When multi-nation, free-trade agreements began to emerge in the 1980s, they were accompanied by ample criticism that warned of detrimental consequences for the labor forces of the industrialized Western markets. Manufacturing in higher-wage countries, it was speculated, would systematically be relocated to lower-wage jurisdictions, and good-paying jobs would be lost in the process.
Probably the most widely known trade agreement is NAFTA, the North American Free Trade Agreement, which was signed in 1992 and came into force in 1994, creating a trilateral trade bloc between Canada, Mexico and the U.S. The number of nations and regions entering into similar trade agreements has since exploded, and today a dizzying array of acronyms exists for these multilateral trade blocs. You can see a list of them here.
Following on the heels of NAFTA’s implementation came the arrival of Maquiladoras, Mexican factories close to the U.S. border to which raw materials and parts were shipped and subsequently assembled into a finished product ready for export. Many of these factories were owned by American manufacturers that moved their plants from the U.S. to Mexico, and the speculation about the loss of American jobs became a reality.
The Maquiladora model of wage arbitrage in manufacturing grew rapidly. However, it was a trade structure between neighboring states that has since been overtaken by trade between non-border states. And nowhere is this growth more evident than with China.
The 2001 entrance of China into the World Trade Organization (WTO) was a very important event for the economic development of the country and followed the establishment of permanent, normal trade relations with the United States in 2000. These two events recognized China as an equal partner in the world economic community and added momentum to the pace of the economic globalization process already underway.
Over the decade following China’s WTO membership, the country has emerged as a global trade powerhouse, expanding its export sector by leaps and bounds as hundreds of foreign companies rushed to exploit wage and cost differentials by shifting domestic production to the Chinese mainland.
Much of the criticism directed at the loss of jobs during this time had been countered with the so-called “They sweat, we think” argument, the gist of which goes something like this: with the growing importance of the FIRE (finance, insurance, real estate) economy and technology in the developed world, jobs with low barriers to entry and lower wages had become less desirable. As such, the manufacturing jobs (sweat) sent abroad would be replaced with jobs that required highly skilled or educated (think) employees. The specialized skills needed to fulfill these positions created a higher barrier of entry, called for higher wages, and would secure these jobs within an economy. The mundane task of product assembly, itself an artifact of the industrial age, was no longer needed in the information age.
A component in this argument is the vital role of research and development (R&D). After all, many of the goods that are eventually manufactured in China and brought to market, or the processes that are used in product development, are the consequence of an idea that ends with a new gadget, drug or killer app, or the improved version of an existing one.
And this is the spot in the sweat vs. think fairytale where we meet up with the big bad wolf; China is emerging as an R&D hub.
A report published this month by Deutsche Bank Research reveals that China is now a net exporter of R&D services. China is about ready to huff and puff and blow down the house of cards erected around the developed world’s R&D export model.
Space constraints do not allow for an in-depth look at the report’s findings, but here is a brief outline of some of its facts and figures:
* Over 90% of the world’s leading technology companies not only manufacture worldwide, they also carry out research and development worldwide.
* Emerging market economies have more than doubled their R&D spending in the last 10 years, to 1.2% of GDP, almost half the 2.5% spent by Western economies.
* The traditional R&D centers of Japan, the EU, and the U.S. are assigning a significantly higher share of R&D contracts to external sources.
* Indications of a fast-growing transfer of knowledge and innovations from emerging markets back to industrial nations are surfacing.
The last item above includes an interesting twist on the way in which this transfer is taking shape, known as “knowledge-augmenting.” This is a strategy where emerging markets are developing technologies that are planned specifically for use in industrial nations. Assisting countries such as Germany and the U.S. to enhance their technologies will, in turn, result in further reliance on the manufacturing capabilities of countries such as China. A nifty little trick.
The report, titled “International division of labor in R&D: Research follows production,” discusses many other nuances and aspects to the story (India is an up-and-comer) and is definitely worth a read. It paints a picture of emerging markets in general, and China in particular, that will likely challenge the generally held view that the primary role of these markets is to supply the world with cheap, unskilled labor.
The U.S. and other technology leaders will likely be sweating as they wonder what the emerging world economies are thinking next.
