）

Reference

1 lv Chuncheng，2002，InternationalTtrade Theory[M]， Beijing ，China finance and economics public

2 Dong Jiadong， 2000， International Economics[M]， Beijing， China finance and economics public 3 Samuelson，1999，Economics 16th[M].Xiao Tan translation edition，Beijing，Huaxia public

4 Dominick Salvatore， International Trade， 8th edition ，Beijing ， Qinghuag university public

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