The Peter Zeihan Podcast Series - China Will Soon Lose the Title of "World's Manufacturer" || Peter Zeihan

Episode Date: September 6, 2024

Globalization led to the rise of China as a manufacturing powerhouse, since finding the lowest cost producer was the priority. However, deglobalization, coupled with China's demographic decline and aging workforce, has both eroded that competitive advantage and changed everyone’s priorities about cost. So, what happens next? Full Newsletter: https://mailchi.mp/zeihan/china-will-soon-lose-the-title-of-worlds-manufacturer

Everyone, Peter Zion here coming to you from Yosemite. This is an unnamed lake behind me, so I'm going to claim it. This is Peter Lake, and there's Peter Island right in the middle of it. Great for laps. I build a summer home here. Anywho, I wanted to talk a little bit today about the global structure of employment looking forward and back. If you could sum up the concept of globalization into a single phrase, it would be lowest cost producer. The idea is whoever, can produce the product or the step in the supply chain at the lowest cost in a reliable manner, pretty much gets the business. And when the Chinese bellied up to the bar in the 1980s, they brought a billion industrial workers with them. And that's before you consider the fact that it's a single legal structure, such as it is, or that they subsidized the bejesus out of everything to drive any competition out of business. Basically, they took all the assembly and the low end stuff from the rest of the developing world where no region was probably suffering more than Latin America, where the geography is much more difficult for infrastructure, and so the Chinese

could out-compete them there as well. For the first world countries, and most notably the United States, we got out of that sort of business, because if you pay an American $50,000 a year to, say, assemble a car, it's going to be a really expensive car. And so we doubled, the tripled, quadrupled down on design work. And there are a few industries where this shows up more than technology. The Chinese may make some low-end semiconductors and do a lot of assembly, but it's the Americans who design most of the chips and make a lot of the high-end chemicals that are necessary for Chinese fabrication facilities to work. So when someone tells you that the Taiwanese or the Chinese or the Koreans or the Japanese stole our industry and semiconductors,

no, no, no. We still do the high value-added stuff. The Chinese do the low-value-added stuff. Anyway, this has... has been the state of affairs in increasing intensity for the last 30 to 40 years. And now we're entering a new world where the Chinese are aging out. And so they're losing their economic competitiveness even at the low end. And their workforce is collapsing because their population is in demographic decline. Actually, demographic decline, too kind. Demographic collapse. They now have more people aged 60 to 75 than 0 to 25 if I remember my math correctly. Anywhere where it's close. Sorry, I can't fact check out here.

Anyway, lots of old people, very, very few young people and even fewer people coming into the workforce in the future. Okay, so what happens now? Well, the Chinese are no longer competitive. It's only because of the sunk cost of the industrial plant that we still think of China as an industrial power. And, you know, $30-odd trillion in sunk-cost an industrial plant, that's not nothing. But it's not enough without a workforce. That's before you consider the trade wars. that are intensifying, regardless of who wins the American presidential election, regardless

of who wins in various European elections, both the American and the European block have turned very sharply protectionist specifically versus China. And so we're probably going to see significant crunches in the trade portfolio of products coming from China very, very soon. What we've seen with the electric vehicles is really only the beginning. What that means is if the Europeans and especially the Americans still want stuff. They're going to have to make it their damn selves. And there is the problem because the United States has geared its educational system, has geared its infrastructure, has geared its capital structure over the last 30 years to do

more and more higher and higher value-added work, not a lot of assembly. And so we're going to have to take highly paid, highly skilled American workers and put them to work doing things that under normal circumstances that they'd have people in another country do. Now, this will generate a lot of employment. This will generate a lot of political power for labor, organized or otherwise. But it comes at a cost,

because if you're going to pick one word to sum up globalization, it was efficiency. And there is nothing about having people do jobs that they weren't trained for, that they're overqualified for. There's nothing about that that's efficient. So yes, we will get huge growth. And yes, we will get huge inflation to go along with it. The 2, 3, 4, 5, 6, 7% that people have been bitching about these last 3, 4 years.

That's just the start.