On the Path to a Service Economy: Made In Post-China™

by Ashok Kumar & Alex Gawenda

18 June 2013

“Those jobs are gone and they’re not coming back” snapped Apple Ceo Steve Jobs. The scene was a 2011 dinner held at the home of venture capitalist John Doerr in Woodside, California, a short drive south of San Francisco. Those on the guest list–the aforementioned Jobs, as well as Facebook’s Mark Zuckerberg, Oracle’s Larry Ellison, Yahoo’s Carol Bartz—presented a veritable murderer’s row of the billionaire geeks who, in recent decades, had prescribed the American Dream its glasses; and all were gathered to discuss, over champagne and snorting laughter, the future of their industry and its relationship to the domestic economy. The question–innocent enough, carefully phrased—of whether the iPhone might someday be manufactured in the U.S., where it was conceived and developed–and indeed where many earlier titans of tech, like Thomas Edison and Henry Ford, had flourished and employed millions of workers–was put by perhaps the only non-CEO at the table: President Obama.

“They’re not coming back.”

And they needn’t. For as today’s ever-more-enlightened corporate officers, such as those of the Silicon Valley coterie described above, are concerned—and they’re in agreement with virtually every ‘guru’ of Wall Street and swami in The City you want to name–economic nationalism—entailing as it does notions of regional financial security and job rootedness—is just one more material attachment; and international capital–she is a rolling stone. Local politicians, meanwhile, with their sepia-toned rhetoric of “reshoring” and “bringing back” these industries, which had anchored and maintained so many of their constituents, are simply playing the part left to them, and invoking nostalgia to assuage present pain, while avoiding the acknowledgement that it’s largely out of their hands now. There are of course numbers out there, factual and positive, to trumpet, of low-yield, capital-intensive jobs, conjured up out of youthful—and yes, high tech–industries since 2010, and these have certainly furnished real employment to real Americans, but they are, on balance, paltry, and no rejoinder to Mr. Jobs’ bald-faced observation. The era of ‘Made in America’ remains an all but closed chapter in American history—and, interestingly, its Chinese analogue now appears, in all aspects, on the same path.

Made in China

Foreign Direct Investment (FDI) in China began shortly after the industrialized nations underwent a crisis of accumulation that extended from 1965 to 1982.  What ascended out of the crisis was the period of “neoliberalism” which saw profitability rise between 1982 and 1997.  The emergence, movement, and on-going reconstitution of globalcapital was prefigured and circumscribed by the antagonisms of labor, a pattern consistent with 150 years of industrial history.

When out of the mass of productive powers thrown together for the war effort there emerged a much invigorated and enlarged labor movement, unwilling, in the decades following, to retire of itself—after defeating Hitler and winning welfare–into passivity, capital—well, capital became understandably anxious. Capital reacted to the labor strife, and falling profit rates, through the creation of labor-saving technological innovations, “technological fixes” but with a spike in union density, wildcat strikes and  wages, (and consequently) higher labor costs resulted in a “profit squeeze” in the US, and a reorganization towards lean production of deregulation of capital and labor markets, concessionary union contracts, and mergers and acquisitions.

The postwar boom had not been slowing in the 1960s, exactly, but the working and middle classes continued to demand a larger share of it.  In reaction, the proprietors of capital decided, in short order, to take their dollars and pounds, marks, francs, and lira, elsewhere; to void trade barriers, wherever protective of labor, and inaugurate a bonanza of deregulation that would cast all of Western labor into direct competition with its as-yet unorganized counterparts. But a good deal had already been achieved, in the way of: solidarity, wage increases, labor laws, a social safety net, inflation in the political costs of smashing up peaceful protests. To counter these remaining victories: a tremendous algal bloom in consumerism, reabsorbing wages through the tranquilizing allure of tchotchkes, purchasable on credit; a spiritual blight facilitated by a parallel increase in the ubiquity of advertisements—on TV, in the subways, on the buses, in the stadiums, by the highways, in the neighborhoods–and eventually on the internet, where they now blot out the sun. Globalization is a phase in a historical process, and can be reversed no more than could the industrial revolution.

