The declining population of China has made the news recently. In today’s post, Chris Clarke (bio below) gives us his views on population decline, artificial intelligence, (A.I.), and how robots might become the drivers for renewed Chinese growth. Chris points out that his article is not aimed at an academic audience. Therefore, he has refrained from citing reams of statistics and examples to support various points. Anyone with a passing familiarity of world trade, growth, and other statistics as well as geopolitics should be able to follow the text.
The US media has been delighted to report the recent fall in China’s population by over 800,000. The consensus amongst pundits is that it heralds the start of economic decline relative to the US.
What if the opposite were true?
China has become the second largest economy in the world. Its many years of remarkable double digit economic growth has threatened to oust the US from its number one position. As a result of the pandemic, the disruption of world trade due to US trade policy, and the Ukraine war, global growth has faltered. We are in a period of economic restructuring to deal with supply chains and other changes.
There are long established cultural and ideological differences between China and the US. It is not our purpose to discuss them here. (This blog has covered some of the cultural differences in several posts.)
US policy is clearly aimed at retaining its place as the dominant economic and military power. The US has acted against China with this intent. It has:
- Embargoed trade in key technologies with China and sought to force allies to participate.
- Sought to relocate and protect important research, manufacturing, and service activities in the US.
- Tried to prevent developing nations in Asia, Africa, and the Middle East from accepting infrastructure and other Chinese support, especially along the modern silk road. This is vital to Chinese trade.
- Maintained dollar dominance through its use in trading important commodities such as oil.
- Ringed China with military bases, equipment, and alliances at a cost of trillions of dollars.
- Sustained a constant flow of anti-Chinese propaganda in the media. Sources cited are often military or clandestine intelligence agencies and are rarely challenged.
Bringing jobs home to America and disrupting trade have dire global economic impacts. The US is an internally driven economy. As an export led economy, apart from strengthening its military in and around its territory, China has chosen investment and infrastructure for trade as its primary engines for growth.
Because China’s model is export focused, policies in restraint of trade severely damage its prospects. Europe and emerging markets also suffer, leaving the US relatively unscathed.
What if the schadenfreude and glee in the US over Chinese population decline are premature?
In the past, a positive flow of low-cost workers into countries has generated growth in their Gross Domestic Product, (GDP). Lower labour costs and an increasing population benefited China for many years. Now, some other Asian nations have that demographic advantage. China’s former one-child policy, and the usual decline in birth rate that follows increased family incomes, have reduced birth rates.
Once Japan, too, benefitted from low-cost labour. Then, its total GDP stagnated as labour costs rocketed, and the population aged. Yet Japan’s standard of living is not in decline. Visits to Japan reveal a standard of living that is far from falling. This is largely because GDP per capita increased as population aged, and fecundity faltered. Technology replaced now expensive and scarce labour. Comparisons of the success of Toyota to that of ailing General Motors are salutary.
To counter its increased labour costs, Japan exported capital and knowhow to benefit from lower costs available in other countries. Its corporations now operate from inside the US’s and EU’s heavily defended trade barriers. This route is partly closed to China, due to restrictions on its corporations’ activities in the US.
China may be about to benefit from policies like those of Japan.
In recent years, the deployment of A.I., satellite-navigated and robotic controlled agricultural machinery in China has been puzzling. The Chinese media proudly presents images of enormous machines operating on vast fields, without drivers and few supporting labourers.
Why deploy so much technology in a sector with such low pay? The opportunity to export such equipment might only be part of the answer. Perhaps canny investment in this and other industries is aimed at replacing a declining labour force with technology. This would offer new growth opportunities within China, as field workers move to more productive employment in cities.
(This is exactly what happened in the UK’s – and most other countries’ - early industrial revolution – Ed)
Another reason why Chinese growth may yet surprise us arises from the unintended consequence of US policy to starve China of technology.
Responding to challenges
Michael E. Porter was a famous Professor of Strategy at Harvard Business School in the 90s. Still eminent, he advises governments and corporations on competitive strategy. One of the examples he cites in his bestselling book, ‘The Competitive Advantage of Nations’, concerns the counter-intuitive success of Italian ceramic tile producers.
After World War II, Italy developed a reputation for the manufacture of ceramic tiles. Labour costs were low. Poor workers were willing to endure long hours and shifts. This favoured the manufacturers because production had to be 24/7. The kilns would be damaged if allowed to cool down.
Times changed. The growth of the Italian economy led to increased labour costs and competition for workers from other sectors. Employees had less need to work unsocial hours. Italian and EU labour laws restricted overtime and other working practices. One might expect that this would have destroyed the Italian ceramic tile industry.
However, according to Professor Porter, it encouraged the development of automatic machinery that allowed production to be maintained and enhanced. This countered the effects of the new labour regulations.
This example may be relevant to China. Perhaps China might accelerate developments in A.I., robotics and other technologies, rather than see them inhibited by US policies.
The US’s attempt to strangle its rival economically may thus have unintended consequences. Those who think that China only makes cheap copies of western products, should consider the jibes that were once aimed at Japan. China has thousands of years of history of valuing education and encouraging innovation. Its leaders and people have a strong work ethic and a determination to succeed.
US policies will force China to develop technologies independently from existing patents. It might leapfrog its way to higher growth. There is evidence that this is already happening. China already leads the way in several technologies in communications and electric vehicles. Billions of RMB from public and private investment is going into research and talent development in the chip industry.
As always with geo-politics as with much of life, US politicians should ‘be careful what they wish for.’
Chris Clarke – is a friend and former colleague. He has degrees in economics and management from the UK. He is a past chairman of the Strategic Planning Society. Working around the globe, he held leadership and partnership positions in strategic consulting, corporate finance, and advisory services. He was based in Europe, Asia, and the US, before moving to Central America. On a pro bono basis, Chris was a visiting professor at Henley Management College. He taught senior executives in Asia and Europe. For some years he also ran courses in M&A and corporate strategy for Management Centre Europe.
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