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China's New Chapter
Hill Gets Steeper For China’s Manufacturing Economy

Manufacturing wages are rising in China, but that’s not necessarily good news. CNBC explains:

As China’s economy expanded at breakneck speed, so has pay for employees. But the wage increase has translated to higher costs for companies with assembly lines in China. Some firms are now taking their business elsewhere, which also means China could start losing jobs to other developing countries like Sri Lanka, where hourly factory wages are $0.50.

Apparel manufacturing has been hit “extremely hard,” said Ben Cavender, a principal at Shanghai-based China Market Research. “The result has been that factory owners have gone on a massive investment spree outside of China.”

Companies are also investing in robots in efforts to automate as much as possible to offset labor costs, according to Jefferies analysts Sean Darby and Kenneth Chan. China’s industrial robotics market became the world’s largest in 2013, and is continuing to grow.

Outsourcing devastated the American middle class while creating a Chinese middle class. Now, the same forces are challenging China’s economic stability with the added pressure posed by more advanced automation.

It is becoming increasingly urgent for China to rebalance from a manufacturing economy to a consumer economy, and CNBC’s report shows that there’s a limited window in which this transition can be completed. Robotics and outsourcing will eventually force Chinese heavy industry firms to lay off employees no matter how much of a subsidy the government provides—right now, Beijing is bankrolling many big factories which wouldn’t survive on the open market. Higher wages in China increase demand in the short term, and so they may paper over some of the systemic challenges the country faces. But if hiring people in China to do factory work becomes more expensive than alternatives, then there won’t be any jobs paying any wages whatsoever.

Meanwhile, as the developed world has seen, factory workers don’t easily transition to new jobs in the service economy. Even with aggressive retraining programs, people often struggle to find work in a new industry. Chinese society has shown extraordinary flexibility as it has lifted much of a mostly-rural, agrarian population into an urban-dwelling industrial middle class. But even that development did not occur without dramatic consequences — social trust is very low in China, for example. Another massive transition coming before the last one is even completed (millions of Chinese still live in small poor villages) will disrupt communities and threaten political order. And that’s assuming there are new, better-paying jobs to replace the old ones and that the population is willing to retool for a new economy. If China sees the same kinds of challenges the West has in its struggle to replace factory work, the whole interconnected world will be in for a very rough period.

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  • Unelected Leader

    The thing Westerners have to remember is that the Chinese you encounter outside of China come from the minority. They come from the roughly 300 million who live a middle-class life, or better, by first world standards.
    Behind them are 650 million living a second world, Chinese middle class life ($9,000/year).
    And behind them are 350 million living in abject poverty.

  • lukelea

    With extreme income inequality, which automation can lead to, a service economy trends towards the common people serving the elites. Like in aristocratic times. There are alternatives however. For instance new statutory restrictions on the hours of labor combined with wage subsidies financed by a progressive tax on consumption. For the mathematically inclined, here’s how the latter might work:

    https://docs.google.com/document/d/1WIdVnQEWdYgYYly9iKkesWCVhfINvbtwuVq2GMOxMbw/edit

    • Observe&Report

      A progressive consumption tax? Interesting.

      However, a large contributor to income inequality is massive corporate tax avoidance whereby corporate revenue is “invested” in shell companies set up in tax havens. Investment doesn’t get taxed, so US multinationals get out of paying around $2.4trillion in tax.

      http://ctj.org/pdf/pre0316.pdf

      • Andrew Allison

        Tax avoidance consists of taking advantage of existing laws which can, and should, be changed by Congress to deal with the issue. As Judge Learned Hand famously wrote, “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.”

        • Observe&Report

          I am in full agreement with Judge Learned Hand. Nonetheless, corporate tax avoidance (though perfectly legal) is a serious problem because it means that everyone else’s taxes have to be higher to make up the difference.

          • Andrew Allison

            No argument there. The point which I was trying to make is that it’s not corporate greed but congressional malfeasance that the source of the revenue loss.

    • f1b0nacc1

      I cannot imagine a more economically (and potentially socially) destructive proposal. If your intention is to force capital flight, you would be quite successful with such a tax. If I were a rich man (with apologies to Teyve…), I would simply ‘invest’ my money in off-shore shells, then make my consumption purchases through them. Even if there is no tax avoidance (at least no income tax avoidance) this would neatly side-step the consumption tax, and be almost impossible to police. In the meantime, it would move vast amounts of capital outside of the US (the same mess we have with our existing corporate tax), while simultaneously be only useful to the very wealthy and those with sufficient resources to hire the legal/tax expertise necessary to make it work. That this destructive tax would be used to finance ‘wage subsidies’ (just who and how much? I can see this as a lobbyists dream plan!) is even worse….

      Restrictions on the hours of labor is wonderful for some jobs, but for others (much of IT, for instance, but hardly limited to just that) it is both impractical and unworkable. How would one deal with the self-employed, or new business startups, etc.? I suppose you can create some loopholes and exceptions, but then you have just opened the door once again to abuse by those with enough money and expertise to exploit those loopholes.

      This is such a bad idea that I can only believe that FG has hijacked your account here. (grin)…

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