From Contract Manufacture to Global Player:

Is China Moving to the Global Core?

Andrea Komlosy

University of Vienna, Department for Social and Economic History

Associate Professor Harvard University,

Weatherhead Center for International Relations

An earlier version was presented at the ENIUGH conference, Paris 2014, This is IROWS Working Paper #94 available at http://irows.ucr.edu/papers/irows94/irows94.htm  draft v. 4-29-15 please do not quote or cite without permission, 12963 words

< komlosy@wcfia.harvard.edu>

Abstract

This contribution departs from a field study carried out in the Shanghai region textile companies, coping with the Chinese governments plans since 2006 to upgrade the economic structure, allowing China to overcome the peripheral status of low end manufacture, move on towards a consumer society and become a leading centre of the world economy. The companies’ strategies vary broadly between prolonging the low skill–low wage model of contract manufacture, moving up the commodity-chain by introducing design, branding and new product lines, and taking over of command functions, going along with the outsourcing of low skill tasks into the Chinese interior and abroad. The empirical study serves to highlight the contradictions of the Chinese path of modernization and adds evidence to the more general debate about China’s future.

 

Size, cultural heritage, labour regime, work ethics and political system are among the factors to explain, how dependency can be transformed into the position of a global competitor, taking over control over global communication and production lines. The outcome is far from sure yet, however, and the study confirms sceptical voices doubting China’s rise to a new global core. The contribution also asks for the consequences of a possible success. Catching up in the world economy, goes hand in hand with social and regional polarization within the country, as well as with a new international dominance. Neighbours turn into outsourcing locations and suppliers of raw materials, international relations help to secure commodity flows; China starts to demonstrate military presence. In the case of China, economic core formation is inseparably linked to the question of global hegemony. Does the rise of a new core, promoting new alliances in the Global South, represent the emergence of a multi-polar world? Or will we rather face a hegemonic shift, China aiming to take over US-hegemony?

 

After declaring “Reform and Opening” in 1978, the Chinese export-economy entered the global commodity chains fulfilling low skill and low cost contract manufacturing for global buyers. This contribution asks for the specific conditions allowing China to overcome the peripheral status of low end manufacture and become a leading centre of the world economy. Size, cultural heritage, labour regime, work ethics and political system are among the factors to explain, why and how dependency could be transformed into the position of a global competitor, taking over control over global communication and production lines. The contribution also asks for the consequences of the success story. Catching up in the world economy, goes hand in hand with social and regional polarization within the country, as well as with a new international dominance. Neighbours turn into outsourcing locations and suppliers of raw materials, international relations help to secure commodity flows; China starts to demonstrate military presence. In the case of China, economic core formation is inseparably linked to the question of global hegemony. Does the rise of a new core, promoting new alliances in the Global South, represent the emergence of a multi-polar world? Or will we rather face a hegemonic shift, China aiming to take over US-hegemony?

The Chinese case offers a good occasion to re-evaluate core and periphery as analytical tools. It shows that the categories undergo permanent change and re-definition; that history, size, political power and cultural features are as decisive for economic performance as economic ones. And that changing positions of one great power in the world economy, do have consequences on intra and inter state relations, rendering core and periphery relational, entangled categories.

 

“Does the 21st Century Belong to China”? This was the title of a public debate in Toronto on June 17, 2011, also known as the Munk Debate. Niall Ferguson, history professor at Harvard University, and David Daokui Li, professor of Economics at Tsinghua School of Economics and Business in Beijing, were arguing in favour, Fareed Zakaria, CNN and editor in chief of the U.S. journal Foreign Affairs, and Henry Kissinger, 56. U.S. Secretary of State (1973-77) promoting “normalizing relations with China”, contested the resolution.[1] At the beginning the audience expressed 39 Pro : 40 Contra (and 21 % undecided) in favor of the question; afterwards it turned into 38 Pro : 62 Contra. The debate does not only underline the high public significance of the topic, it also reflects the difficulties to frame the question in a simple yes/no answer. Mr. Li’s assertion of a strong China rejected any ambitions to world dominance, stressing Chinese government’s ambitions to contribute to a polycentric world, based on “harmony”. His position was close to Kissinger’s, who also acknowledged China’s ascent, but did not expect China to be ready or able for global leadership.[2] So Ferguson was practically alone, taking century-long historical legacy, sheer size of territory and population, and catching-up success not only in exports, but also in consumption, as the main indicators of a steady rise, to be resulting in global dominance. Ferguson’s main arguments, however, were grounded in two developments beyond Chinese influence: First he saw the rise of East Asia as the future global core as part of the cyclical shift of hegemony, now returning to a world region, which for a long time had been the leading one. Without referring to it, he took up the “Great Divergence” debate[3], interpreting China’s rise as a shift towards a “Great convergence”. Second, he introduced the decline of the West, comprising both the United States and the European Union (which he simplisticly takes for ‘Europe’), as the main drivers, which make China’s rise possible. According to Ferguson, it was not until the 2008 global economic crisis, that China was able to shift from cheap export manufacturing to a center of growing domestic demand and consumption. Ferguson’s observation is in line with China’s Five Years Plan[4] and with other official government documents and semi-official policy papers proclaiming “Giving Priority to Enriching People”. "During the past 30 years and more, China scared world-attractive achievements in both economic and social development, successfully entering the new development-oriented stage from the stage of survival and upgrading from a low income country to a middle income country. In this process, the aggregate-oriented economic development pattern played its historic role. The trend shows that in the coming 10-15 years, China has the conditions and possibility to become a high income country".[5] China is holding a quarter of the world population, but only 4 % of global consuming, the policy paper argues. Therefore it advocates shifting the focus from investment to consume and transform China into a global consuming power.[6]

Different from the Munk Debate audience, East Asia’s ascent, and China’s rise to economic core, if not to global hegemony, is widely taken as the dominant tendency in today’s world economy and geopolitics. While it is usually associated with fear, and rejection, from western points of view[7], observers that are critical of the West interpret it as a move towards greater equality in wealth distribution and international relations, hopefully contributing to a post-capitalist world, overcoming the pitfalls of capital accumulation.[8] Both the fearful and the wishful thinking might not be the best basis for assessing the conditions and the restraints, resulting from successful catching up, eventually preventing China from becoming the driving power to enact a shift from Western hegemony to a polycentric balance of global power.

Prominent Western sceptics, like Zakaria[9], advocate the lack of what he calls “liberal democracy” or “constitutional liberalism”[10], enabling innovation and adaptability to new tasks, therefore not taking Chinese advent as a serious challenge. They face objection from people, who rather see the steering capacity of the political leadership (in other words: the authoritarian character of Chinese economic reform) as a precondition for its advantage vis-à-vis Western democracies. According to Huang Yasheng, political scientist at the Massachusetts Institute of Technology, the build up of infrastructure that is driving national growth is the more effective the more decision making and landownership is concentrated in the hands of the state.[11]

 

Two Harvard historians of science developed a possible scenario for the collapse of Western civilization, which they predict to take place at the end of the 21st century.[12] Their alarming dystopian study, which aims at provoking counter-action today, signals the continuity of human life after the big disaster, however. Out of the world, which arises after mass deaths, floods and territorial restructuring of human habitat during the “Great Collapse and Mass Migration” (dated from 2073 to 2093), a “Second People’s Republic of China” takes the lead in stabilizing human life and international relations. We receive the information from a Chinese historian, who set out to recount the development that led to the disaster and enabled China to take the lead in re-establishing stability around the year 2090. Strong political leadership accounts for one of the qualities for humankind to resettle under a resurgent China.

 

The aforementioned study advocates a change of the economic and epistemic model, for unlimited growth is undermining human existence on earth. It is in line with prognostic social science literature, describing the present crisis as a final crisis of capitalism, giving way to either catastrophic scenarios or the chance to build up a more just and sustainable, post-capitalist world at a moment of global bifurcation. This expectation is widely spread in particular among scientists, who follow a world-system approach that relies on cyclical shifts of global hegemony and accumulation. [13] Again China comes in as a symbol of hope, based on its ability to succeed and at the same time transform vanishing Western hegemony.

 

This article does not advocate hope or fear with regard to China. It listens both to voices, predicting Chinese advent within the international division of labor (in positive and critical connotation), and to voices that acknowledge success, but at the same time express doubts about the prospects to translate economic catching up into long term stability, sustainability and social integration (not necessarily based on a scenario of permanent growth), allowing China to acquire a global role model position.[14] It starts with a general outline of China’s departure towards market-economy in 1978, then develops the argument with the help of an empirical study of the textile sector, and ends with a theoretical reprise.

 

China entering the world-economy

 

In his book “Is China Buying the World?” Peter Nolan clearly shows that in spite of considerable catching-up achievements in building up internationally competitive firms, in promoting investment, export capacity, skills and global sourcing and acquiring activity, China is still a developing country, if compared to high-income countries, in particular the United States, Great Britain, Germany, France and Japan. He goes back to the world economic crisis of the 1970s showing the western firms’ and financial institutions’ answers to overcome it by economic liberalization, in particular the unprecedented process of capital concentration in each sector of the economy, resulting in a small number of system integrators that control resources, brands, technology and supply chains, achieving global market shares up to 100 %.[15] Less profitable businesses are sold off or outsourced to peripheral locations, while headquarters, R&D remain in the old cores. Although the affiliation of the MNC to a specific state is diminishing by mergers, cooperations overwhelmingly take place between high-income locations, incorporating developing countries on the lower ends of the commodity chain at best.

