Is The Chinese Economic “Threat” Overblown?
Are the worries about China overtaking the United States realistic?
Kevin Drum points to an article in today’s Financial Times as support for his proposition that many of our fears about China are overblown:
Rising Chinese labour costs are changing the economics of global manufacturing and could contribute to the creation of 3m jobs in the US by 2020, according to a study being released on Friday.
….The Boston Consulting Group estimates that the trend could cut the US’s merchandise trade deficit with the rest of the world, excluding oil, from $360bn in 2010 to about $260bn by the end of the decade. The shift would also reduce its soaring deficit with China, which reached $273bn in 2010 and has triggered an intense political controversy over China’s exchange rate policies.
The article is unfortunately behind a firewall, but the general idea is clear. China’s biggest advantage over the United States right now is the lower cost of doing business, and principally lower labor costs. Right now, it makes sense for manufacturers to set up shop in China because, even after you factor in the cost of transportation, it’s cheaper do to business there. As the Chinese economy improves, that advantage is going to start disappearing and, at least in theory some of those jobs could come back to the United States.
Drum comments:
As China grows and gets richer, its workers will get paid more and it will make less and less sense to move U.S. production there. It’s a natural brake on offshoring. Add to it China’s demographic trends and you have a country that still has a bright future but is almost certainly not going to be able to keep up the torrid growth rates of the past few decades. Once it hits per capita GDP of $10-15 thousand or so, continued progress is going to come ever more slowly.
It’s inevitable that China’s growth rate will cool at some point. The United States posted rates of economic growth during the 19th Century, and the early part of the 20th Century, that would be unsustainable and inflationary today. At some point, China will start cooling down too.
I’m not so sure, though, that this will mean good news for U.S. manufacturing. It’s just as likely that the industries currently finding a home in the Middle Kingdom will look to places like India, Malaysia, Vietnam, or (if they ever managed to create a stable political and economic system) one of the nations of Africa. Certainly, some manufactures may find it cheaper to stay in the United States rather than go overseas, but that’s only going to happen if we take a long hard look at the costs that are imposed on businesses that operate here. That includes corporate taxes, which are among the highest in the world, regulations, health insurance mandates, and the myriad of state and local laws that impact how a business operates. Labor costs aren’t the only factor that influences a business to relocate, and closing that gap isn’t going to make those jobs suddenly reappear.
Yeah, maybe things will cool before we reach a 60-year high in under-30 unemployment. Doh!
(Basically after a decade of globalization and automation related changes to the workforce, it is silly to say “do we have much to fear, going forward?” It is history you should be worrying about.)
Is that what the kids call a tautology?
@ponce:
Fair point. I revised the sentence.
The lost decade for the middle class
Real Median Income had a bumpy climb from the 1960s through the 2000s, and then something bad happened. The right-wingers have their bogey men, like the “costs imposed on businesses” mentioned above, but those actually increased all during the growth phase. The social web expanded from 1960 to 2000, even as incomes rose.
Pfft. China has been expanding their manufacturing with wages that are only now reaching $2/hr. And nuts like Doug would tell us that it is the taxes added onto $8/hr jobs that matter.
Without tax, surely 8 would be less than 2, right Doug?
The future of China and everybody else ultimately depends on whether the idea of “global economy as perpetual motion machine” turns out to be correct or not. I’m putting my money on entropy.
Mike
Ah, the good old days – when plutocrats were treated with respect due to their station and everyone else quickly stepped off of the sidewalk and into the gutter when they passed.
Am I the only one that things the GOPs long-term strategy is to take us back to these happier times?
I’m willing to bet our effective corporate tax rates are on par +/- with other economies of the same size. I find it hard to believe GE is paying the highest tax rate in the world…when they are famously paying nothing. Other than that, it is clear that Doug is advocating a race to the bottom.
The combination of free trade and the shipping container has taken globalization to an unprecedented level. Distance is no longer a factor for all kinds of jobs placement decisions. When you can as easily pay $2/hr as you can $8/hr, of course you’ll choose $2/hr. That is the economic decision. But in one of the weirdest political twists out there, the very people who support free trade, and corporations beholden to their share holders and no one else, will go all superstitious on us. They’ll say no, it is not the wage differential. There scary and invisible things (from the Obama, in the latest cycle) that move those jobs.
It is perverse. They believe in the market, but cannot comprehend that the market is making its decision based on the very visible cost differentials in place.
“It’s just as likely that the industries currently finding a home in the Middle Kingdom will look to places like India, Malaysia, Vietnam, or (if they ever managed to create a stable political and economic system) one of the nations of Africa.”
