How Long Can China and the United States’ “Shop Front, Back Factory” Model Last?

After China began its policy of “opening and reform,” Hong Kong enterprises moved their production facilities onto the mainland but continued to be responsible for selling goods on the international market. This became the “shop front, back factory” model, which today has developed into a sort of dilemma. For example, Guangdong, which once appeared to be Hong Kong’s economic hinterland, gradually reduced its dependence on Hong Kong investments due to transformations and upgrades in its industrial sector. This has led to a trend of “find another Hong Kong.”

Let’s look at this “Hong Kong-style quagmire” in terms of Sino-American economic relations. In the current world order, it seems as if America, Europe and other developed economies have taken on the function of “shop front” for China. As for the “factory,” China has the processing plants and production plants. It is only recently that the United States, listening to the demands of other developed countries, has made an effort to return manufacturing to local sources. Most recently, in the New York Times, an article titled “How the U.S. Lost Out on iPhone Work” addressed this economic phenomenon.

That Sino-American economic relations face a “Hong Kong dilemma” is only a hypothesis; in essence this is an economic upgrade, the inevitable result of industrial restructuring. The crux of the matter between China and the United States is not only how long this “shop front, back factory” model will last, but also, where is there room for improvement?

After this latest financial crisis, America’s economy will certainly face a substantial revision. Economists are saying that this is necessary for the rebalancing of the global economy. This economic rebalancing isn’t a simple matter of returning production jobs. According to the structure of the current economic system, these jobs can’t return. This is because American workers cannot accept the same wages as their Chinese counterparts and this increases the price of labor. As the New York Times article clearly indicates, if you rely on production in the U.S., the cost for Apple products would certainly increase and lead to a great loss in competitive advantage.

For the last 100 years, the economic structure has not been like it is today. Because globalization is basically dominated by the developed countries of Europe and the United States, it has forcibly moved onwards. Moreover, between the various countries and regions, the economic and social development gaps are vastly different. The world markets are complementary and balanced.

At present, the weight of the emerging economies and developing countries in the global economy has improved significantly; they provide the voice for rebalancing the global economy. In China, for example, capital had long been a scarce resource. Now, China has become a capital-exporting country. The world will be forced to accept the output of China’s capital, which is a global economic rebalancing. However, this rebalancing is not limited to who is buying U.S. Treasury bonds.

The heart of the so-called “Hong Kong dilemma” is the rebalancing of the global economy. The recent global financial crisis, global governance and how to improve economic globalization are things that every country, particularly China and the U.S. as the world’s two largest economies, must consider.