 

A survey conducted by the UK Government’s Department of Trade and Industry (DTI) in 2008 compiled the top 1400 global companies, showing that out of the total investment in R&D 60 % took place within the top 100 firms, while the bottom 100 firms accounted for less than 1 % of the total.[16] Moreover, only 37 out of 1400 firms came from low and middle income countries, which have 84 % of the world’s population; 34 of them from Brazil, Russia, India and China (BRIC). Between 2001/2 and 2009/10 R&D investment in the world’s top companies increased by three-fifths, rendering investment in technical progress a key source of competitive advantage. China and others were entering global competition at a moment of enormous concentration of Western companies to defend and increase global lead.

 

When the Chinese government and Communist Party dismissed the Maoist model of autarkist self-reliance in 1978, outsourcing low-skill and low-wage manufacturing from Western cores to developing countries was on top of the agenda to overcome the crisis. By mobilizing peasants from the interior to the coastal regions through the introduction of the “Household Responsibility System”[17] in peasant agriculture, lifting restrictions on internal migration and the authorization of export manufacturing zones, China was able to meet an urgent necessity of restructuring the global commodity chain. Allowing privatization and establishment of private firms in the consumer industries was only one side of industrial restructuring, however. On the other side there was the transformation of state owned companies into giant firms, aiming at meeting Western standards of competition, in strategic sectors of the economy.[18] These firms are state-owned and rely on public demand. While private founders, both from the People’s Republic and the Chinese diaspora, were encouraged by low legal barriers, cheap government credits and the absence of almost any requirements protecting and providing social security to workers, the government giants maintained labor protection. However, the number of protected workers decreased by privatizations and lay-offs, constituting the labor-force for private hiring, but also for risking to start one’s own private business.

 

Table 1:  China: The proportion of different forms of ownership

 

 

Public Ownership

Non-public Ownership

Year

State-ownership

Collective ownership

capitalist

individual

cooperative

Joint venture

1952

19.1

1.5

0.7

6.9

71.8

1957

33.2

56.4

7.6

0.0

2.8

1978

56.2

42.9

 

0.9

1997

41.9

33.9

24.2

2005

31.0

8.0

61.0

 

Source: Allan Xioajin Ding, Shanghai University of Economics and Finance, 2011.

The table shows a considerable percentage of collective ownership, which after 1978 underwent a transformation into “Township and Village Enterprises” (TVEs), offering peasants the possibility to work in nearby towns. It also shows, that after 1997 private ownerhship faced a rapid increase at the expense of collective and state ownership.

 

When assessing the role of Chinese firms in the global economy, private contract manufacture and state-owned strategic giants show a totally different pattern. Contract manufacture is a vulnerable sector, exposed to high pressure from the contractors, which can only be met by the Chinese producers due to the availability and new mobilization of cheap migrant labor, willing to accept the crude labor-dormitory regime as a ladder to social ascent.[19] The contracted Chinese firm is located at the lowest end of the commodity chain, often subcontracting further into small family enterprises. The huge demand for migrant labor has a hoover effect on the rural economy, both attracting fresh labor and mobilizing family household and small agriculture in the rural areas to support migrant workers with unpaid work.[20]

 

By contrast, the state enterprise sector is relying on urban workers. Backed by government protection, it developed to a highly competitive level. Following the Western type of concentration, going global in order to raise capital, improve technology and secure resources was just a question of time. Limits of foreign investment were lifted, allowing foreign participation and inter-firm cooperation. Nolan is listing Chinese giant firms in strategic sectors such as power station construction, high speed trains, oil companies, banking, aerospace, telecom equipment etc.[21] They are related to the rest of the economy by the booming demand for infrastructure, construction, machinery, energy, hence relying on the internal demand of a fast growing economy. Some of the Chinese giants were able to enter FT 500 and FORBES lists of big enterprise. Compared on the grounds of R&D expenditures, brands and export markets in high-income countries the Chinese state-owned firms have a low performance though.

 

There is increasing interest of big Chinese firms to globalize their investment in order to secure supply, technological cooperation and markets since the turn of the century. China’s FDI outflows were almost absent in 2000, showing a steady rise until 2007 ($19 billion), followed by a steep rise from 2008 to 2010 ($59 billion).[22] Big Chinese firms began striving for mergers, acquisitions and share packages in foreign markets.

Looking at the absolute amount of Chinese investment in high-income countries, there is no reason to assume, that “China is buying the world”, as suspected by fearful commentators. China bought some mining, transport and industrial assets in high-income countries, most prominent the take-over of IBM Personal Computer division by Lenovo in 2005, the Swedish car company Volvo by Geely in 2010[23] or the 35 year license agreement for the Pireus Container Harbor by the Cosco-Group in 2009.[24]

 

In the meanwhile Western firms steadily increased their positions in China by investing in Chinese companies, rising from $52 billion in 2002 to $106 billion in 2010, accounting for high percentages of added value, sales and exports.[25] Among others, major Western car producers built up joint ventures with Chinese firms in order to profit from cheaper production costs and the vast market, provided by an expanding middle class.[26] Globalizing the production chain opened emerging markets to Western acquisitions and involved local industries into transnational supply, contracting and subcontracting chains. “Our firms build positions inside them”, Nolan argues, referring to U.S. Secretary of Labor (1993-97) Robert Reichs seminal articles in the Harvard Business Review, entitled “Who is us?” (1990) and “Who is them?” (1991), responding to the fact that the national base of U.S. industries was replaced by international mergers and cross-national investments. Questions of U.S. national identity against the backdrop of industrial decline also inspired Samuel Huntington’s book “Who are we?” (2005).[27]

 

In 2005, the purchase of the U.S. oil company Unilocal by the Chinese CNOOC was stopped by appealing to national security concerns.[28] Chinese state-owned oil companies, which are highly dependent on oil imports, wanted to get a foot into the international oil market, which faced major monopolistic restructuring in the late 1990s. A similar case of rejection took place, when Chinalco was offered a strategic position in the Australian mining company Rio Tinto in 2009. Similar ressentment accompanied the acquisition of the French Club Mediterranée by Fosun.[29] In spite of the commitment to free move of capital, Western firms and their states react by closing off their markets from Chinese acquisitions, driving them into stock shares instead of take-overs.[30] They also redirect Chinese investment into emerging and developing countries.

 

To date, the global ownership was not turned upside down, in the contrary: While China’s stock of outward FDI increased eightfold between 2000 and 2009, provoking media discussion that “China is buying the world”, in fact there is still a large deficit in China’s FDI,, inward foreign investment by far exceeding China’s outward FDI. Moreover, China’s investment in high-income countries is negligible: in 2009 it amounted to $27 billion, compared with Western inward investment of $500 billion.[31] Alone 67 % of China’s outward stock of FDI went to Hongkong and Macao in 2009.[32]

 

Like inside China, the foreign investment of Chinese private manufacturers differ from strategic state-owned firms. When private manufacture, either from the diaspora or from the mainland, goes global, it was to relocate low-skill tasks from China to developing countries in order to upgrade the functions that are kept at home. In the case of textiles, by far the most important sector to go global, this means, that spinning and weaving is kept in China, while garments are manufactured in neighboring Asian countries or in other parts of the Global South. Initiative and inter-firm communication depended to a high degree on diaspora Chinese, paving the way for further private investment, when labor costs in China went up after the reforms of the labour regulations in 2006.

 

Foreign investments in infrastructure, transport and construction are carried out by state owned big enterprise, eventually in cooperation with private partners. Provided without conditionality, Chinese companies often are more attractive than Western competitors. Conversely, they often bring their own workers as part of a full package, meeting critique of disregarding local labor markets, sparking anti-Chinese feelings.[33] Foreign investment does not primarily aim at returns, but at securing raw materials, agricultural commodities and intermediate inputs, access to technological upgrading as well as to selling markets. Networking is embedded into strategic considerations of supporting China’s place in an international division of labor that more and more orients towards China.

 

Victor Krasilshchikov’s comparative explorations about East and South East Asian Tigers’ and some Latin American states’ catching-up experience serves as a useful corrective to premature interpretations of China’s rise to core, not to speak of hegemonic or post-hegemonic ambitions. Studying the first and second tier East and South East Asian Tigers’ development trajectories, Krasilshchikov does not see arguments that support an East Asian renaissance. In spite of different political systems, these projects were characterized by the dependency on the global cores. By following the development pattern of the advanced industrial states, they achieved industrial and technological development. Semi-peripheral success led to a series of traps, however. Whenever success was achieved, it took place in sectors, which had lost lead and therefore were assigned to move into peripheral locations, while the cores in the meanwhile had moved on a new track. According to Krasilshchikov, the conservative character of modernization, carried through with authoritarian means, guaranteed that cheap labor power was mobilized into export production, thus fulfilling the high income, or high end producers’ interest in lowering costs and securing supply. Rising inequality was a condition of success, at the same time blocking the spillover of growth to peripheral regions and broader layers of the population. This is why the initial impetus of catching-up, promoted both by national endeavours and global product cycles, did not allow the semi-peripheral economies to transform into cores. In the contrary, as soon as they had reached a certain level of industrial success, they fell back, because local elites were reluctant to overcome social and regional imbalances.[34] The availability of cheap labor prevented the implementation of more sophisticated techniques, blocking development on a high level equilibrium, depriving educated middle-classes from expected and promised social advancement.

