Kiwi analyst Michael Parker on why robots and modern China are ruining Adam Smith's Wealth of Nations treatise and will frustrate Donald Trump

Kiwi analyst Michael Parker on why robots and modern China are ruining Adam Smith's Wealth of Nations treatise and will frustrate Donald Trump

Chinese robots appear to be bringing to an end a path of "serial industrialisation" across Asia that has run for 60-odd years, says Hong Kong-based Bernstein analyst and ex-pat Kiwi Michael Parker.

In a research note entitled Adam Smith vs Chinese Robots...The end of The Wealth of Nations, in one chart (not ours), Parker points out that instead of shedding low cost manufacturing as it develops, China is getting rid of the workers but not the work.

Parker notes that Adam Smith's Wealth of Nations, published in 1776, remained broadly relevant to capital allocation decisions globally for 240 years. Basically, if an individual, company, or country has an advantage in producing something, then the individual, company or country should specialise in producing that one thing, and trade for everything else. But, Parker, says, in recent years this concept has run into two forces that Smith could not have contemplated, being robots and modern China.

Parker goes on to say the simple path to economic development in Asia over recent decades has been to cut import and export restrictions, open up borders to foreign investment and "absorb the t-shirt, plastic toy and sneaker manufacturing jobs" from some other Asian market as the population in those markets gets richer and demands higher salaries. This has played out in Singapore, Hong Kong, Japan, Taiwan, South Korea and now China. Thus the competitive advantage has been low cost labour, and low cost manufacturing has "bounced around Asia" taking advantage of this.

"This approach has led to a path of serial industrialisation in Asia for the last 60 years," says Parker.

The end of the road is nigh

But, he suggests, the end of the road for this Wealth of Nations scenario may have arrived.

"In 2015, China spent 50% more on robots than North America and roughly three times more on robots than Japan. The number will be higher and the disparity greater this year. In short, China is taking a different approach when it comes to how to deal with the mismatch between high cost employees and low cost manufacturing. Specifically, China is not getting rid of the work (or not all of it). It's just getting rid of the workers," Parker says.

Meanwhile, Parker notes global trade by value has been falling, being down 10% year-on-year in the four quarters to June 2016. The peak was US$4.834 billion in the fourth quarter of 2013. The drop, he says, is a function largely of low commodity prices and on-shoring, whilst China is still operating a trade surplus in the vicinity of US$600 billion and remains the world's biggest net exporter.

"At the same time the t-shirt, plastic toy and sneaker manufacturing jobs are leaving China. Walk into H&M or any High Street apparel store anywhere in the world and the clothes that you will find there are all made in Bangladesh, Vietnam or Honduras. China is simply not the factory of the world anymore, or not the low value one."

"This was supposed to be the end of the Chinese economic experiment. Without factory jobs for the unskilled migrant workers, the engine within the economy was supposed to falter and growth was supposed to collapse. That hasn't happened. The simple manufacturing is moving to low cost parts of the world (as Adam Smith would have predicted), the more complex manufacturing tasks are being automated, and the workers are moving into the services sector," says Parker.

Chinese jobs in services

Parker and his Bernstein colleagues monitor the Zhaopin job search website weekly, evaluating the number of jobs available and the wage being offered in Chinese cities. Over the past year, almost without fail, he says job postings have increased as have wages. Over 12 months job postings are up 68% and the mean wage is up 4.5%.

"There are plenty of jobs available in big Chinese cities for unskilled workers at the end of 2016. Most of them are in the services sector."

This includes jobs in IT, communications, electronics, the Internet, financial services, business services in accounting and legal consulting, retail, wholesale trade, leasing, education, hospitality, beauty, nursing, health services, logistics, media, publishing, entertainment, academic and scientific research, government and non-profit.

"In short, the migrant workers are not moving back to the countryside. They are finding service jobs in Chinese cities," says Parker.