So while the famous diplomatic mission of 1972–when all of contemporary Western media descended onto Beijing to witness America’s grand gesture of good faith–has since passed into official record with Richard Nixon’s jowly charm being the thing what done the trick and made sociable a hardnosed nation, the stakes were much higher than simply bringing another party in to foot conference lunch bills; capital needed new frontiers. With a few concessions on the Taiwan question, it got them. Let it be known, then: before Ronald Reagan’s stiff upper lip could overthrow the U.S.S.R.’s Evil Empire, and raise the Iron Curtain, Nixon’s canny ability to withhold racial epithets for a few days had itself reduced the Bamboo Curtain to toothpicks, packaged for export. “Rang yi bu fen ren xian fu qu lai,” announced Deng Xiaoping in 1978, “Let some people get rich first.” (And “some” did.) Billions of dollars of Foreign Direct Investment (FDI) inundated the countryside, summoning out of China’s vast reserves of unorganized labor and raw materials a great dread empire of toilers and smokestack-afforestation; a real life Mordor, forging acid-washed jeans by the ton. And within a scant few decades China had come out atop the world economic standings–at the number 2 position; a scoreboard-don’t-lie moment of apparently objective triumph for Chinese leaders and their neoliberal bedfellows.

But the Chinese working class, so often caricatured in the West as either globalization’s passive victims or its active vectors—as its stoic assemblers of sneakers or its eager army of blacklegs—have, in recent years been exploding this mythology, and asserting themselves in ever-higher numbers. Younger workers, who moved from their villages in the interior to the industrial metropolises then rising in the southeast, during the 80s and early 90s, are proving rather uppity. As Duan Yi, a Chinese labor activist, attests, “The new generation of workers born in the 80s and 90s are not like their parents. They want to make a life in the cities. So they are becoming better organized and more rebellious than ever before.”  Chinese government figures paint a picture of burgeoning upheaval: the incidence of mass protests between 1993 and 2003 grew six fold, from 10,000 protests to 60,000; from some 730,000 protestors to over 3 million.

Tellingly, the labor costs for big firms during this same period tripled—encroaching upon and often flattening profit margins. Indeed a 2012 survey conducted by the American Chamber of Commerce found only 73% of U.S. based firms in Shanghai to be profitable–down from 78% in 2011 and 79% in 2010: an ongoing slide the firms attributed to rising labor and logistical costs, a shrinking labor supply, and the development of domestic competition. Almost half of manufacturers and importers in another survey of the same year said they would, in light of the same reasons, consider moving out of the country altogether–of which 26% did. China is in the throes of a major shift in the balance of power between labor and capital, transforming producers into consumers, a deficit-West with a surplus-East.

And this bumper crop of wildcat strikes and work stoppages, which has only accelerated since 2004, is all the more significant for its illicitness in the nominally socialist state—where independent unions and strikes are in fact illegal, and all grievances—concerning workplace conditions, wages, the appointment rather than election of factory representatives—must be mediated through the All-China Federation of Trade Unions, or ACFTU. But the usefulness of that particular legal channel is demonstrated by the recourse en masse to extralegal means.

Whereas previous policy dictated that the nail that stands up get the billystick, recent events have shown government goons being, most ominously, called off. But this goon-leashing would be in line, apparently, with what a 2012 IMF report concluded was a large-scale return–accompanying not only rising labor cost but rising raw materialcosts as well–of the Chinese economy to services and away from investment and export-led growth; a transition in which the Chinese working classes figure also as consumers, whom must be cultivated, and not as just so much brute labor. And accordingly, 2012 marked the first time that China’s working population shrank (by 3.5m).  At this rate many economists, even in the IMF, predict that China will reach a point of labor scarcity soon, the so-called “Lewis turning point”, an inevitable developmental phase when wages surge sharply, industrial profits are squeezed, with a steep fall in investment.  The current process in China is similar to the crisis of the 1960s and 70s.  A workers’ struggle leads to higher wages and broader social reforms, resulting in diminished labor output and higher costs of maintaining workers in production as well as an increased “social wage”, squeezing profits further.  In the final phase: capital innovates by automating and/or leaving for a more profitable terrain.  The transition may deepen the crisis of accumulation in the “real economy”, at least in the short term, for international capital. Capital depends on the Chinese State to continue its role as comprador; a shift away from this configuration undermines industrial capital’s bottom-line.