 

It is doubtful to compare China with small, politically dependent states instead of looking at the role of China in re-assessing regional power, which it had exercised for centuries. It is still open, if China will fall into the same traps, as the large Latin American countries and the Asian Tigers did before. There are good reasons to assume, that China is different because of historical legacy, size and timing, and will be able to overcome the limits that slowed down the Tigers’ advent, not only by activating her huge internal resources, but also by establishing new types of international cooperation with other emerging projects in the near and far Global South. China might serve as the intermediating hub, eventually overcoming, against Krasilshchikov’s assumption, the limits of conservative modernization.

 

Textiles and garments reflecting reform and restructuring

This chapter focuses the private manufacturing sector, in particular textiles and garments.[35] After a short summary, depicting the transition from global contract manufacturing to high end production searching control of the commodity chain, allowing raising income and consumption for bigger parts of the Chinese population, the prospects and limits of high end production will be discussed on the grounds of a field study, carried out in the Shanghai region in 2011. The results will be analysed against the competing interpretations of hegemonic rise or traps to modernization that might even restrict the prospect of China’s transition into economic core. Finally the question is raised of whether or not using core – periphery models may help to grasp China’s shifting position in the world economy.

 

From Contract Manufacture to Global Player

 

Textiles and garments were among the first sectors, which underwent closure of state companies or privatization. After restructuring in 1993, the state share of textile/garments fell from 98 to 20 %, closing or privatizing companies and laying off 1.5 million workers.[36] At the same time, former employees were encouraged to greenfield strategies, first in special Export Production Zones (EPZs), later on extended to coastal cities, then to entire coastal provinces.[37] Huge industrial zones with never-ending factory compounds mushroomed, housing both production halls and dormitories. The years 1980-2006 can be regarded as the period of contract manufacturing.[38]

 

Private consumer industries were supplying Western and Japanese companies with Cut Make Trim (CMT) or Original Equipment Manufacture (OEM) – simple, labor-intense operations at the low end of the commodity chain. Labor was provided by migrant workers, who were allowed to leave their home villages, but did not obtain household registration at their work place.[39] They worked long hours for low wages, and control included the dormitories provided by the company.[40] Outsourcing to contractors allowed foreign customers easy cost savings, on the one side fuelled from surplus value from factory labor, on the other side backed by the transfer value from non-paid labor, performed by the migrants’ home families. Demand rose steadily contributing to China’s rising trade surplus with the United States of $ 1,6 billion in 2011, stabilizing the U.S. budget by the purchase of U.S. treasuries. From the 1990s onwards, production chains in the textile sector faced a transition from “production-driven” to “buyer-driven” impetus: while in the former companies relocated manufacturing to subsidiaries, the latter was dominated by global retail and brand owning companies, sourcing from various independent contractors.[41]

 

The out-phasing of the World Textile Agreement in 2004 accelerated sourcing in and outsourcing to China, because it ended the system of export quotas, set up in the framework of GATT in 1974 by the Multi-Fibre Agreement, followed by the World Textile Agreement in 1994 in order to protect Western textile industry. Until then, Western country-wise import quota had opened developing countries windows of opportunity for exporting to high-income countries. When quotas were abolished, China’s manufacturing capacity had a “hoover effect” on global buyers, who now preferred to shop one stop in China instead of including various smaller and often less reliable contractors.  It encouraged “global buyers” turning to China and make use of the complete commodity chain, offered by Chinese contractors and agents. [42]

 

In the meanwhile the Chinese government had changed its objectives. Simple export manufacturing was declared being overcome and new strategies for upgrading China’s position in the commodity chain were announced. The shift from outward processing for foreign contractors towards controlling the more rewarding high end operations aims at  allowing China to become a high-income country, “giving priority to enriching people” instead of “global buyers” and western consumers, and gradually replace export by domestic markets.[43]

 

It goes without saying that the implementation of a new strategy takes time and requires transitions, in which old and new type enterprise overlaps. The political primacy, held by the Communist Party and the government, was about to support change, however. Just as they had opened the field for private company foundations by allowing employers to fully exploit their workers, they now introduced requirements for labor regulation, minimum wages and social security, raising the income, the social position and the purchasing power of the workers.[44] Regulation can also be seen as a response to the huge amount of labor protests, involving millions of workers.[45] Conflict resolution became institutionalized, allowing the government to use workers’ protest to make employers adapt to the new situation.[46] Factory owners were not only pushed to upgrade their production, but they also faced a cost explosion, resulting from wage increases, lower working hours and employers’ contributions to social security. At the end, they were pushed to give up low technology production and move into more profitable activities. Banks stopped to give cheap credits for contract manufacturing at all. Upgrading also was to affect the textile and garment sector by overcoming the low-skill, low-wage, low-end model of CMT and OEM manufacture and replace it by Original Design Manufacture (ODM) or, at best, by Original Brand Manufacture (OBM).[47]

The light textile industry should strengthen environmental protection and quality safety, strengthen corporate brand building and improve technological equipment level”.[48] For the textile industry the overall directive of the 12th Five Years Plan foresaw to “Promote the industrialization and application of hi-tech fibers, and new-generation functional and differential fibers. Accelerate the development of industrial textile products. Promote the localization of high-end looms and accessories. Support the recycling of old and waste textile products.”[49] In other words, privatly owned Chinese consumer industries were to deliver higher added value with the help of product innovation (new products), process innovation (new technologies) and logistics (command of commodity chains).

 

Industrial statistics prove evidence that China was able to enter new sectors and move up the chain, hence reaching a position to “catch the value”. As a consequence, textile and garment industries’ share in total industrial production decreased from 20 % (1990) to 8 % (2010).[50] Likewise, output and labor productivity increased.

 

The Five Year plan meticulosly listed the strategic emerging sectors., like new generation IT, energy saving and recycling, biological industry, rail traffic and aviation equipment, satellites, new generation nuclear and solar energy, photovoltaic and others, which should put China on a technology intensive and knowledge based growth track.[51] However, the textile sector still contributes important shares to industrial added value and employment. Textile and garment are themselves target of restructuring, moving towards high end, skilled, technology-intense, value creating activities, including build up and control of commodity chains with company branding.

 

Table  2 shows growth rates as compared to the declining rates in the United States.

Table  2: Textile, Garment & Leather: China in Comparison with United States

 

Textile 1998

Growth

1998 -2005

Garment & Leather 1998

Growth

1998 - 2005

Output value, Mio US-$

  China

  U. S.

 

52, 559

91,387

 

+ 193%

-  33%

 

38,722

74,960

 

+ 166%

-  58%

Added value, Mio US-$

..China

..U.S.

 

12,288

28,118

 

+ 222%

-  24,8%

 

9,001

14,933

 

+ 221%

-  48%

Per capita added value US-$

  China

  U.S.

 

 

2123

42219

 

 

+ 215%

+  33%

 

 

2750

41412

 

 

+ 83%

+ 20%

Labour force: large companies, Mio persons

..China 2006

..U.S. 2004

 

 

6,25 Mio (2006) 405.000 (2004)

 

 

 

 

 

 

6,23 Mio

332.000

 

 

 

Profits, Mio US-$

..China

..U.S.

 

2,038 (2002)

2,343 (2002)

 

+ 217% (02-06)

+ 4,6% (02-06)

 

2,038 (2002)

6,492 (2002)

 

+ 17% (2002-06)

+ 14% (2002-06)

 

Source: Yin Xingming (2009): China catches up with the U.S. as the world’s largest manufacturer, in: China Economist Nov/Dec. 2009, 20-30.

 

Since 2006 there was a high legal and financial pressure on contract manufacture owners in coastal areas to follow the new plan directives. As a consequence, hundreds of companies were not able to comply, resulting in a high rate of bankruptcies.[52] A large number of companies was able to survive along the old pattern of low wage low end manufacturing, however. In many other cases successful restructuring took off, introducing new products, new technologies and new steering logistics into the textile and garment sector.

 

Sewing and the production of knit-wear do not offer big potentials to raise labour-productivity, therefore they are facing outsourcing from the coastal provinces to the Chinese interior, or to Vietnam, Cambodia, Laos, Indonesia, or Sub-Saharan Africa, where labor is much cheaper. Conversely, spinning, weaving and knit-weaving allow to introduce advanced technologies and high end products transforming the textile sector into a capital- and technology-intensive one.

 

Those textile firms in the east that are able to upgrade their position in the commodity chain by covering high end production, branding and merchandising, by improving material quality, machinery, working skills and process control and eventually outsource labour-intensive productions to cheaper sites will be able to meet the challenge of restructuring. We can find this type of company in the spinning and in the weaving sector, delivering highly qualified yarns and fabrics for fashion wear, home textiles and technical applications.

