Cheap labour isn’t forever. The act of taking advantage of it enriches the work force over time. At least, that’s what should happen.
As America proved, a work force can, in effect, end up aiding its own overall decline due to a lack of competitiveness on wages and pensions. That sort of rigidity, whether good or bad, isn’t the only thing that can lead to a decline in manufacturing employment. Automation can too.
How would things have gone if the US, rather than taking advantage of cheap labour in China, had kept things at home and heavily invested in automation?
It’s a hypothetical that we will examine below. Not least because it’s a thought experiment that can get us thinking about the implications for China of the rise of 3D printers.
By way of introduction, we turn to Vivek Wadhwa over at Forbes last month. The technology entrepreneur explained eloquently why China stands to lose so much more than anyone else if automation keeps advancing. Indeed, forget about real estate bubbles and mis-allocated capital, the rise of automation could be the greatest Chinese black swan of all.
Here’s a flavour of the piece:
There is great concern about China’s real-estate and infrastructure bubbles. But these are just short-term challenges that China may be able to spend its way out of. The real threat to China’s economy is bigger and longer term: its manufacturing bubble.
By offering subsidies, cheap labor, and lax regulations and rigging its currency, China was able to seduce American companies to relocate their manufacturing operations there. Millions of American jobs moved to China, and manufacturing became the underpinning of China’s growth and prosperity. But rising labor costs, concerns over government-sponsored I.P. theft, and production time lags are already causing companies such as Dow Chemicals, Caterpillar, GE, and Ford to start moving some manufacturing back to the U.S. from China. Google recently announced that its Nexus Q streaming media player would be made in the U.S., and this put pressure on Apple to start following suit.
But rising costs and political pressure aren’t what’s going to rapidly change the equation. The disruption will come from a set of technologies that are advancing at exponential rates and converging. These technologies include robotics, artificial intelligence (AI), 3D printing, and nanotechnology. These have been moving slowly so far, but are now beginning to advance exponentially just as computing does. Witness how computing has advanced to the point at which the smart phones we carry in our pockets have more processing power than the super computers of the ’60s—and how the Internet, which also has its origins in the ’60s, went on an exponential growth path about 15 years ago and rapidly changed the way we work, shop, and communicate. That’s what lies ahead for these new technologies.
With the crucial point being:
Even if the Chinese automate their factories with AI-powered robots and manufacture 3D printers, it will no longer make sense to ship raw materials all the way to China to have them assembled into finished products and shipped back to the U.S. Manufacturing will once again become a local industry with products being manufactured near raw materials or markets.
In the future manufacturing will thus be relocated to the demand or resource point. A transition which Wadhwa says is actually already taking place.
But our fantastical tale is not really about the above. Rather, it’s a story that attempts to illustrate the causes and effects of automation by addressing what might have happened to the world had Americans not consumed Chinese products so eagerly from the 1990s onwards.
We begin with the following scenario. (And yes, beware, a few generalisations have been made for dramatic effect.)
It is the 1990s in the United States. Domestic competition is rising and labour costs are starting to weigh on manufacturers. Unions are unwilling to make compromises on salaries, a fact that leads to the erosion of margins and puts pressure on corporate profits.
For at least a decade, if not more, the country has been flooded with cheaply made, low-quality (easy-to-manufacture) goods from China — such things as toys, plastics and textiles.
This comes against a general decline in manufacturing jobs in the developed world, the result of automative advances and outsourcing trends towards emerging countries more generally.
Cash-strapped and floundering, manufacturers are faced with two real options: embrace China’s new position as a low-cost manufacturing leader and move production lines of superior goods there, and thus improve profitability — or, give in to fully automated production lines which undercut production costs almost everywhere else.
For the purpose of our narrative, let’s imagine that instead of moving towards China, America opted to go down the full automation route instead. By this we mean they never took production lines of superior goods to mainland China. Nor did they become dependent on China for component production. What’s more, they invested in the type of automative processes back at home that made it worthwhile to compete with China on the production of low-quality goods too. Lights out manufacturing on the grandest of grandest scales.
In short, they killed off the market for Chinese goods in the US completely.
So what happens next?
US as manufacturing king
So, had US robots undercut the Chinese in such a way… could it be that US manufacturers would have remained competitive on the domestic market, if not become the primary exporter of goods on a global level too?
Even if that was the case, the boon would arguably only have lasted a short while. Eventually the impact of automation would have misfired on itself — since it would only have cut American jobs further. Arguably the US may even have experienced a deflation akin to that experienced in Japan, as prices of goods began to catch up with underlying productions costs — which would now reflect resource costs only.
Indeed, with US manufacturers dominant on the global production stage, we imagine the US — much like Japan — would soon have become a trade surplus nation.
The rationale for that, of course, is that America’s biggest trading partners would have started to direct financial flow towards the US, as they sought the means to purchase US-made goods. A scenario which would almost definitely have prompted a sharp appreciation in the dollar.
Could this have unleashed currency wars of a different sort?
For example, consider if America, like China, had opted to stop currency fluctuations from interfering with its export dominance now that the economy was fully export driven. Would they have been tempted to deploy the same sort of currency depreciation strategies that the Japanese deployed back in the 1990s (as they too became global export leaders)?
Forced depreciation of the dollar, had it happened, would have flooded ever larger sums of dollars onto the international market. On the flip side, the US Treasury — as well as US corporates — would have started to accumulate extremely large foreign reserves (just like the Swiss are doing today). These eventually would have to be actively managed, and diversified in line with America’s exposures to trading partners.
But unlike in China where — under a similar dynamic — the yuan printed by China’s own intervention policies is contained within the domestic market, something that leads to inflation pressures, negative real interest rates and domestic asset bubbles, these dollars would have been free to flow internationally.
On a corporate level, international M&A and the purchase of international equities may have been favoured as a result.
The zero short-term rates that would have accompanied such frenzied dollar printing, meanwhile, would arguably have created a major US dollar vs rest-of-the-world carry trade at the same time.
What’s more, if trading partners had used those borrowed dollars to fund their US goods purchases, the US may even conceivably have ended up a critical global creditor nation. Albeit, a creditor nation exposed to deflation and negative rates, thus in need of ongoing domestic fiscal stimulus and liquidity intervention.
With the above, what we are therefore wondering is: had the US opted to automate rather than outsource back in the 1990s, would it have effectively become Japan? That is to say, would the US have become exposed to exactly the same problems it is now experiencing, but much earlier on?
Indeed, did running a trade deficit with China, and funding it with fiscal expansion, actually help America dodge the Japan bullet all those years ago, while giving China an incredible opportunity to grow off the back of it?
Which daresay implies that had Japan itself decided to run a trade deficit, and chosen to fuel its economy on private rather than public debt, it too may have avoided its own protracted deflation?
Though, who can really say what would have happened. It’s all hypothetical.
What we can say, however, is that China’s current automation dilemma does remind us a lot of what’s happened before.
And it’s fair to argue that if China does decide to go down the automation route, there could be major deflationary consequences — which, for now, are still greatly under-appreciated. Of course, there’s still the chance that China “does an America”. That it seeks out cheaper production costs elsewhere — notably by outsourcing to poorer countries and regions, like those in Africa or in inland China.
This, however, would mean taking up the deficit nation mantle; thereby potentially doing for Africa and its own internal regions, what America did for China all those years ago.
However, there is one major risk this time around.
Low-cost production techniques could soon become so advanced and so low cost — thanks to developments like 3D printing — that even the tiniest salaries in Africa will not make it worthwhile to employ human beings at all.