Dynamic Comparative Advantage: Implications for China

Over the last two decades the structure of the Chinese economy has transformed rapidly. The transformation has had a significant impact on other economies, particularly as Chinese exports maintain their global ascendance. The economic threats and opportunities posed by China will continue to change over time. Yet very little research has been conducted on the economic forces that spur the transformation of China’s economic structure. We present a model of the forces underpinning China’s evolving economy, investigating the determinants of China’s progression through key economic stages, including the initial transition from agriculture to manufacturing. To highlight the speed of structural transformation we analyze data from 1985-2003. Our forecasts suggest that while China currently has a comparative advantage in labor-intensive manufacturing, comparative advantage is likely to shift to capital-intensive industry early in the next decade.