Factory Asia: A Threat to both Poor and Wealthy Countries?

International trade has always performed as a mechanism whereby wealthy countries could take advantage of less-wealthy countries.  In the beginning, the example was set by England, a country with a worldwide distribution of colonies whose policies they controlled and a Navy that could coerce weaker countries into acceptance of disadvantageous trade agreements.  The goal was always to obtain lower-order goods at a low price so that they might be converted into higher-order merchandise that could be sold back to these countries at a premium.  This system was followed by a number of wealthy countries and worked well for them.

Just as a moral justification could be imagined by slavery’s beneficiaries, an economic justification could be conjured up to provide comfort to those benefiting from the trade situation.  The primary premise derived was that trade between two countries benefits everyone.  There was logic behind this in that a country selling raw materials to England would gain income which, in principle, could be distributed among the people of that nation.  However, the real profit was to be made in producing finished goods that required greater skill and more advanced technology.  To continue this advantageous exchange, England usually prohibited the development any of these advanced skills in its colonies.  The cementing of this inequality was expressed in a second economic premise, that of “comparative advantage,” in which it was claimed that trade works best when each partner produces the goods that they are best at producing.  In other words, undeveloped countries should continue to sell undeveloped goods to wealthy countries in order to be able to purchase developed goods from the wealthy countries.

It is not difficult to imagine that economic thinkers in wealthy countries benefiting from this economic system viewed it in a positive light.  What typically emerges from a morally embarrassing activity is an attempt to bury any immoral content.  Coercive trade policies became “free trade” policies.  Since their countries benefited and the underdeveloped countries did receive income from trade (short-term benefits rather than long-term benefits), therefore everyone benefited.  And because the level of trade was greatest when each trading partner produced what it was best at producing, the principle of comparative advantage was obviously correct.

In this way, reality was replaced by myth, and myth was elevated to economic law.  This favorable view of free trade forms one of the basic premises of the neoliberal thinking that has been ascendant in wealthy countries for the past 50 years. 

But what might happen if these economic myths become a straitjacket that imposes policies on wealthy countries that put them at a disadvantage with respect to those countries that have chosen to not believe in myths.

Japan and South Korea are two countries who became economic powerhouses by declining to accept neoliberal guidance.  They recognized that the only way to gain sufficient economic growth was to be able to produce and sell high technology products.  They depended on strong government policies aimed at developing certain key industries that would eventually allow them to manufacture products that could compete in price and quality in international markets.  This accomplished by subsidizing research and development and protecting these industries from foreign competition—often for decades.  Non-free trade made them economically strong.  China learned from these examples and accepted the role of low-cost labor-intensive manufacturer when it was offered by the wealthy countries.  Its goal was always to eventually compete with those countries who wished to take advantage of it. 

China has also become an economic powerhouse, and given its size and its ability to escape from neoliberal constraints it appears to have constructed significant long-term plans.  It seems to be positioning itself and its Asian neighbors into a network of factories and suppliers that will dominate manufacturing worldwide.  An article in The Economist, The future of Factory Asia, explores these developments.  It begins with this lede:

“Rising Chinese wages will only strengthen Asia’s hold on manufacturing”

And what is the level of “Asia’s hold on manufacturing?”

“Cheap Chinese labour has been crucial to the building of “Factory Asia”, the name given to the region’s complex of cross-border supply chains. Asia first emerged as a manufacturing power in the 1960s, when Japan began exporting electronics and consumer goods. Taiwan and South Korea followed its lead. By the 1980s Japanese firms were building plants across South-East Asia. But China’s opening up was the gamechanger. In 1990 Asia accounted for 26.5% of global manufacturing output. By 2013 this had reached 46.5%. China accounts for half of Asia’s output today. The region’s share of the global trade in intermediate inputs—the goods that are eventually pieced together into final products—rose from 14% in 2000 to 50% in 2012.”

“Today, 65% of the ingredients in goods China sells to the world are made at home, up from 40% in the mid-1990s. As domestic consumption rises, moreover, its own firms are getting better at designing the products its consumers want (think Xiaomi, China’s smartphone giant).”

Pundits claim that China’s success will lead to rising wages and make it less competitive in manufacturing.  The result is assumed to be a slowdown in economic growth as manufacturing moves to other undeveloped countries with cheaper labor.  It is further assumed that the economic “miracles” observed in Japan, South Korea, and China will then be reproduced in African countries perhaps.  That is the thinking that follows from the neoliberal belief that markets will always chose the correct solution.

But what if China and its neighbors don’t wish to depend on the fickleness of markets and wish to maintain and increase their manufacturing dominance no matter what.  Markets have demonstrated that they can arrive at better solutions than poor planning, but they have not demonstrated that they can improve on clever planning.  It was, after all, clever planning, not neoliberal myths that got them where they are today.