 

Restructuring textile and garments, led to spatial re-arrangements, both within China and on the international scale. Until recently, export manufacturing was concentrated in the coastal provinces in the East and South of China. Upgrading efforts led to the outsourcing of labor-intense operations into the Chinese interior. The call to “Go West” was deliberately expressed in policy papers, and it was linked with government strategies, both offering incentives and putting pressure on local governments to follow it. So China’s large internal peripheries were mobilized. At this moment, the household registration system (hukou) once more turned out to be a useful instrument assigning people to a specific place. Enlarging eligibility for migrants to the coastal zones could be useful to attract and settle skilled labor, while keeping the unskilled migrant workers in a temporary, unsecured position including the possibility to redirect them to their home villages or to the growing urbanisations in the interior.[53] In the case of Chongqing, the booming urban region of the interior, the local government was authorized to award 1 million hukou-registrations to legalize the permanent residence of newly arriving migrants.[54]

 

“Go South” was another strategy, making use of OEM supply chains in developing countries to deliver low skill components. Chinese companies started to set up subsidiaries in Third World Countries subcontracting local producers for further outsourcing demands. In fact, Chinese entrepreneurs, many of them members of the Chinese diaspora, set up production sites in developing countries already since the 1990s. Textile and garment production abroad was a possibility to benefit from the host country’s export quota to Western markets (“quota-hopping”). After the liberalization of the global textile trade in 2004/05, outsourcing entered a new stage. According to the strategy of technological upgrading within China, Chinese companies made use of cheap production sites abroad, supplying them with fabrics made in China, while relocating simpler and low skill tasks to South-East Asia or Africa. In the case of Sub-Saharan Africa, raw African cotton was imported to China, where fabrics were manufactured and sent to Africa for sewing and assembling, thus constituting a triangular manufacturing circle. In Least Developed Sub-Saharan countries the majority of garment factories belong to Chinese (diaspora) owners; in South Africa, where the domestic market is served by local entrepreneurs, they control the export sector.[55] Under the African Growth and Opportunity Act (AGOA)[56] these garments enjoy a duty-free entry to the United States; LDCs like Lesotho, one of the leading participants of the program, were given a third country dispense clause from rules of origin, allowing a “one stage transformation” (instead of at least two stages) in Africa from imported fabrics.[57] As a consequence of this alleged incentive, domestic Sub-Saharan textile production was completely displaced or discouraged. The beneficiaries of the program are retailers and consumers in the United States as well as the network of Chinese companies and their African subsidiaries.

 

Relocating labor-intense operations to the interior, to South-East Asian or to African countries, was to allow the highly developed Chinese coastal provinces to foster quality improvement and brand development. By achieving control over the commodity chain, they were able to offer a finished product to the customer without relying on “global buyers”.

 

Foreign companies’ sourcing strategies adapted to the new situation. For example: In the aftermath of the World Textile Agreement in 2004, several European textile & garment industry associations had founded the China-Europe Textile-Alliance C.E.T.A.  in Shanghai. They set up a joint office for establishing direct contacts to Chinese companies.[58] Until then contacts with Chinese suppliers were rather built up with the help of agencies, held in Hongkong. The new institution reflected the increasing significance of China‘s role in contract manufacturing for Western companies. Only a few years later, France, Spain, and Austria withdrew from C.E.T.A. One of the reasons was to be found in the new landscape of global manufacturing, in which Chinese companies more and more oversee the complete process of development, production, and finishing. The demand for intermediaries had diminished.

 

While contract manufacture followed “global buyers’” orders, who market the finished product under their own brand, Original Brand Manufacturing (OBM) replaced foreign by domestic brands.[59] Only few of them gained reputation on international markets yet. Another efficient way of upgrading to OBM status was through purchasing foreign brand companies[60], thus fulfilling the call for “high tech and fashion”, proclaimed by then Party Leader Jiang Zemin at the 16th meeting of CPCh conference.[61]

 

Eastern China textile sector facing limits of upgrading

 

After the Pearl River delta, the first industrial cluster to specialize on export manufacturing in 1980, the Shanghai urban region as well as Jiangsu and Zhejiang provinces were next to pop up. The Yangzi River Delta became open costal zone in 1985.[62] The region has a long history of cotton and silk manufacturing. In the wake of the Opium wars 1842 and 1860, Shanghai became a colonial enclave, housing the first textile mills in China. In 1930 200.000 out of 285.000 workers were employed in textile factories, 1960 the number went up to 550.000. Until the beginning of “Reform and Opening”, state owned textile and garment companies were located in central urban industrial districts. After the 1990s central areas faced new rapid development, replacing old factories or transforming them into exhibition, shopping and restaurant facilities. Industry was relocated into the outskirts of the Shanghai region, or to the neighbouring provinces. [63]

 

In all towns you can find huge industrial areas with hundreds and thousands of factory compounds. A part of the early foundations of the 1990s and 2000s today faces serious problems, hundreds had to close down. Others are successful examples of restructuring.

 

A field study carried out in July and August 2011 in six companies illustrates the broad variety of business models, coexisting in Eastern China. They mirror the transformations, carried out in the textile sector, and the challenges to come.

 

Visited companies:[64]

-          C1 Xishengyu Jishan (Shanghai), garment CMT for European and Japanese firms

-          C2 Danfeng Haining (Zhejiang), fully integrated sock knitting production for German buyers

-          C3 Jiale Jishan (Shanghai), fully integrated production line for knit and sportswear, subsidiary locations in the Chinese interior and abroad

-          C4 Dual Nanjing (Jiangsu), tire cord weaving company, Korean subsidiary

-          C5 Colon Jiangyin (Jiangsu), airbag weaving and sewing company, Korean subsidiary

-          C6 Chindo, Wai Gao Quiao Tax Free Zone (Shanghai), Selling and Service Centre of Dornier, a German producer of high quality weaving machines

The textile and garment sector is showing a broad variety of company models, fulfilling different functions in the global commodity chain, comprising fully integrated production lines as well as component productions, ranging from simple contract manufacture (CMT, OEM) to higher value adding functions including design (ODM) or, more recently, even to the development of own brands (OBM), challenging Western brands on domestic and export markets. The visited companies reflect the bifurcation.

 

C1 and C2 represent extended workbenches for Western and Japanese buyers, they are likely to face closing down. C1 is specialized on apparel sewing, C2 on sock knitting.

 

Xishengyu garment factory in Jinshan (C1), founded in the early 1990s by a former tailor, reduced its workforce from 1000 in 2003 to 300-400 in 2011. The owner can hardly cope with the rising costs for labour, which increase by approx. 20 % per year in Shanghai, and more so by the rising contributions to workers’ social security, which increased by twenty times between 2006 and 2011. His contractors are not willing to come up for the higher cost, rather going to relocate sourcing to cheaper places. The owner reacted by moving production to a smaller and cheaper site, planning the closure of the company at the moment of his retirement. His son already moved to another business.

 

The owners of the Danfeng sock factory in Haining (C2), founded in 2000 by a young couple without any entrepreneurial and textile experience, are equally aware of the tense situation. German super-market chains, on whose distribution their production relies, still fill their order books, guaranteeing work for 100 employees. But they feel the pressure on the price, and pass it over to their workers, who have to work over-time, regardless of the new labour regulations. Asked, if her son would take over, the owner seemed surprised. This question had not yet come into her mind. Product cycles in the sock industry are too short to plan a succession. If small and medium enterpreneurs (SME) in low skill and low wage contract manufacturing started in the right moment, with the right contacts to party and government officials, they were able to make a quick start and enter big business. A big majority of SME factory-owners’ carriers end because of the rapid turnover of the product cycle. If they are not able to move up the chain or find a new niche product, their status as entrepreneurs might not be safe.

 

The high-end sports and leisure ware company in Jinshan (C3), represents the way the government is planning to restructure the textile sector. Jiale was founded in 1993 as a private company, enjoying high support and protection from the local government. It comprised departments for knit-weaving fabrics, which are processed to final products in the cutting and sewing departments. The products are ordered, purchased and sold under the brand of the buyers’ firms, hence corresponding the OEM type of outsourcing. Show room and video performance show a broad variety of well-known Western brands from Tommy Hilfiger to The Northface.

 

When profits diminished because of rising labor cost, the management introduced a design department, hence increasing the company’s control over the production line and expanding into more know-how-intensive operations, attracting buyers on a more profitable basis (= ODM). According to the General Manager, they plan to start developing products, branded under their own name. In the meanwhile the emphasis is put on raising the quality of fibers, e.g. by purchasing special yarns from the Austrian-Chinese Lenzing-Nanjing Fibres Company. Relocation is carried out in order to transfer labor-intensive processes into the interior, where a subsidiary was opened in Anhui province in 2007. In 2011 another subsidiary started in Indonesia. By then the workforce comprised 5000 in Jinshan, 3000 in Anhui and 2000 workers in Indonesia, combining different qualification, labor and social security regimes and costs. This strategy is supposed to support the upgrading of the Shanghai locations, allowing the company to enter into a better position to control and profit from the textile commodity chain.