And the oxen-cum-cash cows have been fattening. While consumer debt in the U.S. has itself grown a none-too-reassuring 10% in the last half decade, in China—which now has more active credit card accounts than the U.S. has citizens—it has ballooned an astonishing 67%. Concurrently, GDP output from services–transport, retail, real estate, etc.—is reaching new heights, and in the past 3 quarters has outperformed industrial sectors for the first time since 1961.

Such is the speed of this transition–from the world’s supply-side workshop to its next great marketplace–that manufacturing balance sheets in China and the U.S. may soon converge, and the twain to meet as early as 2015—at least below the Mason-Dixon, according to the Boston Consulting Group (BCG). In evidence: the relative momentum of Chinese workers, who have been winning real medium wage increases of 17% per annum since 2009 taking home nearly five timeswhat they were in 2000, while their American counterparts have annually coughed up 1.5% and the real value of UK workers fell to 2003levels in 2012.   And since wages, which account for 20-30% of manufacturing costs, were in 2011 only 30% lower in China than in the lowest-paying American states, that leaves for bridging a mere 10-15% gap. Once warehousing and logistical considerations are factored in, says BCG, respective profits, too, approach–and will by 2015 achieve–parity.

But this isn’t to suggest that a downturn in Chinese domestic industry will mean a consequent uptick in America’s, and—to their own amazement—the realization of politicians’ promises—because, as former U.S. Labor Secretary Robert Reich has recently written, “if we didn’t have to compete with lower-wage workers overseas, we’d still have fewer factory jobs because the old assembly line has been replaced by numerically-controlled machine tools and robotics. Manufacturing is going high-tech.” Some of these increasingly automated capital-intensive production that have already returned to the US have concentrated jobs in a narrow “highly skilled” class, reflecting the West’s intensifying economic inequality, and a rapidly drying-up consumer base.  Labor economists predict that this accelerated ‘technological fix’ of laborsaving automation is, and will continue to, “hollow out” the job market in the US, replacing living with dead labor, further substituting the material for the immaterial.  Even Chrysler’s much-ballyhooed “Imported from Detroit” campaign, with its promise of rejuvenation if the Heartland just toughs it out, is, by the company’s own admission, “[not] intended to be literal.” What’s left then for the Joe Schmoes, whose jobs, if they aren’t being exported, are beingincreasingly colonized by machines?

Manufacturers in the east and west will no doubt be following Apple supplier Foxconn’s example to replace a million workers with a million robots within 3 years to “cope with rising labor costs.”  In recent years the world’s largest contract manufacturer of electronics and China’s largest private-sector employer, Foxconn, has made global headlines after a series of suicides and labor protests.  In February 2013, Apple stocks tumbled by 2.4% after Foxconn’s announcement of a hiring freeze, announcing that they will be opening a 10,000-worker facility in Brazil whilst at the same time committing $10 billion to open factories in Indonesia.  This dwarfs Apple’s high-profile announcement of $100 million of investment in high-tech capital-intensive with a skeletal labor force operating to operate the machines in the US.

The rostrum set has their answer: learn to program, says David Cameron; “take a shot, go for it. Take a risk. Get the education. Borrow money, if you have to, from your parents. Start a business,” says Mitt Romney—just take on additional debt pursuing additional training, which you may have to do again many times before you retire, if you can retire. Or become a CEO. Easy peasy.

But skilled labor (which includes programmers and other degreed grunts, but also the “immaterial” sectors, comprising the creative departments of advertising, research and development, and so on) isn’t immune either. Their white collar domains–which were enlarged during industry’s decline to accommodate the new service economy, and cultivate its markets while managing a new and growing bottom floor of McJobs–are contracting as overseas markets mature and local workers move up the chain. And if the younger, high-tech elements have been insulated from this reshuffling, it is not owing to any especial significance in their work, but to a saturation point that has yet to be reached–and the lingering necessity for grey matter in the computer world.

