in his famous book the story of the pencil, leonard reed tells the story of a simple pencil made of wood, paint, labels, metal, and rubber, produced in collaboration with producers from all walks of life in different parts of the world. this is actually a phenomenon that is quite popular today -- the global supply chain. although the story of the pencil more than 60 years ago is a fairly rudimentary one, the fundamentals of the global supply chain are already there. what's more, from this story, the main factors that could distort and disrupt the supply chain are already apparent.
milton friedman, a fan of reed's prose, used the story in his more famous television series and bestselling book of the same name, "free to choose", and extended the meaning of the story. as always, friedman emphasizes that thousands of producers who don't know each other, whether they need a pencil or not, don't need the knowledge and information of others, and don't need a central planner, form the most effective cooperation through price mechanism to achieve the goal of everyone's benefit.
in the context of the new technological revolution and later versions of globalization, global supply chains are undoubtedly more complex than the phenomena seen in reed and friedman's time, but many of the factors that could distort the process are the same and have lingered for more than half a century. there are, of course, new elements that they didn't see or speak of at the time. from the point of view of china as the most important participant in the global supply chain, this paper reveals several factors that reed and friedman mentioned and did not mention that may interfere with the global supply chain, which shows the alarm of policy choices.
changes in preterm comparative advantage
under the open conditions, the position of a country's certain industries in the global value chain and the global supply chain will change due to the change of the country's resource endowment and comparative advantage. for example, when a country completes the dual economic development process of unlimited supply of labor, it will no longer have the comparative advantage in labor-intensive industries, and the position in the global supply chain will be adjusted accordingly. since the change of resource endowment happens gradually, the change of supply chain can also be gradual, which is enough for all parties involved to make necessary response in time, so that the whole supply chain can breathe out the old and absorb the new.
however, there is also the phenomenon that changes in a country's comparative advantage are premature in nature and thus have an impact on global supply chains too quickly and too early. in this way, this factor will form a real disturbance to the supply chain. china, known as the global manufacturing center, has seen its comparative advantage in labor-intensive manufacturing weaken too soon and too fast, which has resulted in such effects. reid and friedman didn't talk about it, and probably haven't seen it.
when we say that an economy has the characteristics of unlimited supply of labor, we are actually expressing two phenomena: one is that agriculture, the reservoir of surplus labor, still accumulates underutilized labor; second, the dynamics of demographic change continue to inject new growth into this reservoir. before china ushered in the lewis turning point in 2004, it was at the same time in such a stage -- there was a large amount of surplus labor in agriculture, and the working-age population continued to grow, making china's economy rich in labor force. under the conditions of reform and opening up, the demographic dividend was converted into the comparative advantage of labor-intensive manufacturing.
however, the phenomenon that the comparative advantage of manufacturing industry was weakened rapidly due to labor shortage and rapid wage rise after 2004 does not mean that the surplus labor force has been completely absorbed. in fact, demographic factors played the most important role in the formation of this turning point, as the working-age population entered negative growth after 2010. at the same time, surplus labor in agriculture is still bound by the household registration system and has not been completely transferred. as of 2018, according to the international labor organization, the proportion of china's agricultural labor force was still as high as 27%, compared with an average of 2.9% in high-income countries and 21.9% in china's upper-middle-income countries.
under the condition that there is still surplus agricultural labor force, the shortage of non-agricultural labor force and the rapid rise of wages will lead to the change of comparative advantage of premature delivery. a prominent performance is the premature decline of the proportion of manufacturing industry. the ratio of manufacturing value added to gdp generally follows an inverted u-shaped change trajectory, which usually first goes through a gradual rise process and reaches a certain stage of development, when the ratio peaks and then slowly declines. the share of china's manufacturing sector peaked at 36.8% in 1996, but remained relatively stable rather than declining significantly over the next decade. only after 2006, with the lewis turning point, did it fall all the way from 36.2%. the share of manufacturing fell to 29.3 percent in 2017.
international comparison can show that the decline of the proportion of chinese manufacturing industry is not the result of falling mature trees, but the reflection of premature change of comparative advantage. in 1953, the value added of the manufacturing industry in the united states began to decline at the level of 26.8%. in 2010, the per capita gdp of the united states was $16,443, and the proportion of agricultural labor force in the total labor force had dropped to 7%. japan's manufacturing share fell from 34.1% in 1970, to $18,700 per capita of gdp and 19% of the agricultural labor force. it can be seen that these two countries belong to the high-income countries in the world bank group at the turning point of the decline of the proportion of manufacturing industry, and the upgrade of industrial structure has reached a high level.
