May 9, 2005

Seismic shift has started

Posted in International Economy ·
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A deafening sucking sound can be heard all around the globe. It is the sound of the world’s manufacturing jobs being sucked into China. Over the course of the next 20 years, millions of jobs from Dungarvan to Denver will evaporate and re-emerge in either China or India. This will change our world profoundly, and it is far from clear whether we are ready for this change.

If you want to make sense of what happened in Dungarvan this week, you need to see it in the context of a seismic global change that will leave very few manufacturing jobs in Ireland – or anywhere else in Europe – in 20 years’ time.

This is not as dramatic as it seems, because our recent history books reveal that every 100 years or so, the global economy experiences a shift in its centre of gravity from one country or continent to another.

It is often said that the 19th century was Britain’s and the 20th century was America’s, while the 21st century will belong to China. Well, into this mix I would put India.

This century is likely to be shared between India and China. To examine how this will happen and what it will do to us, it helps to look at what happened when the US emerged out of its protectionist torpor just after the Napoleonic Wars.

The US did for agriculture in the 19th century what China is doing for manufacturing in the 21st. China is having a remarkable dampening effect on the price of manufactured goods worldwide. This effect is similar to the impact the US had on agricultural goods in the late 19th century.

In the first half of the 19th century, huge volumes of cheap US agricultural produce began to put pressure on European farmers. By the 1850s, the mechanisation of US agriculture had made this worse. US-bashing was as typical of governmental rhetoric in London and Lisbon as it is today. (Only this week, US treasury secretary John Snow was at it again, blaming China for the US current account deficit.)

Things went from bad to worse for European farmers after 1860.The period from 1870 to 1890 saw a sustained fall in the price of agricultural commodities in Europe as produce from the huge wheat farms of the US prairies and mid-west began to flood the market.

European food had always been a reflection of the price of land, the productivity of the land and the cost of local labour. When an entire continent came up for grabs in North America, the land was almost free. The huge tracts without any peasant holdings made intensive farming possible, raising the productivity of US land above that of Europe.

The railways in the US meant that they could get produce out of Ohio, Illinois and New York state and onto the world market quickly.

This caused a sustained agricultural recession in Europe. People’s livelihoods collapsed, prompting two important political developments.

The agricultural recession caused mass emigration from Ireland, Britain, Germany, Sweden and many parts of central Europe to the US, rendering the US even more productive. This reinforced the original deflationary impetus from the mid-west, and accelerated the urbanisation of Europe, leading to mass city-based labour movements in the 1890s and early 1900s, culminating in the rise of socialism and communism in Europe.

Those farmers who remained on the land became more militant, resulting in the loss of power by the old rural upper orders, from East Prussian junkers to the Boycotts of north Mayo. Such an enormous transfer of wealth to the US set the scene for the Americanisation of the 20th century.

Today, China is exerting the same influence through its increasing dominance in manufacturing, and it is arguable that the global political ramifications will be just as monumental.

The first reaction will be political, with calls to protect ourselves from China in manufacturing and India in high-tech and upmarket services. This is now a daily occurrence in the US, with politicians of every hue expressing doubts about China.

The second reaction will be financial.

Stock markets and investors will begin to doubt that high-cost manufacturers can survive.

Indeed, it is fair to ask how any western company or country can compete with 50-cent-an-hour factory workers?

Whether you are in direct competition with a Chinese counterpart or not, China is now showing the world what can be produced at a very low cost. For example, this week we have seen the giants of American manufacturing being slated because the markets believe that they are on a hiding to nothing.

General Motors (GM) and Ford, two icons of corporate America, have seen their bonds downgraded to junk status, implying that the market believes they have a reasonably high chance of defaulting on their debts. A few years ago, pre-China, they would have been given the benefit of the doubt, but not anymore.

The proximate reason for the travails of Ford and GM is the price of oil, which also has a Chinese angle.

Standard & Poor’s, the rating agency that downgraded the Ford and GM companies, said its biggest concern was the slip in demand for the biggest SUVs as petrol prices rose. Both Ford and GM are �heavily reliant” on large SUVs for their profits, the agency said.

Sales of the biggest SUVs fell by a fifth in the first three months of the year in the face of soaring petrol prices.

But who is driving up the price of petrol? One part of the problem is China, whose voracious demand for oil to keep its manufacturing factories at full production will keep oil prices high for many years to come.

As we can see, in an age of globalisation all these factors are interlinked. Job cuts in Dungarvan are part of an ongoing process that links the high-cost workers of Waterford with workmen with similar skills in Detroit and Munich. All of them are endangered species as China vacuums up the jobs, starting at 50 cent an hour.

It is not that the jobs will go there tomorrow; rather, the crucial issue is that when transnational corporations like Waterford Wedgwood make global investment decisions, they will be tailoring the cost in China into their calculations.

