The problem is in essence very simple. Decentralized Western capitalists have been able to squeeze domestic labor for forty years and run outsized profits. But now they are faced by a centralized capitalist (which is in effect the Chinese state) who is even more efficient in squeezing wages and increasing productivity. That centralized capitalist is now running out of business Western decentralized capitalists. This is why the latter have to move the heaven and the earth in order to stop the centralized capitalist from winning. But they have to do all of that while never mentioning the role their own profits play in it.
Western capital has spent forty years weakening labor’s claim on productivity growth at home. It now presents itself as the defender of Chinese workers abroad.
Pettis’s repeated accusation that China gains competitiveness by suppressing wages therefore rests on a blatant moral double standard. Western companies are encouraged to maximize margins, raise shareholder returns, automate production, weaken labor bargaining power, and reduce costs. Yet when China organizes production more efficiently and achieves lower industrial costs, the result is described as an economic distortion that other countries are entitled to correct.
There is also a deeper weakness in this explanation.
China’s rising industrial competitiveness does not primarily come from low wages. It comes from the interaction of three structural advantages whose combination is extraordinarily rare.
First, China possesses the world’s most comprehensive industrial system and the densest manufacturing supply-chain ecosystem ever assembled.
Second, it has the world’s largest market across a vast range of industrial products, intermediate goods, machinery, infrastructure equipment, and consumer products.
Third, it has built the world’s largest and most concentrated pool of engineers, scientists, skilled technicians, industrial workers, and manufacturing talent.
The United States possessed a comparable combination during its own industrial rise. But China has assembled these advantages today at an extraordinary scale, density, and intensity.
Low wages cannot explain this system.
Industrial density can. Market scale can. Engineering depth can. The continuous interaction between production, demand, technology, infrastructure, capital, and human talent can.
Reducing China’s industrial rise to “wage suppression” avoids confronting the much more consequential reality:
China has built an industrial system whose competitive advantages are increasingly structural, technological, and organizational.
DAMIJAN blog 