IPFS Menckens Ghost

More About: Economy - International

Sobering article about the new economics

Growing rapidly, Dongguan's population peaked at 12 million in 2007, but has since dropped to seven million, due to competition from Vietnam and other countries with lower labor costs.  Seven million is comparable to the combined populations of Chicago and Houston.  Astonishing.

As we're seeing in the USA, such rapid changes can cause social unrest and the rise of demagogues and Marxists.  They also can cause dangerous tensions between nations.

I'm leading a related discussion next month at a monthly meeting of thinkers, most of whom have sharper minds than mine and more economics education.  Clearly, longtime theories and beliefs in the fields of economics and political science are being tested by the fact that massive amounts of capital can now flow instantaneously to any part of the world.  Reminiscent of Karl Marx's time, capital is trumping labor

Speaking of trumping, it's a tragedy for the USA that Trump had the right instincts about this problem but is woefully inadequate in intellect, temperament and political skills, so that his "solutions" would only make matters worse.  

Regards,
Mencken's Ghost

Mr. Xi's Trump Moment

The economic shocks of globalization have triggered social and political tensions in China just as they have in the U.S.

By Andrew Browne

The Wall Street Journal

October 22 -23, 2016

Just about a century ago, the Boston merchants who had helped to build the textile town of Lowell, Mass., into the cradle of the American industrial revolution started pulling out. First, the spindles and looms shifted to the low-wage South. A half-century later, they migrated to the "miracle" economies of East Asia.

In the 1990s, much of the global textile industry relocated yet again, to cities like Dongguan in southern China, the world's factory floor. Now, as Chinese wages soar, textiles and apparel along with other labor-intensive export industries are on the move once more, this time to inland China and, increasingly, to fast-growing regional rivals such as Vietnam and Bangladesh.

Globalization is shortening these cycles. Technology accelerates the churn. Like Lowell and a more recent procession of U.S. manufacturing cities, Dongguan is emptying out, and the economic and social shocks are triggering a political earthquake in China just as they are in the U.S.

The political dynamics in the two countries are very different, of course, but there are striking parallels. The most obvious are the wrenching dislocations created by a world of impatient capital, footloose labor and intricate cross-border supply chains. Vulnerable workers in both countries are feeling the pinch. Their insecurity drives both the "China Dream" of Chinese President Xi Jinping and Donald Trump 's mantra of "Make America Great Again," and it is echoed in the platforms of populist politicians across Europe.

Anti-globalization has gone global, and its apostles offer comfort and deliverance in a shared language of nationalism and xenophobia. Trumpism is partly a response to international competitive pressures, and so is the Xi phenomenon, with its triumphal message of a nation once humiliated by the West now gloriously ascendant.

Dongguan's rise and fall would be familiar to any student of New England economic history. Lowell's heyday as an industrial center lasted from the 1820s to the 1920s. Situated at the confluence of the Merrimack and Concord Rivers, the city was the manufacturing wonder of its day. The poet John Greenleaf Whittier called it "a city, springing up, like the enchanted palaces of the Arabian Tales." It was organized around boardinghouse mills, which provided decent-paying jobs initially for New England farm girls, along with a place to stay. They operated spinning machines based on a design stolen from Britain.

Portuguese mill girls who worked in Lowell, ca. 1910-15. PHOTO: EVERETT COLLECTION

Dongguan has followed a similar trajectory, only on an unimaginably vaster scale. Once a rural backwater in the Pearl River delta, it grew into an industrial colossus by drawing on a national army of 130 million or so migrant rural workers, who bunked together in cramped factory dormitories. Industries that once flourished in New England eventually ended up here, along with their tools and technology. Dongguan was Lowell ("Spindle City"), Waterbury ("Brass City"), Leominster ("Plastics City"), Gardner ("Chair City") and Holyoke ("Paper City") all rolled into one.

Few in America foresaw this wholesale devouring of the country's manufacturing heartland. The threat arose from empty rice paddies. Dongguan, writes the journalist (and former Wall Street Journal reporter) Leslie T. Chang in her book "Factory Girls," was "a place without memory." Today, it is mimicking Lowell in another way, as its prosperity fast fades away.

