Making 'Made In China' Mean Luxury

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Trade giant China remains dominant in the making and selling of so-called cheap items such as toys and clothing, even during the current global recession. But China aspires to compete with other countries in the trade of luxury items as well. Host Scott Simon talks with Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, a non-profit, non-partisan group based in Washington, D.C.

SCOTT SIMON, host:

China leads the world in making and exporting hundreds of inexpensive items, such as toys and basic clothing. That dominance has grown during the recession, when consumers often want cheaper goods. It's been hard for other countries, including the United States, to compete with China at that level.

But there could be an upside for the U.S. and some other countries. What happens when more Chinese, who are making more money, want to buy quality goods?

Nicholas Lardy is a senior fellow at the Peterson Institute for International Economics, a non-profit, nonpartisan group based in Washington, D.C., and he joins us from his office. Thanks very much for being with us.

Mr. NICHOLAS LARDY (Peterson Institute for International Economics): Thank you, Scott.

SIMON: It's estimated that China's middle class is made up of at least 200 million consumers. Do they necessarily want to buy Chinese products when they get money?

Mr. LARDY: They're interested in products from all over the world, particularly at the very upper end. There's a premium placed in foreign brands, foreign products. Everything from expensive handbags to cars.

SIMON: So this would be Swiss watches, German automobiles, that sort of thing?

Mr. LARDY: Swiss watches, German automobiles, American automobiles - General Motors' Buick is the second-biggest foreign brand - and a bourbon from Kentucky and a scotch from Scotland, and a broad range of commodities.

SIMON: This is something that could obviously benefit the U.S. economy.

Mr. LARDY: Yes. China's imports last year were over a trillion U.S. dollars. So it's certainly one of the biggest import markets in the world.

SIMON: Now, some of us remember when the term made in Japan was synonymous with inexpensive, dare I say, cheap goods. And of course in our lifetime that's changed entirely. Made in Japan now means quality, particularly in the car industry. Is China trying to expand in the manufacture of high-quality items itself?

Mr. LARDY: It's not only trying, I think it's succeeding and it's succeeding much earlier than Japan did for the simple reason that they've allowed foreign firms to play a much bigger role. We buy computers that say Dell or Toshiba and so forth - they're all made in China. They're made by foreign companies operating in China, assembling all the parts and components there.

So the goods are exported from China, but the vast majority of these consumer electronic products are absolutely world class, and the quality is extremely high. So by allowing foreigners to play a very large role in the production, China has moved up the quality ladder, I would say, much faster than Japan did in the 1960s.

A little over half of all of Chinese exports are produced by foreign companies operating in China.

SIMON: So as the expansion of the Chinese middle class continues, at the same time will they in a few years be more interested in buying Chinese goods?

Mr. LARDY: I think Chinese consumers will buy the best quality for the best price they can get. In some cases they'll be foreign goods. Foreign manufacturers in automobiles, for example, have a very large share of the market. These cars are being produced in China by Volkswagen and General Motors, for example - are the two biggest foreign brands.

SIMON: They just have the foreign tag on them.

Mr. LARDY: Yes. They have the foreign tag, they're made to the standards specified by the German and American companies, respectively. Much of the content of those vehicles is actually sourced locally, made in factories that, again, frequently are foreign owned. So the parts companies have also migrated to China in order to serve the demand that has emerged there over the last decade, particularly over the last year or two when China has become the world's largest market for automobiles.

SIMON: So anything U.S. manufacturers can do to compete?

Mr. LARDY: Well, they are competing. General Motors, for years, has sold more Buicks in China than they have in the United States. They're continuing to grow their sales at a very, very rapid rate. Many foreign firms are competing in China by making the goods in China and then selling them in the local market.

SIMON: Nicholas Lardy, senior fellow at the Peterson Institute for International Economics, thanks very much for being with us.

Mr. LARDY: Thank you.

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