When China Wakes Up

How much longer will China be happy making cheap goods for the West?

Vdare columnist Paul Craig Roberts points out that once a particular industry is moved to China, research and development in that industry is also likely to move there. This could have dire consequences for western economies.

At the moment China is quite happy pandering to the needs of western consumers. The Yuan is pegged to the dollar at an artificially low rate, while the US dollar is propped up by East Asian investors. This is increasing the competitiveness of Chinese manufacturers and boosting the purchasing power of American consumers.

Since the mid 1990s, low and middle-income westerners have become dependent on cheap Chinese imports to offset stagnating wages and rising costs for services. A pricey ticket to a football game is still affordable when a new toaster or kettle only costs $20.

However, two things are starting to change:

1. China is now producing more sophisticated, better quality goods

2. Chinese domestic demand is rapidly expanding.

In the early stages of industrialisation, capital starved industrialists make sure that their workers produce significantly more than they consume, but as productivity picks up, a surplus of goods accumulates and employers increase wages so that workers can consume the surplus.

Chinese firms are now buying up unprofitable western manufacturers, such as the UK car manufacturer Rover, and shifting the capital equipment back to China. Soon component manufacturers will also have to move due to transport and communication issues and it will become impractical to maintain research and development facilities back in the home country.

Furthermore, the Chinese will be able to study how the blue prints of the capital equipment and set up their own industries for building capital equipment. At this point China won’t really need to subsidise western consumers since they will have control over the whole production process.

The Chinese will then be able to float the Yuan and charge western consumers higher prices for their products. The West won’t be able to respond by moving production to cheaper countries, such as Bangladesh and Pakistan, because the West won’t own the patents for the products or the capital equipment needed to produce them.

Two other factors may also serve to increase the price of Chinese goods:

1. The cost of raw materials, such as oil, copper and wheat, are likely to increase considerably in the next 10-20 years

2. The aging of the Chinese population will put upward pressure on wages and the Yuan.

Prices for oil and gas, as well as farm products such as wheat and beef, are likely to increase and China will need a stronger currency to pay for these essential imports. At that point it won’t make sense for China to compete solely in low wage manufacturing.

The Indian sub-continent, with a much younger population than China, will then take over a lot of the world’s low wage production. Although, most western economists seem to hate the term “strategic industries” the West is going to have to identify essential industries that it won’t surrender to China.

The fact that Chinese companies are already producing aircraft components for a strategic firm like Boeing, suggests that this is not yet happening.