'Manufacturing activity may come 'home', but there are simply no jobs to steal'

This disruption to the 20th century pattern of manufacturing activity flowing across Asia and into emerging markets elsewhere will have some profound effects, Parker points out.

Firstly, "the best modern example of Adam Smith's argument" is going to disappear. As robots get cheaper and labour gets more expensive, the proliferation of robots in more and more low-skill roles such as t-shirts, plastic toys and sneakers, is likely to occur. And the ability of new, emerging markets to grab these jobs and the export activity that comes with them is likely to be eroded.

"The trade-off between sacrificing Chinese infrastructure for the temporary benefit of low cost labour elsewhere will militate in favour of automation and staying in China," says Parker.

Secondly, Parker notes recent election results in developed markets being interpreted as suggesting frustration among middle and lower income voters with both the Establishment and their economic lot, (think Donald Trump and Brexit).

"One means of tapping into that frustration has been for politicians to promise a return of good, well-paying manufacturing jobs to developed markets (well, one developed market in particular)," says Parker.

"However, thanks to factory automation, that outcome is barely available in Shanghai and Shenzhen, let alone Shreveport and Scranton. The promise of the return of well-paid manufacturing jobs would be economically imprudent if all we had was the analysis of Adam Smith working against the impulse. If an individual, a company, or a country has an advantage in producing something, then that individual, company or country should specialise in producing that one thing, and trade for everything else. Alberto [Moel, Parker's colleague] likes to quote Berkoff's Law: 'Science always losses to engineering, engineering always loses to economics, and economics always losses to politics.' But even that elevated cynicism is arguably no match for robots," says Parker.

"Import tariffs and quotas might serve to thwart a simple economic observation about the efficiency gains of specialisation. Before the emergence of the General Agreement on Trade and Tariffs and the World Trade Organization, countries could effectively protect domestic industry and jobs through trade barriers. Of course, in a world of low cost and adaptable robots, even the role of the humble trade barrier is up-ended."

"It is still possible to force the relocation of production through the introduction of tariffs and quotas. However, if the point of the exercise is to restore well-paying, middle class jobs in manufacturing in the process, the result is going to disappoint. Any such effort today is likely to result in greater and greater degrees of automation. The activity may come 'home', but there are simply no jobs to steal. Mandating a physical task be carried out in a high-cost labour market in 2017 is simply going to increase the chances the task is automated," says Parker.

'The age of industrialisation is coming to an end'

Parker concludes by saying the age of industrialisation is coming to an end. Smartphones and online-to-offline apps give unskilled workers options for making a living that do not involve setting foot in developing market factories, he points out. And automation is making manufacturing activity cheaper and less labour intensive. Thus income inequality in developing markets will rise when work means competing against other unskilled service workers rather than banding together and unionising.

"However, the bigger risk, as has become apparent this year, is the widely held belief that Adam Smith's 18th century observation about specialisation can be reversed. What was once bad economics and bad policy is now physically impossible. Trade barriers may respect borders. Robots do not," concludes Parker.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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I see the Chinese don't make the robots themselves.

Top 10 industrial robotic companies in the world

I wonder why the robot making countries don't take advantage of their own inventions? If you don't need workers then places like Japan and Germany should be able to pump out massive amounts of cheap product.

Don't count on it staying that way, China now looking to patent laws to protect their own innovations. Feel free to have a bit of an ironic chortle about that.

Except they are not all that innovative. What have they invented?

A lot of items that are rather relevant to our own civilisation, actually.

Bit late to patent most of them though.

I do know that, I was rather thinking of things more recent. I believe the Germans and Japanese have a lot of almost fully automated industries already. The question I was asking, though, was why didn't they take more advantage of it if it basically gave you labour at Ethiopian rates in your own country?

See my closed fist at the end of my extended arm? Now just be a good chap and walk into it, will you now?

That was hundreds of years ago you wombat.
Looking for something in the last fifty years or so.
The question is, if China can do it, why not other countries, especially the robot makers?

