May 9, 2005
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 ï¿½heavily 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.