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China’s Economic Slowdown Won’t Restore US Manufacturing Jobs

China’s Economic Slowdown Won’t Restore US Manufacturing Jobs

Thursday, 26 September, 2019 - 06:00
In the early 2000s, American writer Gore Vidal visited China. Witnessing the astonishing pace of urban development there, Vidal declared that “the mandate of heaven has passed from us and come home.” But what happens when the mandate passes on again?

Since the turn of the century, China’s increasing economic dominance has certainly seemed like a mandate of heaven. As one US manufacturing sector after was gutted by the so-called China Shock, American workers watched their jobs vanish. Some economists pointed to trade with China as the main reason for labor’s falling share of national income in the US. 

But much has changed since the early 2000s. China isn't the invincible juggernaut it once was. According to the consulting firm Oxford Economics, China’s unit labor costs -- basically, wages adjusted for productivity -- were about a quarter of the US's back in 2003. Now, they’re almost equal.

There are several reasons for the change. The first, of course, is President Donald Trump’s trade war -- tariffs have made Chinese goods less competitive, and the uncertainty about what additional tariffs he might impose creates costs for anyone thinking of sourcing from China. But the erosion of Chinese competitiveness predates Trump. Wages have been rising steadily for years.

This trend isn’t likely to reverse anytime soon. China no longer has a pool of cheap rural labor that it can bring into the cities to keep manufacturing costs low. Its working-age population is shrinking by millions of people every year, with even larger drops to come.

If productivity were keeping pace with wage growth, China’s competitive position would be secure. But productivity has been sluggish since the Great Recession.

In other words, the competitive threat from China seems to be receding, at least as far as US workers are concerned. China’s industrial champions in the technology and automotive industries might still offer competition to American companies, but they’ll have to compete on innovation rather than costs.

Does this mean American workers will start to see their pay grow more rapidly? Perhaps. My Bloomberg Opinion colleague Karl Smith believes that the recent rise in wages as a share of gross domestic product could be the harbinger of a new trend of increasing labor compensation and falling inequality.

Smith notes that the recent rise in wages has benefited workers in the lower part of the distribution as much as those at the top.

These are certainly encouraging signs, but it would be premature to conclude that waning Chinese competition has anything to do with the modest wage recovery. An obvious alternative explanation is that the pay gains are just a result of the longest economic expansion since World War II. Wages also rose as a share of GDP in the 1990s, only to resume their downward slide after the boom was over.

There’s actually evidence that the recent modest rise in wages has little to do with reshoring manufacturing activity from China. The ratio of US manufacturing imports to domestic manufacturing output has risen, not fallen, in recent years.

The US is just shifting imports from China to other countries, mostly in Asia. Meanwhile, US manufacturing employment has increased, but only modestly.

Another reason for caution is that economists are far from certain that Chinese competition was a major factor in US wage stagnation. Other explanations include the decline of unions, a pro-business tilt in US regulation, and technological changes that made it cheap to replace workers with machines. Meanwhile, the same theories that predicted Chinese competition would make US wages fall fail to explain why Chinese wages also increased more slowly than overall GDP during much of the early 2000s.

It might be that Chinese competition provided American workers with their stiffest competition in the past, but technology will prove to be the challenge in the future. Manufacturing might make its way back to US shores, only to be dominated by robots, shunting many of the remaining manufacturing workers into the lower-paid, less unionized service sector.

Still, there are some reasons to think that China’s slowing economy might pay dividends for US workers. A cooling of Chinese consumption growth, together with the trade war, will probably make multinational companies less eager to do business in China. They could then shift their focus back to the US market, building offices and other facilities and increasing demand for domestic labor. Also, a Chinese slowdown could prompt international financial capital to flow back into the US, boosting investment and raise wages, albeit at the risk of fueling an asset bubble.

So beleaguered American workers will just have to wait and see whether the China slowdown and waning competition will boost their paychecks. But instead of simply waiting and praying that the storm has passed, the US should be looking at ways to shift national income back toward labor.

Bloomberg View

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