At its peak in 2007, says Lin Jiang, an economics professor at Sun Yat-sen University's Lingnan College, Dongguan's population reached 12 million. (The official census data is unreliable.) Then the global financial crisis struck, and China's exports dried up. Dongguan has never recovered. Its population has shrunk to just seven million, Mr. Lin estimates, a loss equal to the combined populations of Chicago and Houston.

The greatest manufacturing boom in history is fizzling, dragging down national economic growth. Henry Cui, the vice president of operations at People Group, a Taiwanese-owned shoe maker in Dongguan, says that his industry is fragmenting: Sneaker production is shifting to Vietnam and Indonesia, high heels to Brazil, ankle booties to Spain and Portugal. Margins are already wafer thin, and his workers are demanding up to 15% annual pay increases. Meanwhile, Mr. Cui's customers on High Streets across the U.K. have been clamoring for discounts since the Brexit vote bashed down sterling. "If you go cheaper and cheaper, eventually you die," he says.

Deindustrialization in Dongguan looks very different from its historical counterpart in New England or in the smokestack cities of the American Midwest and South, which have emerged as Mr. Trump's political base. There, communities disintegrate, skilled factory workers bag groceries at Wal-Mart, and many of the unemployed succumb to the opiates plague. In Dongguan, blue-collar armies simply melt back into the countryside, and many are able to pick up work in urban areas closer to home.

There are jobs available in China's emerging services sector. Even in depressed Dongguan, employment agencies advertise positions at $1,000 a month for motorcycle couriers who deliver office lunches and packages. And, so far at least, the Chinese public's faith in their government's economic management remains solid. Almost 90% think that the economy is in good shape, according to a recent Pew survey, and 60% believe that their country's involvement in the global economy is a good thing.

But Mr. Xi sees the clouds gathering. He speaks with a shrug of the "new normal" of slower growth, and his assertive nationalism—he popped up on television recently in combat fatigues and has used reefs in the South China Sea to create military-style fortifications—betrays deep insecurities.?

Mr. Xi has a daunting problem on his hands: The consumer economy isn't expanding fast enough to make up for lost manufacturing. GDP growth has been slowing every year since 2011. E-commerce may be booming, but bricks-and-mortar shops are shedding staff. Mass layoffs loom in "zombie" ?state enterprises that crank out products in massive oversupply, like steel rods and cement, and survive only on government-directed handouts.

The slowdown threatens a cherished Communist Party goal of doubling per capita GDP by 2020, a year ahead of the centenary of the party's founding, compared with its level in 2010. For that to happen, growth must not fall below 6.5%. Last year, it was 6.9%. Yet economists question whether this growth is real or merely an artifice of state planning. Bank loans build airports that land few flights and roads with sparse traffic.

Premier Li Keqiang is pumping money into high-tech manufacturing, like semiconductors, while promoting "mass entrepreneurship and innovation" to create jobs; 4.4 million startups got off the ground last year, with generous government help. Daniel Lin, a serial entrepreneur, runs a business incubator with a $7.5 million grant from the Dongguan government. Its first candidate: a team promoting a smart bra that monitors for cancer.

There is no knowing whether such ventures will ever succeed. Meanwhile, Beijing is keeping the economy buoyant by inflating an already massive property bubble and adding to a mountain of national debt.

At stake is the legitimacy of the Communist Party, rooted as it is in delivering economic performance. Driven by fears of his party's demise, Mr. Xi has conjured forth a whole new rationale for Communist rule based not on ever-growing prosperity but on nationalism and military prowess. If the masses can no longer be excited by galloping growth, the official thinking goes, they can perhaps be inspired by rapidly proliferating power.

In this context, Mr. Trump's anti-trade agenda is incendiary. It is also too late. The damage to the American workforce is done. Slapping a 45% tariff on Chinese exports to the U.S., as Mr. Trump has threatened to do, won't return jobs to places like Lowell, which is the ostensible reasoning behind his plan. Rather, it will hasten the outflow of Chinese jobs to lower-cost destinations such as Cambodia and Myanmar. Mr. Trump's promises to bring back jobs, says Robert Forrant, a former factory machinist who is now a history professor at the University of Massachusetts Lowell, are "beyond ludicrous."

