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How long can China keep its comparative advantage of cheap production for manufacturing goods? We are aware of rising inflation in China which is eroding their advantage, and here is an article about a UK firm which manufactures cushions, some from a factory in Kirkby on Merseyside and some from his factory in the Zhejiang province in China. The story comes from a programme ‘The Town taking on China’ to be shown on BBC2 at 8pm tonight - and subsequently on i-player.

The business owner, Tony Caldeira, had expected to be moving all of his business to China in order to survive. However, now he is finding that this is not the only solution, for a variety of reasons which provide useful examples for many AS and A2 economic theories. One is the supply and demand for labour - the shortage of labour in China, which is leading to pay rises of up to 50%, cutting the cost advantage for one of his products from 55 pence less to manufacture in China a year ago to just eight pence now. In spite of excess supply of labour in the UK though, Mr Caldeira finds it hard to recruit and retain a skilled workforce - he recently hired 17 new members of staff in a variety of jobs in his Kirkby factory, but five quickly left. He says the skills of textile manufacturing are being lost and that for the industry to be sustainable, they need to be re-established in the younger workforce.

One factor which has driven globalisation in the last 20 years has been lower transport costs - but at present the rising cost of transport for finished goods is contributing to that smaller differential as well.

He also finds the labour productivity in China far lower than in the UK, and also the quality of the product is different - the cushion factory in China produces cheaper cushions, the Kirkby factory offers high-end, hand-finished products. Jessica Lewis, buyer for TJX, the parent group of TK Maxx confirms that a “...UK product in the States adds value just because it’s made in the UK. The customer sees value in that” - so the price elasticity of demand for higher quality UK exports is a factor here.

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