That’s a fair point, and I think at this time an open question. But I do need to weigh in here, as perhaps the only commenter who actually invests in, manages and helps to make prosper middle market manufacturing companies. (and at odds with the views of the usual clowns and buffoons here – not to mention names ((john personna))
Our firm has definately detected a trend of a reverse migration back to the US for manufacturing footprint. There are a multitude of reasons: logistics, change orders/lead times, value engineered product content, and of course political uncertainty. Imagine if there was a change in regulatory and tax environment?
What will happen in some of the alternative countries I think, as I said, is an open question at this time. I do know that our firm’s foray’s into Thailand and Vietnam have not been encouraging so far.
Opportunity knocking, Mr. President.
You don’t have to imagine a change in regulatory environment…just look at how the Koch Brothers behave in a regulated environment…they flout laws and ethical standards, with no regard for the environment, or the safety of their employees…they do business with our enemies…they steal…they price fix.
Shorter Drew…race to the bottom baby…race to the bottom.
Someone please prove to me that de-regulation creates jobs. Cause I think it’s just more dreaming of unicorns from the extremeists on the so-called right. Tax cuts that pay for themselves…and WMD in Iraq…and same-sex marriage destroys the family…unemployment insurance encourages people not to look for jobs…and anchor babies…and evolution is just a theory…and climate change is a hoax…and birtherism. If you really stopped and counted up all the bullshit theories they peddle you would find it hard to believe anyone votes for a so-called republican ever.
The U.S. economy grew much faster during the 1930s and 40s (up to 18% a year) when that commie FDR was in charge of America than it did during the Gilded Age.
But nobody is allowed to mention that, of course.
@Drew:
One demerit for name calling.
Of course some number of jobs would come back at the margin, but we know it would not be enough for everyone. It will not make that $8/hr less than $2hr. People who want low wages, can handle the communications, the complexity of outsourcing, will stay.
I’d note that you actually start with the premise that I’m right. You don’t say “oh no, there was not a wave of outsourcing,” instead by personal experience you claim it is reversing.
Well you need more than one guy’s experience, you need gross numbers, for the country as a whole.
What was that under-30 unemployment again? Oh yeah, worst in 60 years.
Free trade is a good thing. Even when one country has an absolute advantage over another in costs both countries can benefit from comparative advantage, as David Ricardo pointed out nearly 200 years ago. We do not have free trade with China, mostly because of the ways in which China manages its trade.
China’s combination of export subsidies, import quotas, and pegging the yuan to the dollar is deadly to us. It is not free trade. It prevents comparative advantage from working as it should. Consequently, China’s absolute advantage has drained the U. S. of jobs that wouldn’t have been lost in the absence of China’s policy and hasn’t created the substitute jobs that would have been created under a regime of comparative advantage. Unfortunately, a good deal of the harm has already been done and even if trade with China were magically to become free would take some time to heal.
What we do now depends a great deal on what kind of a country we want to be. If we want to be a country in which a sizeable fraction of the people are permanently unemployable, we should just keep right on doing what we’ve been doing for the last 20 years. That will also mean that we’re going to need to tax those who still have jobs to pay for the benefits for those who don’t to keep them from starving. If we want to spread the tax burden around a bit, we’ll need more employed people to spread it to and that either means counter-acting China’s mercantilist policies in some way or subsidizing those jobs directly.
You pays your money and you takes your choice.
On the specific topic of this post I don’t think we need to worry about China’s ruling the world any more than we should have worried about Japan’s 20 years ago. China’s plate is dauntingly full without ruling the world on top of everything else.
@ Dave Schuler…
I’ve been thinking about this lately and, while I’m still iffy, I’m beginning to agree. The current situation, with many countries, is not a free market. We need to exert some sort of pressure to bring these other countries along…and not race to get to their level. It won’t happen overnight and it may never happen completely. But if I wanted to live in China I would. Throwing up our hands and saying the only thing we can do is give up on any sort of standard of living is no solution.
Another thing the fringe right can’t accept (or even mention):
China’s economic success is occurring in a much more heavily taxed and regulated environment that modern day America.
In fact, China’s high taxes and heavy regulations are part of the reason China is kicking America’s arse economically…
“I’d note that you actually start with the premise that I’m right. You don’t say “oh no, there was not a wave of outsourcing,” instead by personal experience you claim it is reversing.”
That’s because I’m intellectually honest, and call it as it is, no matter the commenter. You and the other leftist trolls that have infested this once excellent site might want to try it some time instead of being a partisan hack hiding behind a false veneer of non-partisanship.
Of course there was a wave of outsourcing. My 13 yr old daughter even knows that. But those of us in the real world of investing in and running companies are seeing this emerging trend back to the US. But feel free to keep chanting to the sky while holding your idols.
