China’s Quest for Value

BEIJING – At the end of September, a new free-trade zone was launched in Shanghai, the aim being to mark the start of a new era not only of openness in investment, trade, and finance, but also of deeper Chinese integration into the global value chain. The zone promises to kick-start a new round of liberalizing reforms and help China’s economy adapt to the latest demands of globalization.

Over the next decade, global competition will come to be defined as competition over the global value chain. As the United States and other developed countries pursue “re-industrialization” and the Chinese economy’s low-wage comparative advantage diminishes, China must re-establish its competitiveness by positioning itself at the top of the global value chain, which implies the need to promote trade and upgrade its industrial infrastructure.

This requires, first and foremost, that China build a national value chain and elevate its manufacturing sector, which currently depends excessively on foreign research and development, imports of raw materials and semi-finished parts, and external demand. The sector’s domestic value chain is woefully weak.

The Shanghai free-trade zone promises to facilitate progress in three crucial areas. First, it should improve the manufacturing sector’s localization rate for parts and components by accelerating the transmission of raw materials and intermediate inputs and integrating export-oriented producers with domestic industries.