 

Another type of upgrading of the textile industry is pursued by C4 and C5, two Korean owned producers of technical textiles (tires, airbags). Compared to clothing and home textiles, technical textiles represent a highly sensitive branch of the textile sector, facing high quality and safety requirements. So C4 and C5 represent the high value side of textiles. The Korean companies chose China for the relocation of production both for cost saving and obtaining access to the Chinese market. As Eastern China hosts major factories for car production in cooperation with European, U.S., Japanese or South Korean companies, the automotive sector is encouraging investment in supplying industries.

 

Dual (C4) and Colon (C5) deliver their products, tire-cord and airbags, to tire and car companies. The headquarters are situated in Korea, with subsidiary plants in China. This allows making use of the wage differential, which still saves 70 % compared to Korea according to the management. Cheap wages are combined with a strategy of using high tech machines in order to meet the standards of the international buyers. High tech machinery in the weaving sector is first of all linked with German and Swiss companies, specialized in the most advanced spinning, weaving and knitting technologies. These machines are much more expensive than Chinese, Korean and Japanese ones, but allow achieving results not available with ordinary device. They require special training for the workers. This arrangement is supposed to open new markets for European machine builders. I had the opportunity to visit the two Korean companies as a member of the service team of a leading German producer of automatic looms, Dornier, with headquarters and machine building located at Lake Constance. At first sight, technical problems how to handle certain operations, to avoid time losses and damaged goods and to obtain permanent quality were on the agenda. Very soon they turned out to be structural problems, resulting from a basic contradiction: When the Korean managers complained about defects of the machinery, the German technician stressed the necessity to invest in training of the personnel and careful maintenance of the machines, otherwise the expansive investment would not be rewarding. Quite openly he addressed the working conditions, the over length of the working hours and the lacking investment in attaching skilled workers to the company. Working hours were up to 12 hours daily, 6 days a week. Under these conditions, workers did not stay in the company for a long time.[65] Once trained, they took with them the knowledge and the experience they had gathered with the new machines.

 

Chindo (C6) is the service center of Dornier. The upgrading of the Chinese textile industry offers new markets for western suppliers of machinery and intermediate inputs. They can help Chinese or foreign companies producing in China to enter high quality production.

 

Studying the German machine company that is supplying textile companies all over the world with special automatic looms, allowed observing the transfer of knowledge. Dornier started to sell to Chinese textile firms from the 1980s onwards, first to state owned companies, later more and more to private ones. Installation, training and service were organized from the German headquarters, until trade and service subsidiaries were set up in the main selling markets. The training and service company covering East and South East Asia, Chindo, was founded in Shanghai in 2005. It is managed by a German director, responsible for technical and commercial affairs, and a Chinese executive, responsible for administrative and financial issues. All customers are invited to send their staff to be trained in the training centre. Instead of sending German technicians into Chinese companies, the training is carried out by Chinese technicians, ready to demonstrate handling and maintaining of a sensitive technology in the center as well as on site. We face a transfer of technology, which leads from the German machine factory to the Chinese textile company – mediated and accompanied by Chindo, where German knowledge is transferred first to Chinese trainers and in a second step to Chinese workers. As I learned, Chinese – or as pointed out above Korean – companies still underestimate the importance of training and education. The future is likely to bring greater awareness for the benefits of “social upgrading”, however. More so, Chinese manufacturers might discover, that producing high quality textile machines can lead a next cycle of upgrading. In this case textile could follow garment in its move to the West, pushing garment out of China, while new sectors might completely replace textiles in the coastal areas.

 

Move towards a Global Economic Core?

 

The field-study allows the following conclusions.

 

1 We face the dislocation of low end manufacture from the coastal provinces to the Chinese interior and to developing countries. Contract manufacturers in the dynamic coastal areas are likely to close down, or to give way to technology-intense production, brand development and high added value operations on the high end of the commodity chain, both within and beyond the textile and garment sector.

 

2 For a while small and medium low value contract manufacture enterprises, like C1 and C2, will keep operating, supplying western buyers and retailers with cheap fashion. In the long run they represent an outmoded model that will disappear from Eastern China, leaving these companies without successors.

 

3 Textile upgrading offers new export markets for European (German, Swiss, Italian) machine producing companies. Hence hierarchies between old industrial cores and emerging markets are reproduced on a new level, redirecting the benefits of successful technological improvement in China to European high tech machinery producers. Process upgrading simultaneously reflects success and limits of catching up. Instead of a global rebalancing, a new technological gap opens up.

 

4 Outsourcing labor-intense operations, in the case of textiles namely cutting, sewing and assembling of garments (CMT) into low wage regions, inserts fresh cheap labor into the commodity chain. Advancements of the coastal provinces into core positions rest upon the peripheralization of other regions. These regions contribute to the overall improvement, but they do so at the expense of their own, regional upgrading. 

 

5 Moreover, the observations in C4 and C5 show the difficulties in putting process upgrading into practice in the coastal regions themselves. High tech textile production requires qualifications, which can hardly be realized under the conditions of a management, which still reflects the labor regime of contract manufacturing: low wage, low skill, high turnover. While managers and owners concentrate their efforts on new machinery, they neglect the human capital side of technological upgrading: the necessity to train and motivate their workers. Saving on wages and social benefits still lurks, preventing the potential productivity gains from new technology to transform into sustainable results. So even the very limited goal of reaching core standards in high quality material weaving is not yet achieved.

 

6 C6, the selling and service outpost of German machinery producer, on the one side mirrors the ongoing western dominance, accompanying Chinese textile upgrading. Machinery is produced in Germany, the Shanghai subsidiary only taking care of sales, service and training. Dornier’s profit relies on the successful implementation of the expensive, sensitive machinery in Chinese firms, however. Therefore they insist on training their customers’ workers, hence contributing to the rise of a well-trained, self-conscious workforce, insisting on social ascent and rising income. It will be a question of time, until machinery production will also be moving to China, and Chinese research and development will spill over into this sector.

 

To sum up, the case study confirms the sceptical voices doubting China’s rise to a new global core. China’s upgrading is not (yet) achieved: It remains a declared goal; reality is still contrasting with development plan claims. However, the observations also deliver arguments, showing the ambitious attempts to restructure and transform China from a low end contract manufacturer to a high skill and high value producing location controlling the commodity flows not only in China, but also on a global scale.

 

At that instant, the prospects of a hegemonic shift come on the agenda. A transition to a global core is a sine qua non for such a shift. However, a global core status does not necessarily go along with a hegemonic shift. Discussing the likelihood, conditions and outcomes of a transformation of the global order, we have to transcend the realm of upgrading and catching-up.

 

Hegemonic shift or multi-polar world?

 

Discussing “China” in the West, is highly emotional. Hopeful and fearful projections often obscure the picture, neglecting the fact that China still is a developing country, albeit with fast growing cities, dynamic emerging regions, a rising middle-class, exploding regional and social imbalances and a government, steered by the Communist Party, which accompanies the internal transformation with increasing economic and political attempts to make China an acknowledged and accepted international player. This goes hand in hand with the reassertion and the export of China’s cultural heritage.

 

 

Understanding China’s potential to shift hegemonies requires a historical and a geopolitical background. Different from most other emerging, former Third World countries, China’s attempts to catch up and become a global core builds on its historical role as the leading economic and cultural power before the rise of British and U.S. hegemony. Re-orientation, after more than 150 years of political subordination and economic peripheralization, would just restore a previous self-reliant position. Would it, at the same time, represent a hegemonic shift, making China – or a Chinese led alliance of Global South states – succeed U.S. hegemony?

 

The debate is divided about whether the capitalist world-system is able or not to be rejuvenated by the take-over of a Chinese hegemon. Renewal would allow China to continue building up its industrial capacity (1990-2007/08) into a new cycle, by then transforming the initial dependency from Western impetus into the capacity to self-reliant R&D, setting new standards in product and process innovation within the next 25 years.[66] This timing roughly fits into the pattern of Kondratiev-cycles, claiming that the 5th Kondratiev would not only drive China towards a global core, but equally promote its hegemonic peak.

 

Fig. 3: Kondratiev cycles

Source: http://de.wikipedia.org/wiki/Kondratjew-Zyklus, 7.1.2013

 

Fig. 4: Kondratiev cycles and hegemony

 

Hegemon

Kondratiev A-phase

Kondratieff B-phase

Hegemon

GB up

1790-1820

Textiles

1820-1850

GB peak

GB maturity

1850-1873

rail roads, steel

1873-1896

GB decline

U.S. up

1896-1914

electro, chemistry, food

1914-1945

US peak

US maturity

1945-1973

mass consumer goods, automobiles, petro-chemistry

1973-1990

US decline

China up

1990-2008

Building up industrial capacity

2008-2030?

Transforming dependent into leading capacity, setting standards

China peak?

China maturity?

 

 

China decline?