The United States does not have one of the highest corporate tax rates in the world. The effective rate is about 28%, which puts us right in the middle of the pack. Japan has a higher rate and yet manufacturing is a far larger sector of their economy, so please cease attempting to stop thought by invoking the usual neo-classical talking points.
I do, however, see no reason the rate can’t be lowered. Far better to tax capital gains as income than to maintain the current corporate tax rate.
@Drew: So your anecdotal research (based apparently on one sample that is somehow monolithic?) is pitching for what particular benefit from the government–tax break? regulation change? seed money? enterprise zoning?
Understand, I think it’s fine if you get what you need to expand your business, but don’t get all academic and intellectual about this. Full disclosure, please.
@Dave Schuler: “That will also mean that we’re going to need to tax those who still have jobs to pay for the benefits for those who don’t to keep them from starving.”
We need to keep them from starving? Wait a minute, that’s not in Atlas Shrugged; Ayn Rand never said anything about feeding starving people.
“Wha’ chu talkin’ ’bout Willis?”
Drew is religious. He doesn’t think he is, but like Doug he has a set of fixed beliefs which defy all reason. His belief system will defeat efforts to counter it with logic.
Our corporate tax rate is lower than Japan’s while they have a successful manufacturing economy? Doesn’t matter. Reset: taxes bad. Taxes = Bad is a presupposition, a dogma. Facts will be used only insofar as they support dogma. When they refute dogma the facts will be disregarded.
He’ll always go back to assumptions, always while denying that he’s anything but an empiricist.
The ratio of people who believe they act only on facts as opposed to the number who actually do is hundreds to one. There are always presuppositions. There’s always faith. (Schuler would be an exception. I don’t think he would claim to be entirely empirical, but he’s damned close.)
@michael reynolds: Well, Drew can also suck on this:
http://bilbo.economicoutlook.net/blog/wp-content/uploads/2011/10/US_mass_layoffs.jpg
The BIS keeps data on mass layoffs, particularly on why businesses say they’re doing it. Notice how layoffs due to lack of demand are 100 times greater than layoffs due to “regulation”. Funny how both Drew and Doug continue to shout “liar!” at American business owners.
Who cares about the Chinese? The European Central Bank is going to destroy us all.
I have been bearish on China for some time. The have an export based economy so they won;t survive a crash in the European and US economies. While they have an export based economy they must import food and oil. Yes wages have been increasing more importantly energy prices are going up and there are still shortages. And of course we shouldn’t forget that China has it’s very own real estate bubble and there very sick banks that go along with it.
@Dave Schuler:
Excellent post Dave. I wish more conservatives read this. What you are pointing at seems to be the classic problem of the “prisoner dilemma,” in that you can’t succeed if both sides are not cooperating to maintain a “free” environment.
That we are allowing China to do this is bad enough. That many are attempting to pretend that following this policy is somehow supporting “free trade” is scary in the extreme.
@Dave Schuler:
The difference between theory and practice is that in theory there is none, while in practice there is.
Comparative advantage works really, really, well as a mental experiment. We imagine societies which adapt quickly and efficiently to the new reality. It also helps if, in that mental model, if there are enough advantages to go around. It works well in a Lake Wobegon world.
… but if it really worked, in our worked as well as the mental experiment, it would have already.
(Chinese currency manipulations did not put Drew’s factories in Vietnam.)
@Drew:
Typical. No numbers, a fair amount of anger, and of course your standard Argument from Authority.
You’d at least appear a little humble if you chose another Authority now and then. It doesn’t always have to be you.
(Basically Dave, even if there are enough advantages to go around, Comparative Advantages is quiet on the adjustment time. It could be 50 years. It could be a century.)
(BTW Drew, you perceive me as left, because (a) I am consistently against far right wingers, and (b) you are not really aware of your own position on the far right. Heh, you think Jan is swell.)
((Resolved: The Far Right are this generation’s Dangerous Revolutionaries.))
I have a couple of buddies that are professional comedians. They are always looking for new material. Can I give them your number?
“As the Chinese economy improves, that advantage is going to start disappearing and, at least in theory some of those jobs could come back to the United States”
What happens when the military tells Congress and the Senate that in order to maintain military superiority AND national security they must amend the laws keeping the defense industry inside the United States?
4 million U.S. jobs are heading to China to lower our military costs because the alternative is unacceptable to Republicans. It is inevitable.
There was a great show (Frontline?) that tracked globalization shifts. It was interesting because it tracked jobs from the US to China in “shift A” and then from China to Vietnam in “shift B.” In the same show they tracked jobs from the US to Ireland in “shift A” and then from Ireland to Poland in “shift B.”
Of course it can all work out … when we reach “the global wage” but:
1) That will take time
and
2) of course it is not a two part opera, US and China