Source: Navarro, P. (2006) Report of "The China Price Project", Merage
School of Business, University of California-Irvine.
Major Components to Price Reductions by the Chinese Manufacturing
Among manufacturers, the "China Price" came to be known as a frame
of reference which can in many cases be 50% lower than other competitors.
Although lower wages in China are a important factor behind lower prices,
accounting for close to 40% of the price reductions, other factors,
many of which being perceived as unfair trading practices, are at play.
A whole range of export subsidies are provided, including subsidized
energy, raw materials and land, but also tax exemptions and loans (for
state enterprises) that "do not need to be repaid". Industrial clusters,
particularly in the toy and apparel industries, have emerged, conferring
net productivity advantages by having related activities located nearby.
This was particularly the case for the Pearl River Delta where manufacturers
are nearby each other and close to large international port terminals
such as Hong Kong and Shenzhen.
China was also
maintaining its currency
close to be pegged to the US dollar and under normal circumstances (due
to its very positive trade balance with the United States), its relative
value should be substantially higher. Counterfeiting and piracy are
also rampant, for which many manufacturers are not paying royalties
and license fees for products designed elsewhere. Foreign Direct Investments
(FDI) have also played a catalytic role in terms of financing the transfer
of advanced production technologies, managerial practices, marketing
and distribution strategies. Lax health, safety and environmental regulation
were contributing factors. However, the factors that played to
China's advantage, namely wages, are becoming less relevant in
light of the significant wage inflation that took place in the
late 2000s. From the 2010s, the competitiveness of the
Chinese manufacturing sector, as far as low labor costs are
concerned, is being challenged.