ACTIVE LEARNING CASE

Trade of the triad and China

Over the last three decades, new entrants into the world export
market have transformed the economies of industrialized
countries and the types of products they export. At the
beginning of this time period, the Japanese were a growing
force in the international arena. They dominated the 1980s
and were able to make substantial gains at the expense of
such dominant exporters as the UK and the United States.
Indeed, between 1980 and 1990, both these countries lost
worldwide market share to the Japanese in such industries as
automotive products, office machines, telecom equipment,
machinery and transport equipment, chemicals, and textiles.
In the late 1980s, however, the world economy began to
see major changes. Asia, South Korea, Singapore, Taiwan,
Thailand, and China were growing much more competitive
in the world stage. South Korea, for example, started expanding
its automotive industry, while China’s market share
of office and telecom equipment rose from zero to about
1 per cent of the market in 1990 to 4.5 per cent by 2000.
Meanwhile, thanks to NAFTA—which decreased barriers to
trade within North America—Mexico and Canada were
increasing their market share of automotive products, machinery,
and transport equipment. At the same time, the US
economy started to turn around; 1992 marked the beginning
of the longest sustained economic growth in its history,
a juggernaut that didn’t slow down until well into 2000.
Much of this success was a result of the pounding it had
taken during the 1980s from both Japanese and European
firms that offered high-quality products at very competitive
prices. Such competition spurred the Americans to radically
restructure many of their industries; invest billions in new
technology, plant, equipment, and information technology;
and introduce improvement programs, such as Six Sigma,
that allowed them to match the quality offerings of
worldwide competitors. As a result, by the end of the
1990s, the US share of the world’s export market in areas
such as automotive products, machinery and transport
equipment, chemicals, and textiles was on the rise. Now
the big loser was Japan, which saw its export market share
decline in most of these areas. Today the biggest threat to the export markets of industrialized
countries is China. Between 1993 and 2003,
China’s share of the world’s exports merchandise more
than doubled—from 2.4 per cent to 5.8 per cent. This
3.4 per cent increase accounts for more than half of the
5.7 per cent decrease in exports by triad countries over the
same period. The United States and Japan were the hardest
hit with a decrease of 2.7 per cent and 3.3 per cent,
respectively. China’s expansion is particularly evident in the clothing
and textile markets. Today the country holds 23 per cent
and 15.9 per cent of each market, respectively (see table
below). More impressive, however, are China’s improvements
in exports of office and telecom equipment and of
machinery and transport equipment, both of which require
significant technology know-how.
As can been seen in the table above, China’s rise as a
world exporter has decreased the share of the triad’s share
of world exports in manufactures. In response to China’s increased
competitiveness triad countries are trying to balance
the need to integrate this new player into the international
business arena with the negative short-term effects to their
economies.
Japan’s attitude toward China took a turn from protectionism
when it realized that this new trade partner could
help it overcome some of the problems associated with
its rigid economic system. Large amounts of inexpensive,
low-skill labor now allowed Japanese companies to take
a portion of their manufacturing operations overseas,
within its own region, while more skilled Japanese workers
took care of the more specialized areas of the production
process. In addition, China eased Japan’s long
dependence on the US economy for its industrial and
consumer products.

While US and EU companies have also moved operations

to Japan, the governments are reacting more aggressively to
pressure from special interest groups that see China as a
threat to US businesses and jobs. The United States, which
runs a large trade deficit with China, has argued that the
yuan is undervalued, creating an unfair advantage for
Chinese producers. The United States is threatening to impose
a 27.5 per cent tariff on all Chinese products. Even
Japan has joined this wagon and is pressuring China to move
to a more flexible exchange rate. Yet, critics argue that no
one truly knows the market value of the yuan and that a fall
on its price after deregulation could only worsen matters. For
its part, the EU has reacted by asking China to curtail exports
of textiles into the union after exports of clothing increased
by 534 per cent in less than six months in 2005

An increase in export by any nation does not necessarily

mean that other countries are losing out. In terms of
trade alone, any new entrant to the world exports market,
other things being equal, will decrease the share of
world exports of all other countries. This, however, does
not mean that other countries are exporting less. They
could be exporting, in value terms, a significantly higher
amount as a new trade partner also means a new market
to which they can export. More specifically, however,
trade creates losers and winners. Triad economies are
being forced to specialize. While those with most to lose
pressure their governments to impose trade barriers,
those with most to win—high-skilled industries—are
expanding to serve the Chinese market. Further, customers’
real incomes increase when they can purchase
the same products at lower prices.

The data on this case help to reinforce an important principle

of international trade: specialize in those products in
which you can achieve an advantage. Over time, of course,
competitors may erode this advantage by developing even
better offerings for the export market. In this case, it is important
to either counterattack by improving your own offering
to win back this market share or find other markets where
the country’s skills and resources will allow it to compete effectively.
In light of the emergence of more and more industrial
countries in Asia, the growing competitiveness of Latin
America, and the emerging industries of Eastern Europe and
the former Soviet Union, triad managers have their work cut
out for them.

Sources: “Chinese Urged to Curb EU Exports,” BBC.co.uk, May 12, 2005;

“China’s Yuan under Fresh Pressure,” BBC.co.uk, May 6, 2005; and “The Halo
Effect,” The Economist, September 30, 2004.
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