 

Kondratiev-cycles or “long waves of economic growth” do not sufficiently take into account the effects of expansion and contraction on the spatial arrangement of core and periphery on a regional and on a global scale. Moreover, regional shifts in core-periphery relations are also reflected by secular cycles of hegemony, related to the “long waves”. Both models are highly structural and there are good reasons not to over-emphasize their significance. However, they may serve as hypotheses, against which empirical findings may be tested.[67]

 

Other voices, in compliance with China’s officials reclaiming the peaceful character of their global ambitions aiming at a polycentric world, reject the idea of a next hegemonic cycle within the framework of the capitalist world-system.[68] In spite of different lines of argumentation, they are convinced, that the regenerative potential, which is necessary to supply a new upswing with sufficient natural resources and human labor power, is exhausted and a renewal can only take place, if the next world-order is based on sustainability and social justice. They speak of the beginning of a post-capitalist, and post-hegemonic era, following the on-going decline of U.S. hegemony. Giovanni Arrighi has emphatically postulated that China will be the leading power of a new world order. Instead of exercising hegemony, he argues, China will lead on the basis of a strong political system, based on market relations instead of capital accumulation.[69] While the hegemonic cycle-based model does not put into question the continuity of the existing capitalist world-system, Arrighi, Wallerstein and others argue on the assumption of a final crisis, marking the end of a long systemic cycle, beginning with the rise of global capitalism in the long 16th century, now attaining the end of capitalism as a historical system: They do not see any further potential for the capitalist world-system to overcome its present structural crisis. The post-capitalist model does not explicitly claim a permanent Chinese leadership, but definitely evokes the end of the expansionist model of capital accumulation, carried out by the West. China is attributed the potential to lead the transition into a future world-order.

 

Both scenarios are highly structural and speculative. At the same time, they are realistic, each being aware, that the decline of U.S. hegemony would open a period of competing great powers, old cores striving to maintain, new ones to achieve a globally leading position, whether this position would open a new hegemonic cycle of the capitalist world-system or a post-hegemonic Chinese-led market-economy. They also agree that the present conflicts that mirror the hegemonic crisis of the U.S. might either be overcome, or give way to a permanent chaos, eventually changing the conditions for human life on the planet in a way, which is difficult to conceive today. Oreskes and Conway’s dystopia helps envisioning, equally suggesting that China will take the lead, albeit after a horrifying scenario of a climate collapse. [70]

 

For the moment we leave utopias and dystopias to film[71] and literature.[72] Instead, we test China’s formation as a core, looking for indicators for a hegemonic capitalist renewal on the one side and a polycentric post-capitalist scenario on the other side.

 

Hegemonic symptoms accompanying China’s formation as a core

 

There is accelerating evidence of Chinese global acquisitions (mines, infrastructure, traffic hubs, raw materials, food stuff), securing the supply of China’s growing economy and feeding its population. Strong western resistance against China acquiring ownership of western companies illustrates the old cores’ ambitions to block specific take-overs, neither speaking with one voice nor being able to stop their advance, however.

 

China is promoting the build-up of independent financial institutions, both Chinese ones and with other BRICS partners, eventually replacing the U.S.-Dollar by Yuan Renmimbi or a currency basket. Increasing South-South cooperation, along with a rising internal market, will à la longue withdraw the financial support for the U.S.-Dollar, at present exercised by holding U.S. treasuries. Withdrawing its credit will end the support China has given to the declining U.S. in exchange for an open export market. Strengthening internal demand as well as non-western export markets would replace reliance on U.S. demand, while complying with U.S. claims to promote re-industrialization.

 

There is multiple evidence for a cultural reassertion, based on historical legacy, culture, literature, spread of Chinese philosophy and language. At the same time China is facing rapid Westernization, and it is still an open question, if the Chinese will be able to control acculturation without losing their traditions. Chinese cultural strength is entering a sacred Western sphere by insisting on a Chinese interpretation of capitalism, replacing “democracy” by “harmony.”.

 

 

Last but not least, China is entering the arm’s race. Compared to old grand powers, it is still a wharf. Blaming China to be aggressive, serves as a pretext to justify the militarization of the Pacific region by former colonial powers, the United States and its regional allies.[73] Nevertheless, China’s global rise goes hand in hand with its growing international economic presence. Western embargo politics against Russia, following the conflict about Ukraine’s entering the EU association agreement, will strengthen South-South cooperations. Russia will rather turn to China, overcoming its fear to undergo Chinese dominance, to compensate for EU sanctions, and Brazil, Argentina and South Africa might profit from the rising demand, fostered by the Russian ban on European food imports. Economic wars contribute to armament, drawing China into a competition, which might turn out to be a burden for its economic and social ambitions, however.

 

Post-capitalist symptoms accompanying China’s formation as a core

 

If we believe the Communist Party of China, the present transformation will lead to the unfolding of “socialism” in 2049, 100 years after the foundation of the People’s Republic. This assertion can hardly impact serious scholarship. However, it reminds us of the primacy of politics, exercized by the party over the process of transformation.  Western scholarly assumptions often do not comply with Chinese perceptions.

 

Post-capitalist symptoms are equally attributed to China by western scholars. Orientalizing interpretations of China for being static, backward and despotic, which had dominated Chinese studies for a long time, were overcome, pointing out the strong position, sophistication and effectiveness of China throughout history, only set out of function from the Opium Wars 1842 to the Revolution of 1949. Kenneth Pomeranz, Andre Gunder Frank, Kaoru Sugihara, Bin Wong and others, also referred to as the “Californian School”, conceived a non-eurocentric approach to China, contributing to the estimation of China’s progress and high level of development, preceding and exceeding European states until the 18th century.[74] With his book “Adam Smith in Bejing” Giovanni Arrighi topped the Californian school.

 

Arrighi refers to Fernand Braudel’s definition of capitalism as a specific expression of market economy, based on monopolizing markets by states who bind public interest to those of capitalists, when he defines China’s historical system to be a “non-capitalist market-economy”, but not a capitalist society.[75] The present system of China builds up on this historical legacy, re-introducing capitalist elements, but without subordinating state interest to capital. Observing the rapid commodification of the Chinese society, increasing the scope of activities for investors while limiting poor and working classes participation, may evoke different interpretations, however.

 

Being trained in a Western, Marxist understanding of state – capital relations in the world-system, the hybridization of socialist and capitalist elements that Arrighi suggests is hard to assess. Equally, liberal observers, who take capitalist relations as a basic universal mechanism of market-society, can hardly cope with. Conversely, postcolonial approaches plea not to subordinate non-Western societies to Western criteria. In the Chinese context, this requires evaluating a number of major terms and concepts. In particular, Chinese historiography suggests interpretations of “hegemony” and “periphery”, which diverge from Western definitions. The Chinese way of inter-linking the nation states of East Asia through a Chinese center allowed sharing common principles, values and norms, bridging hegemony and polycentrism. Moreover, in the Chinese context, the term periphery stands for far distance from the center; it is not necessarily subordinated to the core, which rather invests into its peripheries than extracts from them.[76]

 

In front of these considerations, we can only suggest an open out-come. It is possible that the former hegemon and its Western allies resist the challenges of the Global South, and block transition. Some authors claim that this resistance is meant to promote a shift from U.S. American hegemony towards an American global empire.[77] The restauration of a “New American Century” may take place in compliance with European partners, or against them, as the Ukraine – Russia case demonstrates.[78] Another tentative outcome is a new imperialism, set up by China.[79] Last but not least there is the option of a new multi-polar world-society, mediated by a consolidated China.

 

Core and Periphery reconsidered

 

Looking at China, shows a broad variety in which cores and peripheries occur. These variations apply to different periods of history, hence represent a sequence. Likewise, they refer to different contexts at a given time, hence show synchronicity.

 

During Mao’s rule (1949-1976), socialist China refrained from being assessed on an international scale by putting the emphasis on strengthening internal developments, replacing the notion of “catching up” by the vision of “great leaps forward”. Although showing a low level of measurable economic performance because of embargo and self- isolation, the country can neither be regarded as core nor as periphery. In the eyes of the Chinese leadership, China was perceived as a center, carrying forward the imperial tradition under different political banners, however. China also was a center for political movements, following or promoting the Maoist path of development all over the world.

 

With the shift from Maoism to “Reform and Opening” in 1978, China underwent a process of peripheralization: This finding refers to the external impetus to serve as a cheap work bench for Western companies, allowing to overcome the global economic crisis by incorporating new sources of externalizing costs and appropriating values. It underestimates the agency of the CPCh to adapt to the global demand for cheap and informalized labor, while maintaining state control over foreign investment and strategic key sectors of the economy in the process of reintegration into the world-economy. Mobilizing migration from the country-side to the coastal provinces designates the interior as a source of value appropriation, hence introducing spatial peripheralization into a relationship that was governed by administrative regulations instead of market forces until then.

 

Assessing China in the tradition of a non-capitalist market economy, sheds a different light on the existing gap between coasts and interior, and between China and developing countries respectively, trusting in the redistributive promises of central authorities.

