The End of Cheap Goods?

This article on the decline of “the China Price” in the Economist has gotten a bit of attention recently. The article prominently features Bruce Rockowitz of Li & Feng, one of the largest global sourcing firm, whose ideas I think are worth treating a bit skeptically.

For 30 years manufacturers in China helped to keep global inflation in check. But that era is now over, says Mr Rockowitz. Chinese wages are rising fast. A wave of new demand, especially from China itself, is feeding a surge in commodity prices. Manufacturers can find some relief by moving production to new areas, such as western China, Vietnam, Bangladesh, Malaysia, India and Indonesia. But none of these new places will curb inflation the way southern China once did, he predicts. All rely on the same increasingly expensive pool of commodities. Many have rising wages or poor logistics. None can provide the scale and efficiency that was created when manufacturers converged on southern China.

The article then goes on to speak about how the China price is moving upmarket into electronics.

Mr. Rockowitz is almost certainly right about commodity prices, and I do think it is one of the challenges of the next decade or two to figure out how to deal with a world where resources are increasingly scarce. Wages are not nearly as large a problem as he makes it seem though. A few things to point out:

1. Wages have been rising in China at roughly the same speed for a decade, and that has done nothing to change end prices. The price of goods is determined more in the design and marketing phase than in the production phase.

2. There is absolutely no reason to say that South/South East Asia can’t produce the same economies of scale as China. Chinese companies are already subcontracting both to Southeast Asian companies, and to Chinese companies further inland (though in the latter case mostly those interested in domestic distribution).

3. Li & Fung has an economic incentive to convince their end buyers that price hikes are inevitable.

As mentioned in the Economist article, there is a transition going on in Southeast China from low-tech to high-tech manufacturing, which is obviously pushing sourcing houses to adapt their business. But Asia still has plenty of highly populated, and impoverished, seaside areas where manufacturing could thrive.

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Håvard Halland Håvard Halland

PHåvard Halland is a natural resource economist at the World Bank, where he leads research and policy agendas in the fields of resource-backed infrastructure finance, sovereign wealth fund policy, extractive industries revenue management, and public financial management for the extractive industries sector. Prior to joining the World Bank, he was a delegate and program manager for the International Committee of the Red Cross (ICRC) in the Democratic Republic of the Congo and Colombia. He earned a PhD in economics from the University of Cambridge.