It is not a surprising news that with few contract manufacturers in U.S, many businessman turn to China’s expertise and scale. And in an article of WSJ, James R. Hagerty mainly focuses on the toy manufacture market and claims that it’s no fun making toys and toasters in U.S. Truly, “made in China” products can be found everywhere in one’s life, and it seems that the manufacture industry in U.S has coming to fall. However, Is that really a bad thing?
I still remembered the first concept I learned from Econ102 Class, Comparative Advantage, which means that an agent could produce a particular good at a lower relative opportunity cost or marginal cost prior to trade compared with another agent. Actually, the law of comparative advantage explained why countries engage in international trade, both sides could benefit through trading due to their comparative advantage.
While Ricardo’s comparative advantage model mostly applies to the good trade, developing an industry could be viewed at a similar way. Compared with U.S, China’s manufacture industry has at least two advantages: lower cost of labor and less regulation. While lower cost of labor make higher profit possible, less regulation means that Chinese manufactures could produce as many and as variety things as they want without too much restrictions. For example, they do not need to worry about the pollution from production process too much. Those two advantages make manufacture industry, especially for those knickknack and components, a comparative industry. Thus for China, it is wise and profit to take the advantages.
At the same time, U.S also benefits from turning their manufacture industry to China, as U.S could spare more time and effort on the industry they are good at. Say, R&D industry. It is interesting to see that many comments of this article are talking about how U.S’s governments and policies impede the development of its manufacture industry. But actually it is not a bad thing to get rid of “hindrance industry”. Each year China pay a lot of money to learn and buy the most advantage theory and technology from America.
What is more, though Ricardo’s comparative advantage model usually involves only two agents and two goods, it is not harm to imagine what would happen if we bring more countries and commodities in. Umm, actually it is going to be a quite complex question since we add more agents into a game and the strategy combination are going to increase exponentially…. But anyway, how about each country only produce the goods that it has comparative advantages compared with all others and get other commodities through trading, which will make the whole world a single market.