when china's manufacturing sector began to decline, its per capita gdp was only $3,069, still among the middle-income countries, and the proportion of agricultural labor force was 43 percent higher. this precocious "de-manufacturingisation" has left china's labour force reconfiguration without a path to higher labour productivity (because manufacturing is more productive than services as well as agriculture), setting too tight a timetable for moving up the value chain. what's more, since the global supply chain is formed over a relatively long period of time, and is a comprehensive result of manufacturing capacity and connectivity of all parties involved, the premature development of giant baby inevitably puts undue pressure on the global supply chain to adjust. a set of numbers confirms these possible effects. with the decline in the proportion of manufacturing, the export proportion of forward intermediate goods and backward intermediate goods with global value chain participation decreased from 11.6% and 12.5% respectively in 2008 to 8.5% and 9.4% in 2015.
the monopoly tendency of very large companies
with the rapid development of artificial intelligence and big data, entrepreneurs and economists are discussing whether the planned economy can be revived. economists cite hayek's related treatise, trying to deny the revival or return of planned economy. according to hayek (friedman extended the same lesson from "the pencil story"), knowledge and information are fragmented, and it is only through the price system or market mechanism, rather than through central planners, that they can be motivated to become effective economic activities for millions of entrepreneurs and other parties.
the economists involved in this debate have been led in the wrong direction by entrepreneurs. in the face of artificial intelligence with learning ability and big data with unlimited development space, if not now, the near future will also prove that we can no longer be 100% sure that knowledge and information are necessarily scattered, so there is no need to assume that only through trial and error can we select the correct information for decision-making. in fact, the current issue of the so-called planned economy essentially reflects the judgment and intention of the superstar business owners or agents who are the leaders of the development of new technologies to control their position in the future society.
economists seem to have forgotten, or ignored, that there is a third state between central planning and market competition that hayek presciently identified, and warned of, in the very book they cited, "the use of knowledge in society". that's a monopoly. economists have also quoted keynes in the debate - "sooner or later, for better or worse, ideas, not vested interests, are always at risk." in fact, the existence and appearance of vested interests must precede ideas, and in most cases have bad and dangerous effects.
companies that have emerged in the new technological revolution and globalisation have many names: superstars, big tech companies, corporate giants, unicorns and so on. their common characteristic is supersize, and from the day of their birth with a large beauty, so spare no effort to pursue their own scale. to do this, everything from acquisitions and mergers to listings and private placements is subject to expansion.
unicorns illustrate this tendency to scale. the inventors of the name define it as a startup that is valued at more than $1 billion through a public offering or private placement. the rise of the so-called growth team, created by facebook, shows just how strong the urge to scale is. the growth team becomes the ceo's favorite team, known as "the most important product feature of the enterprise" (mark zuckerberg's phrase), which is in effect to attract the largest number of customers in the most cost-free way, and technological innovation is used to serve this purpose. there are numerous cases that show that such enterprises never make profits or even pursue profits, and venture capitalists just support their expansion, expansion and expansion regardless of whether they are profitable or not.
it is said that zuckerberg's dream as a student was to connect the world, and his later career was to build a data-centric social network to connect the whole world. however, as niall ferguson points out, each node of a social network is not equal in status, nor are the individuals (which can be individuals, businesses, organizations, and other social actors) equally connected. therefore, the so-called "connection" is to gather all the information into a central command, that is, hundreds of millions of ordinary people are "connected" by these super giant enterprises. for this reason, these enterprises show the characteristics of doing everything and doing everything.
amazon, for example, is by no means a discount retailer, but a marketing platform, distribution and logistics network, payment provider, credit lender, auction house and publisher. in the era of internet and big data, financial technology and zero marginal cost of operation are like adding firewood to the fire of desire.
the world is all for profit, the world bustling all for profit, their interests on earth where? it's about getting as much market share as possible and squeezing out competitors.
monopolies that result from a highly concentrated, over-concentrated market have always been evil. in european and american countries, more and more parties and observers found that in today's era, from the manufacturing extrusion effect, hinder the technology innovation, thousands of participants information monopoly, abuse, fraud, infringement, distortion, resulting in damage to the supply chain, the results in the stagnation of wage growth, income inequality, until the political populism, which is associated with the monopolies of the "star enterprise". once the monopoly seeks government protection and subsidies, it will be even more dangerous.
