China's rise represents competitive challenge, opportunity for Asia-Pacific

Bangkok – China represents a challenge for all countries in Asia-Pacific as China's top export products are recording large gains in market share, the United Nations Economic Commission for Asia and the Pacific reported in its latest Survey.

The Economic and Social Survey for Asia and the Pacific 2007 says while China's strength is as a hub for assembling technology-intensive intermediate products imported from the region, it is yet to move up the technological value chain.

But China's export strength has grown and is reshaping trading patterns in the Asia-Pacific region. China has become the world's third largest trading nation, ranked behind the United States and Germany and accounting for 7% of world trade.

The UNESCAP study shows all Asia-Pacific countries faced rising competition from China. In Indonesia, the electrical machinery and equipment sector lost ground to China's exports in third country markets. In Japan, besides electrical machinery, optical and photo industries as well as areas of iron and steel were also under competitive threat.

"China represents either a direct or potential export challenge for all countries in the region," the Survey said.

In the apparel industry, Mongolia was already facing a "direct" challenge from China's exports in third markets, while Indonesia's and the Philippines' apparel industries also faced competitive pressures.

"Although labour-intensive goods account for a declining share of China's exports, they nonetheless continue to account for many of the country's main export sub-sectors, such as apparel, knitted clothes, furniture, toys and footwear," the Survey said.

At present further market share gains by China's textiles into the United States and Europe have been slowed by recent quota agreements with the European Union and United States that limit Chinese textiles exports until 2008.

But this provides regional textile exporters with just a breathing space. Textile exporters need to respond. "Unless regional exporters can plan and implement strategies to counter (Chinese textiles exports) free trade in these goods may exert considerable challenges," the Survey said.

Labour-intensive production and processes in China, as well as the chance of achieving economies of scale in production through both exports and domestic sales are a major lure for foreign investors to China.

"Countries in the region need to sharpen their competitiveness in order to compete on a level playing field with China and other economies," the Survey said.

Key requirements for regional exporters should include the 'hard' infrastructure in transport of ports, roads, and airports, while also ensuring 'soft' infrastructure such as adequate financial sector facilities and simplified rules and regulations are in place.

The Survey says one way to counter the competition is for countries to focus on niche segments in markets. Cambodia, for example, successfully promoted "socially responsible labour practices" and launched the "Better Factories Cambodia" project to enhance its labour standards. Sri Lanka has focused on promoting quality products and innovation.

The Survey notes that China too is facing problems in its production cycle. "Wages have been rising in the southern coastal regions of China where the majority of unskilled labour-intensive production has been based." The result has been evidence of relocation of coastal production from China to lower wage-cost countries, such as Viet Nam and Cambodia," the Survey noted.

But there remain wide-ranging opportunities for Asia-Pacific countries to export to China. As well as technology-intensive intermediate products, there remain clear opportunities for countries to export to China in natural resource-related and agricultural products.

"High and middle-income regional economies have great opportunities to export to China. The highest overlap is for Japan, the Republic of Korea and Singapore, followed by the middle-income ASEAN (Association of South East Asian Nation) economies of Thailand and Malaysia," the Survey said.

UNESCAP says ASEAN needs to broaden its regional market by reducing trade barriers in the Asia-Pacific to strengthen opportunities for regional exporters. "ASEAN countries should move rapidly to deepen and consolidate economic integration in order to form an integrated common market and production base," it said.

As the region's oldest and most comprehensive annual review of economic and social developments, UNESCAP's Economic and Social Survey of Asia and the Pacific provides the only independent source of analysis covering all countries in this vast and diverse region, and considers both the social and economic spheres of development. The 2007 Survey, entitled "Surging Ahead in Uncertain Times," looks at the most critical issues, challenges and risks our region faces in the months ahead.

Headquartered in Bangkok, Thailand, UNESCAP is the largest of the UN's five Regional Commissions in terms of membership, population served and area covered. The only inter-governmental forum covering the entire Asia-Pacific region, it aims to promote economic and social progress.∞