And as the public sector—the West’s last redoubt of union power–suddenly finds itself besieged by state and local-level politicians, eager to turn economic crisis into opportunity and please big donors while marginalizing opposition blocs, the Keynesians—right on cue—come running over the hills, repair kits in tow. No, no, no: re-invest in the public sector! Rehire those laid off cops! Build bullet trains! It’s the only way to staunch job outflow and breathe life again into a moribund economy—and isn’t that what we all want? Sorry, but this ain’t your father’s welfare state, Paul Krugman. Deregulation has gradually rendered Keynesianism a lost cause. With little to no red tape holding it to a social contract or national allegiance, capital is free now to get its profits wherever it finds them. Thus, the present crisis differs not in degree but in kind, and—here comes Michael Spence with the cold water—“[a] structural problem demands a structural answer.” Government packages only restore pre-crisis demand temporarily, and are, “unlikely to generate the escape velocity needed to get out of the jobs hole,” because, “non-tradable job growth can’t mask the declines in the tradable sector anymore.” Steve no-Jobs wasn’t making it up.

Further cementing this redistribution of jobs and industry, from the U.S. (and Europe) to capitalism’s suburbs, is a shift in purchasing power: not only has the dollar been depreciating for a decade, but a full fifth of U.S. household annual income today goes to servicing debt—instead of, y’know, buying more things. Emerging markets, however, are entering consumer society’s first bloom; and strike-won wages there just beginning to disappear into iPhones and cineplexes.  Years of wage suppression in the West predicated on a neoliberal ‘social contract’ of cut-rate Chinese goods are in a process of mutation. As Bruce Rockowitz, CEO of Li & Fung which handles 4% of China’s exports to the US, claims “It is the end of cheap goods,” and that none of the alternatives will come close to curbing costs and inflation like China. “There is no next” after China, says Rochowitz, predicting that the price of goods will rise by 5% per annum, optimistically, and that Li & Fung’s sourcing operation has already seen annual price increases of 15%.

The Twilight of the Spatial Fix

Though, the question of ‘where next?’ persists, if these territories—Indonesia, Peru, Mexico, Eastern Europe—mature into service economies, will capital nest its factories and convert raw materials and labor into finished product? Africa, populous as it is, lacks the readymade infrastructure to support the logistics of large-scale manufacture. And though Vietnam and India, have variously beentouted as the “next China,” the real truth in these prophecies, it turns out, has less to do with their inexorable transformation into tomorrow’s workshops for the developed world, churning out new products by the tanker loads, than with their active resistance to such a future.

While China undergoes a labor shortfall, the UK and US have a burgeoning surplus population of unemployed or underemployed contract workers, aptly captured in the title of a 2012 Forbes article “Careers Are Dead. Welcome to Your Low-Wage, Temp Work Future” with 40% more people holding temp jobs since 2009 and the Bureau of Labor Statistics stating that three out of five new jobs created are part-time and low-wage with no possibility of progression.  A new generation of workers can look forward to lives marked by uncertainty and precariousness.

As a consequence of increasing labor costs the price of consumer goods in the industrialized economies will rise, coupled with mushrooming debt levels, falling real wages, a downward resetting of asset prices, accelerated automation of both the service and industrial sector and a reduction of debt-financed purchases, with the net effect of plummeting consumer-buying power. Even with the continued offensive by the state to attract investment and profitability, there is no policy that will benefit both the proprietors of capital at the top and the laborers at the bottom. Any plan that expands the workers’ share will undermine profitability, but without consumer spending the crisis will remain. The system weighs heavy by the contradictions embedded within it

While China is on a path to a service economy other emerging markets are turning export-oriented production inward towards domestic consumption.  In the US evolving ‘technological fixes’ exacerbate the crises of overproduction with dwindling options to divert it within the “real economy”.  The post-industrialized West should take heed: ‘those jobs are gone and they’re not coming back.’ In the 1970s neoliberalism’s raison d’etre was the overtake of labor by capital, a process of annexation that continues with today’s crisis.

David Harvey says that “capital never solves its crisis tendencies, it merely moves them around” but that “if the spatial fix is negated… global crisis in inevitable.” As capital continues down the path of least wages into ever-obscurer corners of the globe, following ever smaller returns, while leaving mobilized whatever labor it presses into service, it’s bound to run out of easily exploitable room; the spatial fix is a vanishing frontier, accelerating toward obsolescence.

What then? Evolution or revolution: history.

Ashok Kumar is a PhD student of Labor Geography at Oxford University. He tweets @broseph_stalin.

Alex Gawenda is a Chicago-based scrounger who writes sometimes.[1]

[1] Important insights and contributions from Joel Feingold

(This was originally posted at www.counterpunch.org on 14/6/2013 and is syndicated here with the kind permission of the authors[comrogues]).

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