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The End of Cheap Chinese Labor

Chinas Mass-Produced Consumerism: An Unintended Result of Mao Zedongs Population Growth Strategy

  • Mao Zedong’s population growth strategy of the 1960s led to a “demographic dividend” in China in the 2000s, where many young adults were available to work in factories for cheap labor, resulting in an era of mass-produced consumerism
  • This period was enabled by the migration of rural workers from their homes to urban centers
  • China is now facing a declining fertility rate and, as such, labor costs have increased significantly over the last decade, making “Made in China” no longer inexpensive.

China Reaches Lewis Turning Point as Urbanization Peaks and Labor Declines

  • Before Mao’s death, the One Child Policy made high fertility illegal, resulting in a labor market suddenly shrinking
  • Today, those kids are adults and the rate of urbanization is at its peak
  • Companies who relied on Chinese labor are categorized into three groups
  • The total number of Chinese workers peaked back in 2015 and has been declining since
  • China is reaching what economists call the “Lewis Turning Point”
  • Foreign investment is decreasing as a result of this labor decline
  • To escape the “Middle Income Trap,” China must educate more evenly so that even “low-skill” factory work requires skills
  • Despite efforts to switch to a consumption-driven economy, little progress has been made.

China and Japans Experience with Navigating Middle Income Trap, Specialized Factory Towns, and Nebula, an Alternative to YouTube

  • China has faced challenges in escaping the Middle Income Trap, which few countries have accomplished
  • Japan’s experience provides a more realistic view of China’s future, with declining birth rates and other issues
  • Specialized factory towns have arisen as a result of globalization, one producing Christmas decorations and another producing rare earth metals
  • Nebula is an alternative to YouTube where creators’ interests are better aligned with viewers through exclusive content, improved features and lower cost.