China has the coin

..and the will.

That's the same accusation that was levelled at Japan, Korea, Taiwan, etc. in their early stages of industrial development. The next stage in China will be as inevitable as for those other nations. And they are getting there pretty fast.

Perhaps the crucial thing here will be:
It's like something out of a Sci-Fi novel.

Robots+Universal Basic Income via the robots+people free to be more creative, more sporting, even more innovative or maybe carve out a wee small enterprise niche for themselves. Depends how you look at it. Might not happen till after we have a massive cull via war, because too many of us can't get out heads around the idea of there being actually no need for capitalism, and I mean, no need.

Yes, indeed, which was why I was wondering why Germany and Japan don't do that. With robots, 3D printing and all that, countries won't need to trade at all.

Yes Zac. There is actually quite a body of work in science fiction of the privileged ones living in crystal towers with every comfort, surrounded by the completely dehumanised kept outside.

I think this could turn out to be quite interesting. The really successful Asian countries, Taiwan, Japan and South Korea had some things in common. They started their ascents as military dictatorships with very homogeneous demographics. Industrialisation wasn't done along normal capitalist lines but rather military edict. They all had harsh governments which has largely been forgotten now. China no doubt studied the secret of their success and is still adamant that it will not accept multi party democracy in any form. China has a huge advantage in that the government simply intervenes to guide and command progress. Now in the age of advanced industrial robotics they may be wise to avoid changing their politics. They can tap Africa for its resources, control the fertility of their people, practically mould them however they want, rush through any changes they want, build a vast military and produce anything they want using robots, while continuing to generate vast wealth.

By your command

Check out how Taiwan used to welcome refugees:

1987 Lieyu massacre

They don't need to. They're buying up robotics firm, along with their IP and skilled staff.

Two words: window guidance. One book and/or documentary: Princes of the Yen

Of course a robot being introduced will eliminate a particular task or job. True. But I have never been convinced that this automatically leads to lots of people being unemployed. There can be an employment shift. for example this very article points out the rise of service workers in China.
Seems to me the same phenomenon happens here.
Mind you we have the banks and the likes of phone companies trying their best to get rid of anything that looks like service.

I'm surprised that this article is not getting more discussion. I guess the JK thing overshadows things.

But China, it is interesting. Here we have a country that is not a democracy, a country that eschews multi-culturalism, a country that loses many people to emigration, people leave who are young and talented too. It is almost impossible to become a citizen of China. A country that has no friends. This should all add up as a big negative for success. It goes against everything we claim will work, like mass immigration, open borders and social vibrancy. Yet it can't be denied it has been rather successful.
Why don't we emulate the Chinese method? That would make sense wouldn't it? It is, after all, what China has done by practically applying the Singapore method to China. Dictatorial rule focusing on business development. And now robots...

Another prediction to not fret over. "Jobs churn is about 20% of all jobs each year.20% of all jobs change each year and if not subject to technological change then at least to technological drift. That means that over 30 years we expect 600% of jobs to have had some technological drift, no?
...the predictions of labour force change to be wrought by the robots are so much lower than the extant fluidity of the labour market that this simply isn't something to worry about. Nor is it something we need to have a policy about. It's simply not a change very different from the normal workings of the economy.
..But think through it, if we don't get to consume the output of the robots then we're not getting everything we want and thus we've all still got jobs. And if we do get to consume the output of those robots making everything we desire then we don't need jobs. It's not possible for the end state to leave us unsatisfied and also unemployed.

I'm not sure how the rise robots goes against Adam Smith. Isn't it just a lowering of costs, giving whoever uses robots a competitive advantage, and therefore leading to that country specialising in that good/service? What has changed?
I think it will be interesting if America does manage to bring some manufacturing back home, as we might see spending on robots really take off given it is a higher wage economy. Could this then make America more efficient in the long run than even the lowest wage economies at being the factory of the world?