China May Already Be Losing the Trade War

The Chinese yuan.

Capital outflow is spelling trouble for Beijing.

“Made in China” is not as cheap as it used to be, as labor costs have risen rapidly in the country's vast manufacturing sector. “Chinese factory workers are now getting paid more than ever: Average hourly wages hit $3.60 last year, spiking 64 percent from 2011, according to market research firm Euromonitor. That's more than five times the hourly manufacturing wage in India, and is more on par with countries such as Portugal and South Africa.”

In the 2000s, U.S. labor costs were twenty times that of China, according to the U.S. Commerce Department. Today, however, the same survey has U.S. wages only 4 times more than Chinese workers, with the gap closing rapidly due to rising wages and prices in China—as opposed to the United States and other industrial nations. Inflation is a significant problem in China, yet few foreign observers ever mention the issue in the context of either the currency or the economy as a whole.

As the new government of Donald Trump engages with Beijing in areas such as trade and economics, Washington needs to appreciate that the economic situation in China is changing rapidly and has significant political ramifications. Rising wages and prices are eliminating China’s relative advantage in the global competition for investment and production, while higher productivity nations, such as the United States, are actually becoming more alluring. One need only observe the growing flow of direct investment from China to other nations in Europe, Latin America and North America to understand that the People’s Republic is no longer as attractive a destination for capital as it was two and three decades ago.

Christopher Whalen is senior managing director and head of research at Kroll Bond Rating Agency. He is the author of Inflated: How Money and Debt Built the American Dream (Wiley, 2010) and the coauthor, with Frederick Feldkamp, of Financial Stability: Fraud, Confidence, and the Wealth of Nations (Wiley, 2014). His website is www.rcwhalen.com.

Image: The Chinese yuan. Wikimedia Commons

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