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When Steve Jobs introduced the iPhone in 2007, Chinese labor cost about one U.S. Dollar — less  than Thailand or the Philippines and a bargain compared to Malaysia.Fast-forward fifteen years and wages have increased nearly everywhere.But China is in a league of its own.By the time the iPhone 14 was released last year,  the cost of labor had gone from one to eight dollars.Today, for the price of one hour of Chinese labor you can buy 4.5 in Mexico.  In fact, the only major Latin American economy with a higher cost is Chile.Not only is “Made in China” no longer cheap,  globally speaking, you might even say it’s expensive.So, what next for the “World’s Factory”?Sponsored by Nebula, the platform created, owned, and loved by creators. Sign up for  exclusive, early, and bonus content and to support PolyMatter directly.This is what two decades of cheap T-Shirts, TVs, and toys looks like.This is Walmart and Amazon and the Dollar Store.On the left are people.You know about the One Child Policy, but you may not know what immediately preceded it.Mao was convinced that a large population was the best deterrent against nuclear war.  On his final visit to Moscow, the chairman bragged about the ease with  which his country could lose 300 million people.So, although children — also known as free farm labor — are desirable  in any agricultural society, in China, this incentive was inscribed in law.Points, which could be redeemed for food, were awarded based on the size of one’s family.Surprise! The population exploded.30 years later, this is what China looked like in the year 2000.Each rectangle represents an age group — for example, 55 to 59 year-olds.  Babies are at the bottom and seniors at the top. The longer the rectangle, the larger that group.Let’s also add some historical context — the year each age cohort was born — over here.  These 45-year olds in the year 2000, for instance, were born in 1955.Now, the difference in size between these rectangles may seem fairly minor.  But see this “minor” difference between 25-29 year olds and 20-24 year olds?  That represents 25 million people.As you can see by the large number of 25-34 year olds,  Mao’s “strength in numbers” baby boom was quite effective.And what’s special about 25-34 year olds?  Well, they’re what an economist might classify as young, dumb, and broke. They’ve recently  graduated and they’re hungry to start working, even for low pay and with poor conditions.In other words, if you were trying to unleash on the world an endless  supply of affordable toasters and cheap T-Shirts,  you could hardly have designed a more perfect demographic structure than early-2000s China.In summary: your cheaply-made iPhone 3G was a distant ripple  of Mao Zedong’s 1960s-plan to survive nuclear war.The second ingredient to this generation of cheap,  mass-produced consumerism we take for granted was migration.All those baby boomers were born in rural communes way  out in China’s geographic equivalent of Montana.Reaping the fruits of industrialization required that they pack their bags  and travel hundreds of miles East, toward the urban coast.Between 1990 and 2010, ten million new fresh-faced migrants made this journey each and every year.  And at this rate, it’s awfully hard to imagine ever running out of labor.But beneath these impressively large numbers, China was just  going through the same demographic transition as every other country.In the first stage, you have an agricultural society. Without the aid of tractors or  harvesters or sprinklers, there’s only enough food to survive if everyone spends their time farming.And, on the farm, remember,  children are free labor. Just don’t expect to live very long without modern medicine.Lots of births, lots of deaths. China during the Cultural Revolution.Next, you start building a few rudimentary machines — nothing fancy but enough to allow  a single farmer to produce rice for, say, one point one people. Then something magical happens:  someone else’s time is freed up to focus on something like antibiotics.Mortality goes down, but fertility stays high. China in the 70s and 80s.As time goes on, more and more farmers put down their shovels and move to the city.  And in the city, children turn from valuable assets to expensive  liabilities. Fertility, therefore, starts to fall.Now, for simplicity, imagine just three groups of people — kids, adults, and seniors.Because mortality was until recently high, you don’t yet have a lot of 80 and 90 year-olds.  Because fertility was previously high, you now have lots of adults.  And because fertility is currently very low, you don’t have many kids.This is your country’s golden opportunity — what’s called a “demographic dividend”. A few short  decades where you have lots of working-age adults, with few kids or seniors to financially support.If you can put them all to work, you can ride this demographic wave all the way to modernity.And that’s exactly what China did.The only difference is that China’s demographic dividend happened on an extremely  condensed timeline. It ramped up incredibly quickly and is now collapsing all at once.Before Mao died, here in 1976,  he was actively trying to expand the population as quickly as possible.  Naturally, 30 years later, all those baby boomers entered the labor market at the same time.Immediately after Mao died, here, the One Child Policy suddenly made high fertility illegal. So,  today, the labor market is suddenly shrinking.For the last few decades, only diaper companies have felt this dearth of children. Economically speaking, kids are pretty useless.But today, those kids are no longer kids — and their absence is an absence of labor.Remember those millions of extra 25-34 year-olds from 2000?  They’re now, on average, 53, and rounding the corner to retirement.What was once a demographic dividend has become a deficit.Needless to say, China today is the youngest it will likely ever be in our lifetimes.  If you’re currently 20 and live to 90,  you can plausibly expect to see its total population decrease by about 40%.The rate of urbanization, likewise, can only go as high as 100%.  China is reaching what economists call the “Lewis Turning Point”.The total number of Chinese workers peaked back in 2015 and has declined every year but one since.So, where does this leave companies who rely on this disappearing labor?In one of three categories.First, if China is your primary market, you might be inclined to stay.If not, the question is: do you require skilled labor?If the answer is ‘no’, your company left China a long time ago.  