Introduction This paper is meant to determine whether or not the theory of comparative advantage applies to China with respect to the industrialized world. We will also touch on how the theory of factor endowment applies to China. There are some countries which operate in autarky, which will be discussed as well. Finally, we will examine how the distribution of gains from free trade causes much political debate regarding trade with China.
China – Comparative Advantage and Factor Endowment China has a substantial comparative advantage due in part to its vast and inexpensive manpower used for labor purposes. China is a hub for production of various types of products. Raw materials are imported in China from the US and other countries around the world. Labor in china is so inexpensive, that it has been averaged at .047 cents per hour.
China also has a substantial abundance of raw materials such as arable land, forest covering, grasslands, water resources, hydropower sources, coal reserves and iron ore deposits. China also enjoys an abundance of scientific & technological advances and developed educational systems. In ranking, they are lacking in electricity generation, crude oil existence and steel production (University, 2008)
Due to the aformenetioned, China enjoys many business partners from around the globe for the purposes of providing inexpensive production methods. These products, which may cost less than $3.00 to produce, are now being sold at Walmart for more than five times the price. This is a rather substantial turaround.
Regardles of China’s comparative advantag, the theory of factor endowment also greatly applies to the scenario capioned above. For example, it will take China approximately 2000 years to unearth and restore approximately 20 million unearthed relics (People's Daily Online, 2003). An influx of archeological professionals for the purpose of unearthing and restoring these artifacts would greatly add to China’s exhisting educational environment.
Countries Operating in Autarky The root word autarky is derived from the greek word αὐτάρκεια. Literally translated in economic terms, this word means “self sufficiency”. Ironically, China came very close being a full-fledged autarky under Mao Zedong, but was no longer considered an Autarky in 1978 (Wikipedia, 2008). North Korea, also known as the “Hermit Kingdom” is an extreme Autarky, opposed to everything foreign. Even though this is the case with North Korea, Kim Jung Ill’s favorite drink is Hennessy Cognac. He also happens to be one of Hennessy’s largest importers. Leadership has its privileges, even in the Hermit Kingdom (Geogrphic, 2007).
Distribution of Gains – Debates and Conclusion Free trade has many advantages. As a former political science student at American University and intern in the United States House of Representatives, I have heard the words “free trade tends to either stop or prevent wars”. This is true considering the fact that China has multiple intercontinental ballistic missiles aimed directly at the continental United States. Regardless of the aforementioned, China is becoming a close friend due to the fact that it is a major production hub for companies in the United States.
As far as the downsides are concerned, we need to examine exactly why a substantial amount of work is being outsourced to China. In the United States, a union worker may earn up to $50.00 an hour just for installing door handles on vehicles over a period of eight hours. In China, that same American company may spend around 0.47 cents per hour to do the same exact job. The argument made here is that free trade, in this form, is hurting employment in the United States and making the job market very soft. In other words, when the market is soft, there is more competition for job seekers.
The middle ground is fairly simple. Raw materials outsourced to manufacture products with inexpensive labor, lowers the cost of those products when they hit the shelves in our local stores. It is fair to say that the price reduction due to the inexpensive labor is compensating for the loss of income and slight loss of employment in the United States. Also, from a macroeconomic standpoint, our current unemployment rate is roughly 5.5%. According to Laurette Brady (Professor Business and Management at Norwich Univeristy), this unemployment percentage may be considered healthy for our economy .
References Brady, L. (2004, Spring Semester). Professor of Business and Management. (S. M. Materio, Interviewer) Geogrphic, N. (Director). (2007). Inside North Korea [Motion Picture]. People's Daily Online. (2003, December 27). Retrieved June 18, 2008, from China lacks professionals to restore unearthed relics: http://english.people.com.cn/200312/27/eng20031227_131356.shtml Rugman, A. M., & Collinson, S. (2006). International Business. Pearson. University, U. N. (2008, June 18). National Factor Endowments. Retrieved June 18, 2008, from United Nations University: http://www.unu.edu/unupress/unupbooks/uu04te/uu04te0b.htm Wikipedia. (2008, June 3). Retrieved June 18, 2008, from Autarky: http://en.wikipedia.org/wiki/Autarky