Hello, welcome to visit Shanghai Forum
[The true meaning of the free enterprise system is that nobody is in control. The government and their international cooperation can establish a framework of rules, and work with other countries.]
Reporter：The per-capita income levels of and differences between two countries can affect their cooperation and tariff negotiation. Will this push the developing countries to cooperation? How can different countries in different levels cooperate better?
James Markusen：First, we have to keep in mind that that cooperation among developing countries is difficult and that they often present themselves as rivals. In higher developed countries such as North America and Europe cooperation is difficult as well. Even though there are some mutual gains, issues such as environment and intellectual property remain difficult. As for poor countries, the paper I was writing uses environmental issues as example, the issue just goes way down the list of priorities which results in little progress in this area. China still relies heavily on coal fire, which is a carbon intensive energy. We talk about global warming all the time, but we’re still not at the stage when countries are willing to make sacrifices.
As for intellectual property, the costing is huge. From drugs to software, the initial costs are all huge. Developing countries only want to pay marginal costs, however it usually takes about one billion US dollars to develop something new.
Security problems are also major fields of controversy. But once countries are willing to invest money and new intellectual property is developed, countries will be respected and gain in return.
As development proceeds, skills improve, which leads to the rise in wages. This often portrays a ‘bad’ image, but it reveals the fact that basic products are unprofitable, which leads to the movement of simplest goods to other countries. This is a natural process that the US and Europe went through as well. For example, Korea, Singapore and Hong Kong used to be manufactures, but now have moved up to white-collar stages. As countries climb up the ladder, it is a normal process that incomes rise, simple goods move down the ladder of countries and they demand products from these countries, and the ascending countries transform to service industries.
Reporter: As for other developing areas in Asia, what will their future prospective be? Will they just repeat the road that goes from world factory to industrial upgrading, or can Asia find a new way to develop their countries?
James Markusen: Actually this transformation process is happening on its own. Private incentives focus on accumulating expertise so as to move on to higher technical levels, thus they don’t have to be managed by the government.
Let’s talk a little about the Shanghai Free Trade Zone. Many friends and I think it’s a terrible name. A free trade zone refers to a special place for manufacturing, which allows importing things without having to pay duty fees and then exporting them. Computer parts and machinery are popular in free trade zones. But that is not what Shanghai’s Free Trade Zone means. It’s more about enterprising. It’s primarily about services such as banking and finance. So the two free trade zones mean differently. The Shanghai Free Trade Zone will help Chinese businesses move to new levels of international sophistication. They will rely less on multinationals and be less constrained by the central government and take on sophisticated forms of business. It is a good thing.
Reporter: There are also other forms of regional economy such as Guangzhou, Shenzhen as so on. What do you think this will bring?
James Markusen: Most of these forms are still manufacturing ones, and doesn’t involve much expertise. Many factories in Guangzhou and Shenzhen are currently managing orders from Hong Kong and Singapore. This is not what the Shanghai Free Trade Zone offers, but still as I said, that’s nothing bad. The Shanghai Free Trade Zone will attract the white collar jobs away from Hong Kong, Tokyo and Singapore. Overall China is still majorly in charge of manufacturing and much marketing is done offshore. The Shanghai Free Trade Zone can strengthen Chinese businesses in white collar activities, and marketing can be done from here, in Shanghai.
Reporter: These days, Asia also faces industrial transfer. Vietnam, India are winning more order forms and becoming new world factories instead of China. Is it a chance for Chinese factories? Will those big enterprises having much capital become the winner?
James Markusen: There is a trend that manufacturing is going back to US and Europe. The time, intellectual property issues, competing with states, rising wages in Asia are all reasons. They are willing to pay three times of the wages but not five times. In the US, manufacturing wages rise, but services are very routine, and can be replaced by machine and internet. The US is undergoing a loss of white collar jobs and good quality jobs for the young because technical changes lead to requirements of small numbers of skilled people. The unemployment rate in Europe is even higher.
Reporter: In your paper you mentioned different integration of knowledge capital and physical capital will influence the way the firm choose to invest abroad, like FDI and OS. What do you think of Asian firms’ way of investment?
James Markusen: This is a natural process of change as Asia accumulates skills in engineering. Knowledge is very expensive to develop, but once it is developed it can be highly reusable throughout the years. As expertise levels rise, simpler goods are moved out of China. The exportation of knowledge and infrastructure is notable, such as Chinese trains. I was on the fast train from Nanking to Shanghai and it was great. China is now demanding protection of intellectual property.”Free Trade Zones” help Chinese businesses go abroad. This is the physical part, but headquarters are just as important as factories. These two strengths can help Chinese firms expand and bring more jobs.
Reporter: There are Baidu, Ali, Tencent, three big internet giant companies, enlarge their empires by buying many other companies. So, will the future business world compose of shares of these big companies with several small companies squeezing in?
James Markusen: There is a term called network products. Internet and software both belong. How you value these things depend on how many people are using them. There is the natural tendency in any network service to large firms. Take the trend from Nokia and Blackberry which were at the peak 5 or 6 years ago to the iPhone now. The development of applications, or Apps reared this transformation. These independent but special products were sold not only to individuals but also to the bigger firms. What determines the change from one network to another is the range that the service covers. So network effect leads to winners and losers.
Reporter: There are voices saying that the impact of the Asian power on the worldwide economy has been exaggerated, what do you think of these sayings?
James Markusen: I don’t really like the saying of “power”. Politicians exaggerate the importance of Chinese export. Actually as for electronic products, the Chinese content is quite low. The Chinese content of an iPhone is very small, about 5 percent. The physical parts are about 15 percent, which are commonly taken by Japan and Korea. The services, software designs and marketing networks are majorly managed by the US, so the US content in an iPhone is about 30 to 35 percent. So even though Chinese growth rates are huge, it looks usually much greater that it actually is. It is exaggerated. During the last 20 years, huge domestic changes have taken place in China. Household incomes have risen, but total consumption has been suppressed. As wages in China rises, Chinese production stays in China, and shares of exports drop. In China Daily a yearly goal of 7.5 percent of economic growth was mentioned. However, I don’t think this is a worthwhile goal in itself. Too much concern has been paid by governments on exports. There should be a new orientation to the Chinese people and provide better goods to the Chinese people.
Reporter: Since the reform and opening up policy was released, regional economy has been an important approach toward economic transition in China. The Shanghai Free Trade Zone established last year is part of China’s newest actions. What opportunities can this approach bring to national and multinational firms?
James Markusen: I have said about the good things of the ‘Shanghai Free Trade Zone’ above, but there are also bad things. It might give the central government less control over stable macro environment. Trade off is what economics all about. The true meaning of the free enterprise system is that nobody is in control. The government and their international cooperation can establish a framework of rules, and work with other countries.
[James Markusen]
James Markusen, professor of economics at the University of Colorado at Boulder. His principal interests are in the field of international trade. His research for the last 25 years has concentrated on the location, production, and welfare effects of large-scale firms and multinational corporations. He has worked on analytical models, numerical simulation models, and empirical estimation. Many years of work researching multinational firms culminated in a book on the role of multinationals in the international economy, and was published by the MIT press in the summer of 2002.