This article is suggesting a different argument: China is assessed as an outstanding example demonstrating that the peripheralizing dynamics of contract manufacture at the low end of commodity chains can turn into the consolidation of a former periphery into core, initiating technological and sectoral restructuring. One must keep in mind that Chinas successful catching-up relied on specific conditions and moments, however. On the one hand, size, heritage and self-assertion are linked to the long and outstanding centrality of the country, distinguishing China from other emerging economies of smaller size and historical significance. It even opens the possibility to conceive the Chinese ascent as part of a hegemonic change, designating China to take over a leading role in a future (capitalist or non-capitalist) world-economy. On the other hand, global restructuring continued playing a role, when China’s admission to the World Trade Organization (2001) and the out-phasing of the World Textile Agreement (2004) reflected the end of Western protectionism for mature consumer industries, allowing China to make use of the liberalization to outcompete smaller developing countries and incorporate them into Chinese-controlled global commodity chains. Thus, China starts acting as core, if not contributing to the peripheralization of other developing countries[80], so integrating them into a reshaped peripheral relation with a Chinese core.

 

Peripheralization is equally taking place with regard to the coastal companies’ initiatives to outsource labor intensive operations into the Western Chinese provinces. They follow planning directives, which promote the upgrading of the coastal industries at the expense of cheap labor relocated to the interior. Core formation shows a polarizing tendency, contributing to the increase and the upward mobility of the middle classes in the coastal regions, while relocating low wages to the internal provinces, hence contributing to their peripheralization. Conversely, official planning documents refer to the developmental effects, linked with the expansion of growth to rural areas.

 

It is of course possible, as Arrighi suggests[81], conceiving the production networks within China and the neighboring countries as a revival of the old steering capacity of the Chinese center to intermediate in the East Asian hemisphere, balancing relations and supporting regional integration for the benefit of all participants. It is still to be proved however, that the concept of harmony, expressed in the official documents, can resist the pressures to compete in a capitalist world-economy, which is not, at least not yet, following Confucian ideals, but the logic of capital-accumulation.

 



[1] Griffiths, Rudyard –  Luciani, Patrick (eds.), Does the 21st Century Belong to China? Kissinger and Zakaria vs. Ferguson and Li.  The Munk Debate on China. Toronto: Anasi,  2011).

[2] Henry Kissinger, On China, New York: Penguin Press, 2011.

[3] Pomeranz, Kenneth, The Great Divergence. China, Europe and the Making of the Modern World Economy. Princeton – Oxford: Princeton University Press; Frank, Andre Gunder, Re-Orient. Global Economy in the Asian Age. Berkeley – Los Angeles – London:  University of California Press, 1998; Vanhaute Eric, Cutting the Gordian Knot of World History: Giovanni Arrighi’s Model of the Great Divergence and Convergence, in: Journal of World-Systems Research Vol XVII, No 1, pp. 89-106.

[4] National People’s Congress of the PR China, 12th Five Years Plan of the People’s Republic of China (2011-2015), http://www.eu-china.net/upload/pdf/materialien/11-06-30_12th-Five-Year-Plan-China-english.pdfhttp://www.eu-china.net/upload/pdf/materialien/11-06-30_12th-Five-Year-Plan-China-english.pdf

[5] China Institute for Reform and Development (ed.), Giving Priority to Enriching People. Orientation of the Second Round of Transition and Reform. China Reform Research Report, 2011,  Introduction.

[6] China Institute for Reform and Development, p. 164.

[7] There is a legion of literature, demonizing China’s threat, hence contributing to establishing a Chinese hegemonic core as a fait accompli – compare Martin Jacques, When China Rules the World: The End of the Western World and the Birth of a New Global Order, London-New York: Allen Lane, 2012; Halper, Stefan, Beijing Consensus: How China’s Authoritarian Model Will Dominate the 21st Century, New York: Basic Books, 2011) or Subramanian, Arvind, Eclipse: Living in the Shadow of China’s Ecnomic Dominance , Washington, DC: Peterson Institute for International Economics, 2011.

[8] Frank, Andre Gunder, Meet Uncle Sam – Without Clothes – Parading Around China and the World, in: Critical Sociology 32 (1), 2006, pp. 17-44; Arrighi, Giovanni,  Adam Smith in Bejing. Lineages of the 21st Century. London: Verso, 2007.

[9] Zakaria, in: Griffiths - Luciani, Does the 21st Century, p. 55.

[10] Zakaria, Fareed, The Rise of Illiberal Democracy, in: Foreign Affairs, Nov/Dec. 1997, pp. 22-43

[11] Yasheng, Huang, Capitalism with Chinese Characteristics. Entrepreneurship and the State. Cambridge: Cambridge University Press, 2008..

[12] Oreskes, Naomi and Conway, Erik M., The Collapse of Western Civilization. A View from the Future. New York: Columbia University Press, 2014.

[13] Arrighi , Adam Smith in Beijing; Frank, Andre Gunder, Meet Uncle Sam – Without Clothes – Parading Around China and the World, in: Critical Sociology 32 (1), 2006, pp. 17-44; Wallerstein Immanuel, Structural Crisis, or why capitalists man no longer find capitalism rewarding, in: Wallerstein, Immanuel/Collins Randall/Mann Michael/Derluguan Calhoun, Does Capitalism have a Future? Oxford: Oxford University Press, 2013, pp. 9-36.

[14] Serious doubts vis-à-vis over-estimating the Chinese miracle were expressed by Nolan, Peter, Is China Buying the World? Malden, MA: Polity Press, 2012 and Krasilshchikov,  Victor, The Malaise from Success: The East Asian “Miracle” Revised , Saarbrücken: Lambert Academic Publishing, 2014.

[15] Nolan, Is China buying, pp. 16-20.

[16] Nolan, Is China buying, pp. 22f., 49f.

[17] The Household Responsibility System, introduced 1978-1983, was at the origins of „Reform and Opening“. It enabled peasants to produce and sell to the market. In a first step mobility restrictions were lifted, allowing peasants to work in nearby towns in collectivly owned “Township and Village Enterprises” (TVEs)- See Arrighi, Adam Smith in Beijing, p. 362; Unger, Jonathan, The Transformation of Rural China. Armonk, N.Y.: M. E. Sharp, 2002.  They were not able to prevent the migration of peasant workers to the coastal provinces, however. Lacking „household registration“ (hukou) at their new place of work, the workers relied on family support back home, providing social care, thus compensating for the lack of social security for migrant workers. See Pun, Ngai, Made in China, Women factory workers in a global workplace. Durham: Duke University Press, 2005 .

[18] Nolan, Is China buying, p. 59f.

[19] Pun, Made in China; Scherrer Christoph (ed.), China’s Labor Question. München: Rainer Hampp Verlag, 2011.

[20] Komlosy, Andrea, Vom Nachzügler zum Trendsetter. Chinesische Arbeitswelten im Textil- und Bekleidungssektor, in: Blätter für Technikgeschichte 73 ( 2011), pp. 73-104, here 81.

[21] Nolan, Is China buying, p. 55.

[22] China Daily, July 27, 2011.

[23] Nolan, Is China, p. 98.

[24] Neues Deutschland, February 5, 2014. A further privatization was stopped  by the left-wing Greek government beginning 2015.

[25] Nolan, Is China buying, pp. 84-95, is listing major U.S. and German FDI and acquisitions in China by sector.

[26] In 2013: Volkswagen, General Motors, Hyundai, Toyota, Nissan, PSA-Citroen, Ford, BMW, Mercedes-Benz, Fiat, Frankfurter Allgemeine Zeitung, April 2, 2013.

[27] Reference in Nolan, Is China buying, p. 11.

[28] This event received broad coverage in the international media; it is analyzed in great detail in Arrighi 2007, Adam Smith in Beijing, pp. 280-283 and Nolan, Is China buying, pp. 80-99.

[29] Le Monde, December 7, 2014.

[30] Other Western business and political groups welcome Chinese investments and partnership for facilitating entry into the Chinese market – Ibid.

[31] Nolan, Is China buying, pp. 95ff.

[32] Ibid.; China Daily, July 7, 2014.

[33] Nolan, Is China buying, p. 74.

[34] Krasilshchikov, The Malaise.

[35] According to international classification textile industry comprises the production of fibres and fabrics, while garment industry refers to the manufacturing of fabrics into clothes, technical and home textiles. In the case of knitwear both fabric making and final assembling are classified as textile industry. Here „textile“ is used for the whole production line from design to the finished product.

[36] According to Shanghai Museum of Textiles, run by the Shanghai Textile Holding (Group) Corporation (visited in August 2011).

[37] Xiaolan, Fu – Yuning, Gao, Export Processing Zones in China: A Survey. Geneva: ILO, 2007. http://ilo.org/public/french/dialogue/download/epzchineenglish.pdf

[38] For the periodization of Chinese post-opening development policies see Wenten, Frido, Restructured Class-Relations since 1978, in: Scherrer Christoph (ed.), China’s Labor Question. München: Rainer Hampp Verlag, 2011, pp. 28-48..

[39] Alexander, Peter - Chan, Anita, Does China have an Apartheid Pass System?, in: Journal of Ethnic and Migration Studies 30/4 (2004), pp. 609-629.

[40] Chan, Anita, China’s Workers under Assault. The Exploitation of Labor in a Globalizing Economy. Armonk/London: M. E. Sharpe, 2001; Chang, Leslie, Factory Girls. Voices from the Heart of Modern China. London: Picador, 2010; Pun, Made in China.