The problem for us is that this is a ridiculous race to the bottom. What is the point of high-wage Ireland if low-wage China is our benchmark? Why bother?

The aim of the Irish economy should be to make Irish society the most comfortable, affluent, high-wage, wealth-generating society in the world. So what’s the point of getting into a cost-cutting frenzy with the likes of China, other than to impoverish our people?

This is the crucial political question for the years ahead. Remember that, although from 1880 to 1914, the world experienced a golden age of free trade and the US became the world’s largest economy, the rest of the world reacted with war, mayhem and protectionism that lasted from 1914 to 1954.

Would you bet against some similar upheaval happening again? Would you bet that millions of manufacturing workers worldwide will just lie down in the face of redundancy and accept peacefully the ascendancy of China?

Would you? Remember, Dungarvan is only the start.


  1. Paul

    By far the best article you’ve writen in years hitting the
    core of what will shape our future. Bang on, Brilliant.

  2. Tom Farrell

    David,
    This is a crisp and compelling wake-up call for the more
    complacent echelons of Celtic Tiger Ireland. If we rest on
    our laurels, wallowing in our achievements to date, we will
    almost certainly go down the road of unsuccessfully
    protecting the past instead of successfully building the
    future. More than ever, we need to continuously beat the
    drum on driving growth via improved productivity (via
    technological progress) and far-sighted investment (in
    education, R&D, and physical infrastructure) -> it is not
    sustainable to pitch our ‘differentiation’ based on
    favourable legal/fiscal regimes and ‘cultural closeness’ to
    both contintental Europe and the Anglo-Saxon countries. As
    you point though, the crux of the matter is will we have
    the political leadership and courage to bring the nation
    along on this ‘Ricardian’ journey?
    I truly hope so…
    Rgds,
    Tom

  3. John Bennett

    very good article david, you are one of the few
    commentators who is really analysing what is going on in
    the world. Five to ten years ago many industry leaders in
    the west were whetting their lips at the prospects of the
    huge markets of China and India opening up to them. However
    they have found that they are notoriously difficult markets
    for western industries to break into and don’t really have
    much desire for western products and services. They only
    things they really want are commodities and raw materials.
    Western technology is becoming ubiquitous and the chinese
    can produce most of the things they need themselves. China
    is a huge country with a billion people. The growth it has
    experienced so far has benefited relatively few people in
    china yet look at the effect this has had on the
    commodities markets ( althogh speculators are distorting
    the market somewhat). That means that commodities over the
    long term are going to get more and more expensive because
    more and more chinese are going to get better off. Of
    course they won’t be wealthy consumers by western standards
    because there are so many of them. There will be a growing
    demand for oil,timber, wheat, beef etc. A leading
    commentator predicts that in the next 50 years western
    countries will become poorer because commodities which in
    real terms have been getting cheaper since the second world
    war are now going to start getting more expensive. Also the
    west is losing its edge in technology and this technology
    is becoming ubiquitous. So in a nutshell the future is
    higher prices for raw materials, falling wages in real
    terms in the west across all sectors not just
    manufacturing, political upheavel and the end of political
    complacency.

  4. Dan Hayes

    David,

    A mild rejoinder. You stated that from 1880 to 1914 the
    world experienced a golden age of free trade and the US
    became the world’s largest economy.But the US became an
    economic superpower during this interval because it
    practiced protectionism from Lincoln to McKinley to
    Theodore Roosevelt to Taft. Tariffs averaged 40% and US
    growth 4% a year for some 50 years.

    Protectionism has behind the rise of every great power in
    modern history: Great Britain under the Act of Navigation
    up to 1850, America from 1860 to 1914, Germany from 1870 to
    1914, Japan from 1950 to 1990, and China,which has grown at
    9% a year for a decade.

    China has climbed from Mao’s peasant agrarianism in
    precisely the same way that America flourished under our
    own Hamiltonian System; that is, through tariffs,
    manufacturing, and foreign exports. 21st-Century China’s
    average tariff rate is a Hamiltonian 11 percent compared to
    free-trade America’s Cordell Hullian 2 percent. China has
    overrun the U.S.’s domestic markets, while fiercely
    guarding its own turf. FOOD FOR THOUGHT!!

    Despite what the editorialists of the Wall Street Journal
    would like the gullible American public to believe; free
    trade is not all that’s it’s cracked up to be.

    I always look forward to and appreciate your thought-
    provoking comments, especially those I disagree with.

  5. Brian

    Your quote from the article.

    “The aim of the Irish economy should be to make Irish
    society the most comfortable, affluent, high-wage, wealth-
    generating society in the world. So what’s the point of
    getting into a cost-cutting frenzy with the likes of
    China, other than to impoverish our people?”

    should be the First Article in the Constitution and the
    primary aim of every political party in Ireland.
    Sadly it is not, are we not mature enough to recognise
    that national self interest is the first requirement of
    any Nation?
    PDs please note.

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