There’s no reason to pay four times more when you could move to, say,  Mexico — especially given its proximity to American consumers.Just 21% of Nike footwear, for example, is still made in China.Finally, by dedu ction, it’s safe to assume any company  that hasn’t left cares about more than just cost.It helps that China has 62 million more 20-year olds than Vietnam has people.  You can’t beat its scale or flexibility. Apple can hire a small country’s worth of  temporary workers right before the next iPhone is released.Infrastructure is also important. Roads, ports, bridges… Chinese cities roll out the red carpet.  After all, the careers of local bureaucrats depended on their ability to attract businesses.Now, these companies have and will diversify, opening a few factories in Vietnam or India,  but they won’t leave China until they’re dragged kicking and screaming.We know they can’t easily escape because they just put up with three years of lockdowns,  protests, and travel restrictions.Apple used to reserve 50 business-class tickets between San Francisco and Shanghai per day.  You didn’t hear Tim Cook complaining when those flights disappeared for a thousand days.Likewise, although China’s labor force is in decline, its consumer market is still large and  relatively untapped. Starbucks, Walmart, and McDonald’s will continue expanding,  not shrinking in the country for the foreseeable future.That’s what happens to companies. But what about China, the country?Previously, the large working-age population  kept the cost of labor down, leading to increased profit.  Confident in its continued growth, companies then used that profit to invest back in the country.But as the population begins to decrease, so too does foreign investment.That puts China in a tough position — its labor is too expensive to be  competitive on the low end, but not skilled enough to occupy the high end.This is called the “Middle Income Trap” and the only way out is education.Greater skills equal higher wages. And those higher wages are spent on cars,  phones, and vacations — consumption that neatly replaces lost investment.And man oh man does China have education.College enrollment tripled between 2000 and 2015. Performance on the Gaokao — the college entrance  exam — is less a score than an identity. And the after-school tutoring arms-race became so intense  that the government was forced to intervene. If China had a state religion, it might be education.The problem is not so much a shortage as an uneven distribution.A tiny minority are extremely well educated while the vast majority are left behind.The country may churn out bachelor, graduate,  and professional degrees, but 70% lack even a high school education.What it really needs is something in the middle.These days, even, quote, “low-skill” factory  work requires skills those without a high school diploma may be missing.Meanwhile, there are only so many glamorous white-collar  tech jobs — the kind China’s college graduates were told awaited them.In other words, most of the labor force either lacks the skills required of a  mechanic, machine worker, or technician, or is unwilling to do what they see as “menial work”.The result of this labor mismatch is mass unemployment.Last year, the youth unemployment rate reached nearly 20%.Now, China has been trying to tackle these challenges since at least 2007,  when Wen Jiabo announced the shift to a consumption-driven economy.But little progress has been made since. Chinese household consumption as a share of GDP,  for instance, remains nearly half that of the U.S. or U.K.For years, the “rise of China” was considered a near inevitability.  Magazine covers depicted giant dragons smothering the globe.  Book covers portrayed red, white, and blue eagles being trampled by giant, red pandas.Increasingly, however, these predictions resemble the anxious, motivated,  and sometimes xenophobic portrayals of the Japanese economy in the 1980s.Beneath these narratives was an implicit assumption: that China would continue on  its current trajectory. That the “demographic golden age” would last forever. That it would  somehow be miraculously unimpeded by the challenges faced by every other country.But the simple fact is, these are really hard problems.Investing in vocational schools is not enough — it also must reverse the stigma which surrounds them.Neither is convincing couples to simply have  more children — it has to make things child care affordable.And it can’t just induce consumption — it has to address the root cause — unaffordable housing,  which swallows up people’s savings.It’s no wonder that out of 101 countries between 1960 and 2012,  only a dozen or so escaped the Middle Income Trap.A more realistic preview of China’s future may lie in the actual fate of Japan — still a large and  influential economy but severely constrained by fundamental realities like a declining birth rate.In the meantime, one of the most fascinating products of late-globalization are China’s  highly-specialized factory towns. For example,  the one town that produced most of the world’s Christmas decorations.Another one, Baotou, at one point produced 60% of the world’s rare earth metals and we explore  its rise in this episode of “China, Actually”, my Nebula Original series.You might be wondering why Nebula? The answer is simple: because it’s ours.Running a YouTube channel is like renting a space in a mall.  Sure, the mall brings us foot traffic and for that we’re grateful. But we’re also at its mercy. And  our interests aren’t always aligned. After all, malls have many tenants and advertisers to please.So, a few years ago my creator friends and I decided to build our own mall — one where  our interests are aligned with yours. On Nebula, our incentives are to design the  very best experience and produce the very best content — the end.Content like RealLifeLore’s “Modern Conflicts”, City Beautiful’s “Great Cities”, and Nebula  Classes, giving you a peek behind the curtain of how some of your favorite YouTube videos are made.Last month, the Nebula team asked for suggestions on Reddit and this year we’ll be adding features  like playlists, better playback controls, and loads of other quality of life improvements.Now, normally, Nebula costs $5 a month. But you can get it for just half that— with Nebula  Classes included at no extra charge — by signing up for a year with the link on screen or in the  description now. That’s just $2.50 a month for loads of exclusive content you’ll love.