America largely wrote the rules for global trade after World War II. Successive U.S. administrations treated trade almost as a gift that they bestowed on the world; free movement of goods and capital would bind the U.S. more closely to its friends and allies in a liberal global order. This generosity, however, failed to take account of China's game-changing potential.

Between 1991 and 2007—the 16-year period when Dongguan was on a roll—the value of U.S. goods imported from China increased by a staggering 1,156%, according to research by the economists David H. Autor, David Horn and Gordon H. Hanson. U.S. exports to China grew much less.

In China, trade helped to lift hundreds of millions out of poverty. In the U.S., it is one factor that has contributed to widening wealth disparities and four decades of stagnant wages for the middle classes. Technology is another reason. While both are disruptive, argues Edward Alden, a senior fellow at the Council on Foreign Relations in his forthcoming book "Failure to Adjust," there is a crucial difference: "Those who lose their jobs to computers are likely to find new ones, while those who lose their jobs to imports are much less likely to do so."

The real problem is not globalization, argues Mr. Alden, but the "irresponsible" political response by the U.S. government to those whose lives it upends. "Washington has left most Americans to fend for themselves," he writes.

Mr. Trump's trade proposals, if enacted, would almost certainly spark a trade war, cutting deeply into the profits of U.S. companies that do well in China, such as Boeing, General Motors, Apple and General Electric. Trade with China supports high-paid jobs in the U.S. for software engineers, marketers, advertisers, retailers, shippers and insurers. If a trade war precipitated a pullout of Chinese capital from American bond markets, it could raise interest rates and throw the economy into recession.

Trade friction, too, would likely harden the Chinese government's growing protectionist instincts, a reversal of decades of thinking since Deng Xiaoping. The visionary Deng realized that China's competitive advantage was its enormous population of cheap workers and that throwing open coastal China to foreign-owned factories would be the fastest route to national wealth and power. Gains from the resulting "catch-up" growth, however, are dwindling.

Beijing is more jealously guarding its domestic markets, and a sharp turn toward authoritarianism under Mr. Xi is reinforcing the trend. New national security laws are driving out U.S. tech companies. Anti-Americanism is on the rise. A video recently released by the Supreme People's Procuratorate warned of the "dark shadow of the Stars and Stripes."

Moreover, wealth disparities in China have grown even more pronounced than in the U.S. Mr. Xi faces an influential Maoist fringe convinced that Deng's entire economic "reform and opening" experiment betrayed the workers in whose name the Communist Party rules.

World trade is slowing. Simple panaceas and strongman personas resonate among publics weary of complexity. "I alone can fix it," Mr. Trump told the Republican National Convention. Mr. Xi is concentrating power in his own hands. The biggest question for China-watchers today is whether a Party Congress next year will set in a place a political succession to Mr. Xi or whether he will make a Putinesque bid to stay on indefinitely.

For both countries, the painful costs of globalization are stubborn realities, and history suggests no easy escape. Even now, after decades of fighting decline, Lowell is still not fully back. Cambodian and other immigrant communities have brought new life, but the old Boott Mills, where New England farm girls once toiled, is now a cultural heritage site for drawing tourists, and another old industrial landmark serves as a business incubator.

Lowell's city fathers, says Mr. Forrant, the history professor, like to tell an optimistic story of "rainbows and unicorns." But there is another, darker narrative—of aging factory workers cast aside. They are out of place in a renovated downtown colonized by artists, movie producers and tech entrepreneurs.

Dongguan's prospects are just as ambiguous. Gong Jiayong, vice president of the local branch of the China Center of Information Industry Development, ticks off a list of priorities to turn around Dongguan's fortunes that would be familiar to city authorities anywhere in the U.S.: build brands, deploy robots, boost spending on industrial research and development. "We're moving from copying to inventing," he says.

In a way that neither city might acknowledge, each has a stake in the success of the other. Over the years, expanding trade and investment between the U.S. and China provided the ballast for the world's most consequential relationship. We know where the alternatives can lead. In the 1930s, America turned inward and threw up barriers to trade. Global conflict rapidly followed.

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