Globalization led to the rise of China as a manufacturing powerhouse, since finding the lowest cost producer was the priority. However, deglobalization, coupled with China’s demographic decline and aging workforce, has both eroded that competitive advantage and changed everyone’s priorities about cost. So, what happens next?
With China fading from the spotlight, Western countries will become more protectionist, which means manufacturing will be coming back home to places like the US and Europe. But that’s going to bring a while slew of problems with it.
While this transition will create significant job growth and increase the political power of labor, it will also bring high inflation and inefficiencies. This will force highly skilled workers to take on tasks that were historically outsourced to cheaper labor markets. So, if you thought inflation was bad now, just wait…
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Hey everyone. Peter Zeihan here coming to you from Yosemite. This is an unnamed lake behind me, so I’m going to claim it. This is Peter Lake and there’s Peter Island right in the middle of it. Great for laps. I built a summer home here. Any who? I wanted to talk a little bit today about the global structure of employment.
Looking forward and back, if you could sum up the concept of globalization into a single phrase, it would be lowest cost producer. The idea is, whoever can produce the product or the step in the supply chain at the lowest cost in a reliable manner pretty much gets the business. And when the Chinese built it up to the bar in the 1980s, they brought a billion industrial workers with them.
And that’s before you consider the fact that it’s a single legal structure, such as it is, or that they subsidize the bejesus out of everything to drive any competition out of business. Basically, they took all the assembly and the low-end stuff from the rest of the developing world, where no region was probably suffering more than Latin America.
Where the geography is much more difficult for infrastructure. And so the Chinese could outcompete them there as well. For the first world countries, and most notably, the United States, we got out of that sort of business because if you pay an American $50,000 a year to assemble a car, it’s going to be a really expensive car.
And so we doubled, tripled, quadrupled down on design work. And there are few industries where this shows up more than technology. The Chinese may make some low-end semiconductors and do a lot of assembly, but it’s the Americans who design most of the chips and make a lot of the high-end chemicals that are necessary for Chinese fabrication facilities to work.
So when someone tells you that the Taiwanese or the Chinese or the Koreans or the Japanese stole our industry in semiconductors, you know, no, we still do the high-value added stuff. The Chinese do the low-value added stuff. Anyway, this has been the state of affairs in increasing intensity for the last 30 to 40 years.
And now we’re entering a new world where the Chinese are aging out. And so they’re losing their economic competitiveness, even at the low end. And their workforce is collapsing because their population is in demographic decline, actually, demographic decline is too kind—demographic collapse. They now have more people aged 60 to 75 than 0 to 25, if I remember my math correctly. Anyway, it’s close.
Sorry, I can’t fact-check out here anyway. Lots of old people, very, very few young people, and even fewer people coming into the workforce in the future.
Okay, so what happens now? Well, the Chinese are no longer competitive. It’s only because of the sunk cost of the industrial plant that we still think of China as an industrial power.
And, you know, 30-odd trillion dollars in sunk cost in industrial plant. That’s not nothing, but it’s not enough without a workforce.
That’s before you consider the trade wars that are intensifying, regardless of who wins the American presidential election, regardless of who wins in various European elections. Both the American and the European blocs have turned very sharply protectionist, specifically versus China, and so we’re probably going to see significant crunches in the trade portfolio of products coming from China very, very soon.
What we’ve seen with the electric vehicles is really only the beginning. What that means is if the Europeans, and especially the Americans, still want stuff, they’re going to have to make it their damn selves. And there is the problem, because the United States has geared its educational system, its infrastructure, and its capital structure over the last 30 years to do more and more higher and higher value-added work, not a lot of assembly.
And so we’re going to have to take highly paid, highly skilled American workers and put them to work doing things that, under normal circumstances, they’d have people in another country do. Now, this will generate a lot of employment. This will generate a lot of political power for labor, organized or otherwise. But it comes at a cost, because if you’re going to pick one word to sum up globalization, it was efficiency.
And there is nothing about having people do jobs that they weren’t trained for, or that they’re overqualified for, that’s efficient. So yes, we will get huge growth, and yes, we will get huge inflation to go along with it. The 2, 3, 4, 5, 6, 7% that people have been bitching about these last 3 or 4 years, that’s just the start.