The point The Economist is making is that China is intent on continuing to capture ever more of the world’s manufacturing sector—and it is in a good position to do just that.  One of the consequences of moving manufacturing from domestic plants to factories in China and other parts of Asia is that the area has developed a massive supply chain that was necessary to support the manufacture.  Labor costs are no longer the dominant issue for many products; it is the ability to provide the myriad components necessary for assembly.  Apple constructs most of its items in China not because labor is cheap, but because it has a network of suppliers in Asia that cannot be reproduced now in the US.

China has no intention of losing work to lower wage countries unless it chooses to.

“Despite fast-rising wages, China’s factories are still far cheaper than their rich-world rivals. Many pay their employees just above the minimum wage, which at about $270 a month in China is less than a quarter that in America. And they are more efficient than many rivals in the developing world. McKinsey, a consultancy, found that labour productivity increased by 11% a year in China from 2007 to 2012, compared with 8% in Thailand and 7% in Indonesia. With Chinese factories just starting to pour money into automation, there is scope to improve productivity further. China became the biggest market for robots in 2013, buying 20% of all those made that year, according to the International Federation of Robotics. But it still has just 30 robots per 10,000 workers in manufacturing, compared with 323 in Japan. Foxconn, the Taiwanese firm that makes iPhones and has more than a million employees in China, says that it wants robots to complete 70% of its assembly-line work within three years.”

China has no need to control all of manufacturing.  There are advantages to moving some manufacturing to other countries, but it desires to keep those activities as close to home as possible—for both political and economic reasons.

“Hence the incipient rise of South-East Asia, which offers a big labour pool with low wages and mostly market-friendly policy environments. The average factory worker in China earns $27.50 per day, compared with $8.60 in Indonesia and $6.70 in Vietnam. Demography is another advantage: China may be ageing rapidly, but South-East Asia’s workforce is largely below the global median age of 29.7.”

Keeping production nearby will be an advantage to Chinese and other Asian consumers.

“The region’s biggest advantage over the rest of the world as production leaves China is simple: it is nearby. For all the benefits of telecommuting, geography matters, both to ensure quick shipment of goods and to let managers hop back and forth between factories. Rising Chinese consumption is particularly helpful to manufacturers located in its environs. As the purchasing power of Chinese buyers grows, the average distance travelled by consumer-goods exports is changing, depending on whether they are shipped from Asia, Europe or North America. From 2008 to 2012, the average journey length for Asian exports fell by 4.5%, while those from Europe and North America rose by 25.9% and 13.7%, respectively. That makes transportation costs cheaper for Asian factories.”

An article in the Wall Street Journal  by Charles Hutzler indicates the seriousness of China’s intent: China Banks on Sharing Wealth to Shape New Asian Order.

“In a speech to a regional forum….Mr. XI presented China as a partner willing to ‘jointly build a regional order that is more favorable to Asia and the world.’  He highlighted a new China-led infrastructure bank and other initiatives designed to leverage hundreds of billions of dollars to finance railways, ports and other development projects, and foster regional economic integration.”

If China and its Asian allies and satellites do manage to maintain their position as factory for the world, what path might other underdeveloped areas take to improve their economies?  Another comment in The Economist addresses this concern.

“They lack a large economy that can act as the nucleus of a regional grouping. The North American Free-Trade Agreement has brought Mexican firms into supply chains that criss-cross North America, but not Central and South American ones. High trade barriers mean western Europe will not help north Africa in the way that it has helped central and eastern Europe.”

“And even when places like India or sub-Saharan Africa prise production from Factory Asia’s grasp, another problem remains. Manufacturing may no longer offer the employment or income gains that it once did. In the past export-led manufacturing offered a way for large numbers of unskilled workers to move from field to factory, transforming their productivity at a stroke. Now technological advances have led to fewer workers on factory floors. China and its neighbours may have been the last countries to be able to climb up the ladder of development simply by recruiting lots of unskilled people to make things cheaply.”

Developing a manufacturing capability has always been the mechanism for economic growth and a stable economy.  It is not clear that service-based economies can provide prosperity for an undeveloped country.

Developed countries should also be concerned about the dominance of Factory Asia.  Most technical development is aimed at acquiring the ability to build something better, smarter, faster, cheaper….  To the degree that countries cede manufacturing prowess to another country, they are also ceding technical prowess to that country.  Apple made a lot of money manufacturing its gadgets in China, but in the process they provided China with the capability to manufacture competing gadgets.  China can now live without Apple, but can Apple live without China?

Short-term effects, which are all a market is aware of, can lead to long-term disasters.  We barely managed to save our automobile industry—and its deep supply chain—when neoliberals clamored to let the market dictate its death.  It is time to send believers in myths back to the sidelines and commit ourselves to some long-term planning.