Reshoring: China vs. The Robots

by Benjamin Studebaker

There’s a bit of a disconnect between international relations theory people and economic theory people. It is rare that a single person finds himself facile with both disciplines and this tends to introduce blind spots in thinking. One of the biggest blind spots concerns the future role of manufacturing in geopolitics. Many people believe that cheap wages in places like China will ensure a strong US-China trading relationship and reduce the chance of future security competition. They think China will rise peacefully. These people are missing an important economic trend–the decreasing relevancy of the US-China wage gap and the inevitability of “reshoring”, the relocation of manufacturing back into the rich countries from whence it came.

There are two reasons reshoring is going to happen, sooner or later:

  1. Energy Costs
  2. The Robot Economy

Let’s touch on each.

Energy Costs

The first big pressure to reshore is going to be rising energy costs. Let’s have a look at crude oil prices over the last decade:

The 07-08 price spike didn’t last for several reasons:

  • The economic crisis reduced demand.
  • Efficiency improvements reduced demand.
  • Alternative energy (fracking, solar, nuclear, coal, wind, etc.) increased energy supplies.
  • The US government opened the strategic fuel reserve, increasing supply.

However, as the global economy has found its legs (kinda sorta, years later than it should have), demand is once again rising and new supply is harder to access and costlier to drill. At a certain point, there just aren’t enough available efficiency improvements to make it reasonable to send goods that are to be consumed in the US or Europe across the Pacific Ocean. Rising energy prices have begun to countervail cheap Asian wages. The global economy is decreasingly a wage game, and increasingly an energy game. While in years to come energy costs might well prove sufficient reason in themselves for companies to reshore, the pressure to come home is compounded by the possibility that manufacturing may soon no longer require large numbers of workers, which brings us to…

The Robot Economy

Robots are better workers than people. They’re more consistent, they work more hours, and they don’t unionize. America’s tech companies are working every day to create the kind of computing power that eventually leads to highly efficient robot workers. The question is not if the robots will arrive, but when. When they arrive, they will eliminate any reason for companies to incur the energy expenses of offshoring.

What does that mean? It means that manufacturing in the developed world will make a dramatic jobless recovery. Energy (and consequently, transportation) will become the limiting factor in production, and that means that geography is going to matter a great deal. Businesses will attempt to locate themselves close to both consumers and their suppliers, and that means that manufacturing is going to make its home in the high-density population centers of the United States and Europe where domestic demand is highest. Countries with weaker domestic demand (i.e. developing countries) will have to import, and the high energy costs of transporting those goods will raise their prices and slow their growth rates.

This is not an outcome a country like China looks forward to, and it is for this reason that the Chinese are not just targeting growth rates, but high growth rates that border on being unsustainable. China needs to develop self-sustaining domestic demand to rival the US and Europe before the robots come if it wants to keep the new foreign businesses that have been driving its boom. Can the Chinese pull it off? Only time will tell, and the United States still maintains the leverage to help or hinder China in this respect–for now.

Assuming China can’t outrun the robots, how will this affect the American or European consumer? Two ways:

  1. Products are going to be cheaper and higher quality. Americans and Europeans will no longer pay for the wages of foreign workers or the energy costs of shipping good across the ocean, while robots will ensure higher quality products of more consistent quality.
  2. There will be no job growth produced from this, and the profits the robot companies will reap will consequently be distributed very unevenly, worsening economic inequality, weakening demand, and potentially contributing to secular stagnation.

How will we confront the demand-depressing inequality that the robots will produce? There’s a mix of policy options for escaping that trap:

  1. New jobs and new sectors as yet unimagined–even if this is possible, it’s doubtful that low-skill workers will be able to do these jobs (if they could, why not use robots?). This forces us to drastically change the skill set of most of the workers in the economy, and this may not be possible due to natural inequalities in abilities and talents and the inability of the state to accurately predict what skills will be needed in the economy 20 years from now.
  2. Keynesian Utopia–we can pay citizens to consume and pursue whatever projects they can think up. This means a universal basic income, and it means we embrace Russell and Keynes‘ views denying the value of work. However, the owners of the robots are unlikely to see that by giving up large portions of their wealth to redistribution they can actually increase their sales and wealth over time. Given that our current political system relies on financial donations, the robot owners will likely buy the candidates and prevent this outcome from arising on its own.
  3. Service Economy–the robot owners may attempt to pay everyone else to pamper them, as in the Gilded Age. The masses become their servants, hence the term “service economy”. The rich attempt to pacify the masses with bread and circuses. Most of the population spends their lives high on something, and we end up happy slaves. Think Brave New World.
  4. Marxist Revolution–the people rise up and nationalize the robots, hanging the robot owners by the rope their robots made.
  5. Political Reorganization to get the Keynesian Utopia–either by structural reform or structural reconstitution, we adjust the way the political system makes decisions in order to yield option #2 when it otherwise would not.

I don’t think we can do #1 in a reliable way, #2 is a pipe dream given the current system, and #4 has a host of issues. There’s the ordinary problem with Marxist revolutions–what kind of state will rise in their wake? Will the cure be worse than the disease? On top of that, a Marxist revolution is very difficult to accomplish in a non-agrarian society with modern military capabilities. The people only beat the army when the army defects to the side of the people, and robot soldiers don’t defect.

Therefore, the likely outcome is either the service economy or some kind of political reorganization in which the robot owners are politically outmaneuvered, ideally before they get killer robots they can turn loose on the rest of us.

That’s what happens on the domestic level. What about internationally? This turn of events means that the US and European economies will not always be deeply intertwined with China’s, and that means that future security competition between the west and the east is more likely than is commonly perceived today.

As for what happens if the Chinese do manage to develop faster than energy prices rise or human beings develop robot workers? In that case, the same things happen, they just happen in China too. China becomes more self-sufficient economically, and the economic connection between west and east lapses, albeit not as much or as quickly.