Is China poised to close the technology gap?

By , Staff writer of The Christian Science Monitor

Last year, one of the biggest and fastest rising US exports to China was something very basic: scrap metal.

China, meanwhile, is racking up billions of dollars in trade surpluses with America in computers and other items grouped by the US Commerce Department as "advanced technology products."

On Monday, an official at one of China's major aviation companies touted China's ambition to build large commercial jetliners by 2020 – a move that could put Chinese workers in direct competition with Boeing and Airbus in producing one of the world's most advanced industrial products.

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This doesn't mean that China has caught up with the United States or Europe in its technological prowess. But the world's most populous nation is adding new capabilities with notable speed and determination.

Because China represents such a large potential market, it has been able to enlist help from the world's largest companies, including General Electric and Sony as it develops.

As a result, some experts say, China's trade relations with the US and other nations hold an unusual risk as well as opportunities for shared prosperity. The threat is that, as large corporations spread their best practices worldwide, China may climb the "value chain" – produce more advanced goods – and freeze the standard of living for most workers in the US, Japan, and Europe.

"We can compete ... only to the extent that we have far superior technology within our borders, not just in companies that may be incorporated in Delaware," says Charles McMillion, an economist who studies China at MBG Information Services in Washington.

The standard theory of trade is that all participating nations tend to benefit. Each gravitates toward selling products they are good at producing. Companies compete with one another, but in the process all national economies become more efficient.

To many economists, the current world economy still fits that pattern.

Still, both the boosters of globalization and those with deep concerns about it say that today's circumstances are unusual. In the past two decades, reforms in populous nations like China and India, coupled with the end of the cold war, have unleashed more than 2 billion workers – millions of them skilled – into the global labor market. Meanwhile, the rise of the Internet and other technology has made it easier for corporations to run global supply chains.

The result has been a great boom in trade, integrating the world economy as never before. China has become a huge market for US goods – everything from heavy equipment and chemicals to farm produce and paper products.

In many ways, China follows the trail already blazed by nations such as South Korea and Japan: First, low-end manufacturing like toys, then electronic goods like DVD players. Then automobiles.

But China has developed on a bigger scale, with more investment from multinational companies, and now is plowing its profits heavily into investments in research and education in the hopes of becoming an innovation-based economy.

Its moves will affect not just economics but geopolitics as well.

The US, long the world's lone superpower, now faces an emerging China that is both a major partner and a potential rival on the world stage.

"The richer the Chinese get, ... the stronger their defense capabilities get," says Adam Segal, a senior fellow in China studies at the Council on Foreign Relations in New York.

Whether US-China relations will grow more or less stable over time is the key question. "The more interdependent our economies become, the more we all have to lose from any conflict, either economic or military," Mr. Segal says.

China's rising economic capabilities, in many cases, have military applications as well, and Beijing's defense budget has been growing. In January, it unnerved the US by conducting a test in which it used a missile to knock out a satellite. It began deploying a new fighter jet recently.

Just how fast is China climbing the industrial value chain? "Probably faster than we expect but not as fast as the hype," Segal says. "I don't think they're going to eat our lunch anytime soon."

In commercial aviation, for example, China remains far behind the US and Europe. "I find it difficult to believe that they could develop their own" large aircraft from scratch in just 13 years, says Paul Nisbet, an aerospace analyst at JSA Research in Newport, R.I.

Still, China has signed a deal with Airbus to assemble the A-320 jetliner. That, coupled with China's own massive investment in the industry, could build its capability over time. Chinese companies have a track record of using foreign partnerships to build domestic expertise.

"This narrowing of the technology gap is occurring in many, many fields," says Mr. McMillion, the Washington economist. In part, he says, "the issue is that multinational companies are now building their very best products in China" as well as in the US.

Since China has much lower labor costs, that holds a potential threat to the high-cost standard of living to which Americans are accustomed.

Already some signs of strain have emerged, some economists say.

The competition of lower-cost and increasingly skilled labor in emerging nations "has put unrelenting pressure on employment and real wages in the high-cost developed world," Stephen Roach of Morgan Stanley, a New York investment bank, writes in a recent report.

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