[41] Gereffi, Gary – Memedovic, Olga, The Global Apparel Value Chain: What Prospects for Upgrading by Developing Countries? Wien: UNIDO, 2003; also see Komlosy, Andrea, Weltmarkttextilien: Globale Güterketten im historischen Wandel, in: Fischer Karin/Reiner Christian/Staritz Cornelia (eds.), Globale Güterketten. Weltweite Arbeitsteilung und ungleiche Entwicklung. Wien: Promedia, 2010, pp. 76-97.

[42] Ferenschild, Sabine - Wick, Ingeborg, Globales Spiel um Kopf und Kragen. Das Ende des Welttextilabkommens verschärft soziale Spaltungen. Siegburg-Neuwied: Südwind, 2004, p. 9-16.

[43] China Institute for Reform and Development, Giving Priority; National People’s Congress of the PR China, 12th Five Years Plan 2011-2015.

[44] Labor Contract Law 2007 (effective since 2008); Social Security Law 2010 – see Zhang, Minjie, Urbanization and Migrant Workers in Yiwu, China, in: Van der Linden, Marcel (ed.), Grenzüberschreitende Arbeitergeschichte: Konzepte und Erkundungen/Labour History Beyond Borders: Concepts and Explorations (= ITH 45. Linzer Konferenz). Leipzig: Leipziger Universitätsverlag, 2010, pp. 223-240, here 230f. Minimum wages were mandated by district, county or provincial governments.

[45] Pun, Ngai - Ching, Kwan Lee, Aufbruch der Zweiten Generation. Wanderarbeit, Gender und Klassenzusammensetzung in China. Berlin: Assoziation A, 2010; Egger, Georg – Fuchs, Daniel et. al. (eds.): Arbeitskämpfe in China. Berichte von der Werkbank der Welt. Wien: Promedia, 2013.

[46] The National Human Rights Action Plan of China for 2009/10 lists 810.000 violations of labor and social laws. 14.000 arbitration commissions were convened, and more than 2 million mediators active in resolving labor conflicts – China Daily, July 15, 2011.

[47] In contrast to Original Equipment Manufacture (OEM), ODM includes the whole production line from design to the finished product for a customer-buyer, while OBM designates the production under one’s own label or brand.

[48] National People’s Congress of the PR China, 12th Five Years Plan of the People’s Republic of China (2011-2015), ch. 9. http://www.eu-china.net/upload/pdf/materialien/11-06-30_12th-Five-Year-Plan-China-english.pdf

[49] Ibid., Columne 4, Key fields of manufacturing, Xhinhua News Agency.

[50] According to Yin Xingming, China Institute for Economic Studies, Fudan University, July 25, 2011.

[51] National People’s Congress, 12th Five Years Plan, ch. 10.

[52] China Daily, July 25, 2011.

[53] Komlosy, Andrea, Von der verlängerten Werkbank zum Global Player, China auf dem Weg zu einem Zentrum der Weltwirtschaft, in: Egger Georg - Fuchs Daniel et. al. (eds.), Arbeitskämpfe in China. Berichte von der Werkbank der Welt. Wien: Promedia, 2013, p. 35-52, here p. 50.

[54] Neue Zürcher Zeitung, August 8, 2011.

[55] Jauch, Herbert – Traub-Mertz, Rudolf (eds.), The Future of the Textile Industry in Sub-Saharan Africa. Cape Town: Friedrich Ebert Foundation, 2006.

[56] AGOA is a U.S. trade preference program for Sub-Saharan countries (2000-2015, extended to 2025), allowing African apparel quota free (until 2004) and duty free entry to the U.S. It is supposed to foster jobs and income in the local African garment industry. – Gibbon, Peter, The African Growth and Opportunity Act and the Global Commodity Chain for Clothing, in: World Development vol. 31 (2003), 11, pp. 1809-1827. http://www.sciencedirect.com/science/article/pii/S0305750X03001487

[57] Bennet, Mark, Lesotho’s export textiles and garment industry, in: Jauch, Herbert – Traub-Mertz, Rudolf (eds.), The Future of the Textile Industry in Sub-Saharan Africa. Cape Town: Friedrich Ebert Foundation, 2006. http://library.fes.de/pdf-files/iez/03796/12lesotho.pdf.

[58] C.E.T.A. service office Shanghai was founded by Germany, Switzerland, Finland, Austria, France and Spain – Communication by C.E.T.A. executive Vivian Zhu (July 18, 2011).

[59] E.g. Dragon, Erdos, Flying, Gujin, Heilan, Hengyoanxiang, Horse Bobu, Lan Tang, Lining, North Tiger, Smart 1933, Three Gun Group, Youngor, White Collor etc. – for more see Shanghai Museum of Textiles.

[60] New York Times, September 26, 2013.

[61] According to: Shanghai Museum of Textiles.

[62] Xiaolan - Yuning, Export Processing Zones, p. 4.

[63] A former factory was transformed into the Shanghai Textile Museum documenting local textile history and providing information for the information above.

[64] Jin Yan (Shanghai), Joachim Debatin (Shanghai) and Stefan Mangold (Haining-Vienna) were establishing contacts with the companies, helped preparing and accompanied my visits. I am grateful to the owners and directors of Danfeng (Haining), Dornier-Chindo (Shanghai), Dual (Nanjing), Colon (Jiangyin), Jiale und Xishengyu (Jinshan) for welcoming me and providing insights into their sites and management in July and August 2011. A more detailed report about my visits is available in: Komlosy, Vom Nachzügler zum Trendsetter.

[65] Butollo, Florian, The End of Cheap Labour. Industrial Transformation and “Social Upgrading” in China. Chicago: Chicago University Press, 2015. Case studies of garment and LED industries reveal that industrial upgrading, opposite to governments claims, rarely supports qualitative improvements in working conditions and wages.

 

[66] Ferguson, in: Griffiths - Luciani, Does the 21st Century, p. 25f; Frank, Re-Orient;  and Menzel, Ulrich, Die Ordnung der Welt. Berlin: Suhrkamp 2015 (forthcoming) support this perspective, pointing on size, heritage and successful catching up.

[67] For a world-systemic understanding of Kondratiev cycles see Komlosy, Andrea, Krisen, lange Wellen und die Weltsystemtheorie, in: Friedrich Ebert Stiftung (ed.), Arbeitnehmerinteressen in Krisenzeiten. Köln: Dietz, 2015 forthcoming.

[68] Arrighi, Adam Smith in Beijing and Wallerstein, Structural crisis - suggest this interpretation.

[69] Arrighi, Adam Smith in Beijing, p. 361.

[70] Oreskes – Convey, the Collapse of Western Civilization.

[71] E.g. the movies Divergent, Elysium, Showpiercer, The Hunger Games, The Zero Theorem – New York Times, October 13, 2014.

[72] Rufin, Jean-Christophe, Globalia. Paris, 2004.

 

[73] Nolan, Peter, Imperial Archipelago, in: New Left Review 80 (March/April 2013), pp. 77-95.

[74] Pomeranz, The Great Divergence; Frank, ReOrient; Sugihara, Kaoru (ed.), Japan, China, and the Growth of the Asian International Economy, 1850-1914. Oxford: Oxford University Press, 2005; Wong, Bin R., China Transformed. Historical Change and the Limits of European Experience. Ithaca-London: Cornell University Press, 1997.

[75] Ibid., p. 332.

[76] Arrighi, Adam Smith, p. 318; Wong, China Transformed, p. 148; Weigelin-Schwiedrzik, Susanne, Zentrum und Peripherie in China und Ostasien, in: Linhart, Sepp  - Weigelin-Schwierdzik, Susanne (eds.), Ostasien 1600 - 1900. Geschichte und Gesellschaft.  Wien: Promedia, 2004, pp. 81-98.

[77] e.g. Arrighi, Adam Smith in Beijing, p.7; Minqi, Li , The Rise of China and the Demise of the Capitalist World Economy. Monthly Review Press U.S., 2009.

[78]Scholz, Jochen, Worum es geht. Die Ukraine-Krise und die geopolitische Konstante auf dem eurasischen Kontinent, in: Thoden, Ronald – Schiffer, Sabine (eds.), Ukraine im Visier. Russlands Nachbar als Zielscheibe geostrategischer Interessen. Frankfurt/Main: Selbrund Verlag, 2014, pp. 89-107.

[79] There are as well conservative as left-wing advocats of the inevitable rise of Chinese imperialism.

[80] South-Saharan countries had a long history of colonial rule and degradation to the delivery of slaves or raw materials to Western colonial powers. After decolonization they made some progress in state supported establishing of domestic industries. When the debt crisis of the 1980s brought in International Monetary Organisations requiring market liberalization and austerity measures, the new industries declined or collapsed. In the 1990s and 2000s Chinese investors entered a situation, which was already shaped by re-peripheralizationTraub-Mertz, Rudolf – Jauch, Herbert, The African textile and clothing industry: From import-substitution to export orientation, in: Jauch, H. – Traub-Mertz (eds.), The Future of the Textile Industry in Sub-Saharan Africa. Cape Town: Friedrich Ebert Foundation, 2006, pp. .9-35. http://library.fes.de/pdf-files/iez/03796/02article.pdf

 

[81] Arrighi, Adam Smith in Beijing, p. 347.