Zehner: No Longer Made in China

China’s manufacturing edge is disappearing, and the trade war isn’t helping.

by Callum Zehner | 5/23/19 2:15am

China’s manufacturing prowess is no secret. In the 40 years since its market reforms, China has grown to become the world’s leading player in manufacturing, contributing 20 percent of global output. And the ubiquity of the “Made in China” moniker on everyday items is such that China’s preeminence often seems untouchable. This is, however, not the case. The features of the Chinese economy that have facilitated the country’s meteoric rise in manufacturing are dissolving. Manufacturing jobs are increasingly leaving China and moving abroad. And the ongoing China-U.S. trade war is only accelerating the flight of manufacturing from the Middle Kingdom. 

China’s manufacturing sector has struggled independently of the trade war. An oft-cited factor driving China’s manufacturing slowdown is a rise in wages; China’s average wage tripled between 2005 and 2016. This had led some economists to believe that the country is approaching its Lewis Turning Point — the point at which surplus rural labor is depleted and the labor pool is smaller — with the IMF citing 2025 as the exact date at which this will occur. Although this wage hike is undoubtedly a positive change for workers, it reduces China’s appeal to manufacturers. Higher wages make labor-intensive processes more expensive, pushing production elsewhere — in China’s case, often to Southeast Asia.

The trade war between China and the U.S., which has re-emerged in recent weeks, has accelerated the flight of manufacturers from China. President Donald Trump has raised tariffs on $200 billion worth of Chinese goods from 10 percent to 25 percent and has threatened to expand the list of tariffed goods. This led a number of firms to shift their production elsewhere. Pegatron, the Taiwanese firm responsible for assembling iPhones, announced that it is moving its operations from China to the Indonesian island of Batam to avoid higher U.S. tariffs. Since the American market is understandably critical to manufacturers, many foreign investors concerned about the trade war have simply put their money elsewhere. The trade war has the added effect of weakening China’s exports to the U.S. — where 18 percent of Chinese exports currently head — and thereby harms the economy by hurting export-reliant manufacturers. However, the manufacturing jobs lost will continue moving to places like Indonesia and Vietnam. The U.S., with its high cost of labor, will not benefit.

It is important to clarify that China continues to dominate global manufacturing, and this is unlikely to change for the foreseeable future. But a decline in manufacturing is happening nonetheless. In many ways, that is perfectly natural. As wages and standards of living rise, manufacturers search for cheaper labor, and other sectors of the economy, like the service industry, gain prominence. At the same time, poorer nations take on the manufacturing burden and use this to develop their own economies. The trade war only accelerates this trend, but it doesn’t bring back jobs to the U.S. In the meantime, potentially all we can do is sit back and keep our eyes out for more “Made in Vietnam” labels.