the destructive effect of unilateralism
as 60 years ago a pencil production process involves from brazil to oregon, from the east indies to california, from ceylon (now sri lanka) to mississippi thousands of strangers, but close cooperation under the price mechanism of producers, the global supply chain is consists of manufacturers and suppliers all over the world. while there is no such thing as a multilateral framework, it is a pluralistic process of cooperation. as friedman points out, none of the differences between people who belong to different countries, speak different languages, practice different religions, and may be hostile to each other can prevent them from co-producing a pencil. we need to add that no one can consistently "take advantage" or "suffer" in cooperation.
the combination of populist political tendencies at home, nationalist will in international relations and protectionist policies in trade and investment is bound to produce a unilateralist behaviour. it is not difficult to identify typical manifestations of unilateralism from the patterns of thinking, behaviour and policy initiatives described in this article, and to infer the potential disruption to global supply chains. of course, in terms of current pertinence, i am undoubtedly referring to the way the us and its policymakers think and guide policy.
unilateralist policymakers see their countries' participation in globalisation as a "loss", and that loss occurs with almost all trading partners. strange as it may seem, this view has its roots. this round of globalisation, at least since the 1990s, has many different features. prior to the 1990s, east-west confrontation and north-south isolation limited international trade to the western countries, manifested as intra-industry trade. since then, the former planned economy countries and the vast number of developing countries participated in the globalization, and international trade returned to inter-industry trade, which took place between countries at different levels of development. obviously, developing countries exchange labor factors for capital factors of developed countries, and the result of trade increases labor income of developing countries and capital gains of developed countries respectively.
thanks to america's neoliberal economy, its belief in so-called trickle-down economics and its redistributive policies so disproportionate to its rich-world status, while owners of capital have reaped the benefits of globalisation, low-income workers and the middle class have not. the early response strategy can be said to be focused on domestic populist economic policies, such as excessively loose macroeconomic policies, which induced insolvent households into the modern ponzi scheme of subprime mortgage, until the world financial crisis and economic recession. the latest leaders have turned abroad, creating a central operations command based on unilateralism, branding all trading partners "exploiters" and adopting rare protectionist measures.
if premature comparative advantage changes and large the monopoly of the company, will be because of the country the harm of their own industry, form the spillover effect and damage in certain degree the global supply chain, the unilateralism policy changes from a point on the comprehensive attack, attack from multiple directions of global supply chain, can cause many links and even the whole chain is impaired.
first, the worst effect of a trade war with punitive tariffs is to distort prices, or in friedman's words distort information, leaving supply chains at a loss in an environment of misinformation. secondly, imposing sanctions and blockades on producers in other countries who are important links in the supply chain means direct impact on the supply chain, resulting in hard injury or fracture of the chain. in a word, the unilateralist policies of the superpower, by attacking the global supply chain, will inevitably cause great negative externalities to the world economy.
how to maintain global supply chains?
these three aspects, far from addressing the distortions in the global supply chain, are the most relevant and urgent issues for china today. in particular, these three phenomena are not only possible, but actually endanger china's position in the global value chain and the way to participate in the global supply chain. guided by these issues, we have made greater efforts to advance deeper reform and opening-up at a higher level.
first, promote the full flow of factors of production, especially labor. china still has a huge pool of agricultural labour to shift. the proportion of china's agricultural labor force is also 5 percentage points higher than that of high-income countries, not to mention the average level of upper-middle-income countries. based on the total economic activity of 810 million people in 2018, the transfer of one percentage point of agricultural labor force means the increase of over 8 million non-agricultural labor force. through the reform of household registration system and land system, promoting labor transfer and rural migrant workers to settle down in cities can significantly alleviate labor shortage, curb the rising trend of wages and extend the comparative advantage of china's manufacturing industry.
secondly, the reform direction where the market plays a decisive role in the allocation of resources should be turned into a specific reform agenda to build a fully competitive market environment. institutional arrangements will ensure that enterprises, regardless of their size or surname, are treated equally in policy and compete fairly in the market. the government's encouragement policies should be more applied to small, medium and micro-sized enterprises, while for large companies with natural monopoly nature, regulations should be strengthened to prevent actual monopoly behaviors from happening.
finally, we will open up to the outside world at a higher level. in the face of us unilateralism, china's most fundamental strategy is to open wider to the outside world and oppose and resist all forms of protectionist measures. despite the headwinds against globalization, the global economic pattern and situation are still favorable to me. for example, from 1990 to 2017, the global share of the us economy dropped from 23.9% to 21.6%, while the share of the gdp of developing countries increased from 22.0% to 35.3%. the u.s. manufacturing share fell further from 15.9 percent to 11.6 percent, while china's was still as high as 29.3 percent in 2017.
therefore, china should have enough confidence and concrete plans to strengthen its close ties with the world economy, rather than return to "inward" development or accept "decoupling".
source: sina finance