The paper shows that China’s trading patterns have already started to change:

 First, there is a clear move up the value chain by onshoring more sophisticated production, and this has been happening for a number of years.

 Second, China appears to be at an inflection point with respect to lower-value-added labor-intensive products. After a three-and-a-half-decade rise, market shares have started to plateau and even decline in some key sectors like garments, footwear, toys, and furniture. Labor-intensive goods had already been falling as a share of total exports for some time, on account of China’s boom in capital- and research-intensive sectors. But China’s global market shares in these goods had remained resilient until only recently. Many argue that this resilience was a function of an increase in production inland, where wages are lower, but the data suggest that exports are still produced almost exclusively on the coast.

 Third, there is mixed evidence on rebalancing. Imports of certain commodities, like coal and copper, are clearly declining, but others, like oil, food, and agricultural commodities remain strong.4 While Chinese consumption is on an upswing, imports of consumption goods and services remain modest except for tourism (which is not a focus of this report).

The CLMV stand to be affected by these changes in important ways and cannot rely on low wages alone to succeed in global trade. As China continues to exit labor-intensive light manufacturing, there may be opportunities for the Mekong countries to enter. Vietnam and Cambodia are already established manufacturing countries and could benefit, as could Myanmar which is still at the beginning of its economic opening but is blessed with a large labor force. These countries may also find opportunities in exporting consumption items to China (and in marketing their tourism offerings to Chinese visitors). On the other hand, as China’s commodity demand slows, Lao P.D.R. and Myanmar, in particular, may see their energy and materials exports declining. The CLMV countries all benefit from low wages, but the earlier literature and our own econometric analysis suggest that success in trade depends on many structural factors as well. In particular, improvements in education, infrastructure, governance, the business climate, and trade openness are important priorities for these countries

Koshy Mathai, Geoff Gottlieb, Gee Hee Hong, Sung Eun Jung, Jochen Schmittmann, Jiangyan Yu

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