China’s Troubles, America’s Opportunity

China is in trouble. How bad is not yet clear [Gilder's Daily Prophecy] August 08, 2022 [WEBSITE]( | [UNSUBSCRIBE]( Attention! Before You Read Any Further… Before you read any further in today’s issue, an urgent situation needs your immediate attention. If you don’t plan on [claiming this new upgrade]( to your George Gilder Report subscription, you’re missing out on a huge opportunity. Right now is your chance to claim one of the biggest (and most valuable) upgrades we’ve ever made to a newsletter. We’re taking The George Gilder Report to a whole new level and I’d hate to see you left behind. [To see how to claim this new upgrade, click here now.]( Once you’re done with that, read on to see today’s issue. China’s Troubles, America’s Opportunity [Richard Vigilante] RICHARD VIGILANTE Dear Reader, The China hawks take the odd position that (a) China is just as Commie as it ever was and (b) the way to beat China is for us to be more like them. That is certainly the driving idea behind the “let’s give $50 billion to Intel bill.” China became a great power via five-year plans and state capitalism; we should too. China does have a lesson for America, but it’s not what the hawks think. China is in trouble. How bad is not yet clear, but under Chairman Xi China is on course to forfeit much of the momentum gained by forty years of capitalist reform. Just days ago, the Xi regime announced that it would not meet its stated goal of 5.5% growth in GDP for the year. In reaction, the western press mostly focused on—and praised—Xi’s “courageous” macroeconomic policies aimed at curbing inflation and popping a real estate bubble. Wrong. China’s economy is stalling because in the struggle between the two Chinas—capitalist and Communist—the Commies are on a winning streak. The CCP is reasserting its power over capital allocation, both financial and human. Xi is pouring money into state-owned businesses, including many that lose money every year. Even most of those still turning a profit show pitifully low returns on capital. To the extent these companies “provide” jobs they are wasting human as well as financial capital. Meanwhile, China’s tax system is accelerating the loss of what was once China’s greatest edge: low labor costs. A Chinese industrialist Who Likes to Be In America Recently browsing the archives of Jordan Schneider’s indispensable [China Talk]( newsletter, I found an excerpt from a 2018 interview with Cao Dewang, the founder of Chinese manufacturer Fuyao Glass. Cao is a remarkable Chinese industrialist who decided to build his next factory in the U.S. rather than China. Despite higher U.S. labor costs, he figured he could make glass for the U.S. market more cheaply here. Here is the excerpt “In 2014, when Fuyao began to consider investing heavily in the United States, I sat down and really began to study the issue of the US tax burden. After some research, I found that the tax burden of the United States was much lighter than that of China. “First of all, China had a VAT tax, and the United States did not. Secondly, [although] labor costs in the United States are very high, accounting for 40% of the operating cost, whereas in China it only accounts for 20% . . . the proportion of insurance paid by Chinese companies was very high. Although labor costs are half as expensive domestically, we calculate that in our case we were nearly 4% more expensive than the United States, plus the VAT for auto glass, which is around 12%. “Third, the American energy prices were lower than China's. The price of natural gas there was one-fifth that of China's, electricity was only 40% of China's price, gasoline cost only half of what it did in China, and the cost of transportation and logistics were relatively low. These inputs made the price 4% to 5% cheaper, so the overall calculation made production 16% to 17% cheaper. Moreover, if I shipped the glass from China to the United States, the freight costs would increase by 15% to 20%.” China is losing its labor cost advantage to the U.S. Part of that change is explained by the natural progression from an emerging to an industrial economy. But as Cao’s experience shows, as the nominal wage gap tightens, tax policy comes to the fore. Biden to Introduce Social Credit System like China? [Click here to learn more]( If you say the wrong thing on Chinese social media, you are labeled “untrustworthy”. They can then take away your ability to travel, restrict internet access, or deny your family the best jobs. They even confiscate your pets. Thanks to Biden’s new Executive Order 14067, a former CIA and Pentagon advisor predicts America will soon become a total surveillance state like China. [Click here to see our dark future…]( China Losing Its Edge To assess net labor costs, we must take into account both absolute wage levels, and productivity. Wages in an emerging economy might measure as little as 5% of U.S. wages. But the productivity of a workforce just off the farms and using less sophisticated equipment might be a tenth of the U.S. workforce. The net cost advantage is not 95% but 50%, which is why not every single job in the whole world moves to low-wage economies. Over time the productivity gap shrinks but does not disappear. As a result, emerging economies lose their labor cost advantage long before their wages equal U.S. wages absolutely. Generally, when foreign wages reach about 30-40% of the U.S. level, the case for outsourcing becomes less than compelling. That’s about where China is now. Broadly speaking, low-skilled Chinese factory workers are paid just under $4 per hour. Low-skilled U.S. factory workers make about five times as much. Chinese labor productivity is often reported to be about 30% of U.S. levels. Thirty percent of $20 is $6, making China’s net labor cost advantage about $2 per hour, not much of an edge considering the other challenges to outsourcing. We can close that cap by tax policy; as Cao shows, to some extent we already are. China extracts a total of 24% of wage income for what we would call Social Security, 8% from the employee and 16% from the employer. That’s almost twice the U.S. combined rate of 12.4% or 15.3% with Medicare After adding deductions for health care, workman’s comp, unemployment and maternity insurance the Chinese total can reach 39% of wages. “Housing Insurance” (really a mandatory savings program) can push the take even higher. We can’t do apples to apples because the Chinese are paying for their current government health care, not just providing for their golden years. Still, a mandatory payout of 39% far exceeds U.S. penalties for employment. Chinese corporate income tax rates are nominally similar to U.S. rates; the standard is 25, and favored industries pay less. Chinese firms, however, also pay a 12% VAT or value added tax on sales revenue above the cost of purchased components. VAT is due even if the company is not making a profit. Chinese workers are becoming less competitive because they are overtaxed. Our Opportunity Meanwhile, net labor costs (wages x productivity) are rising globally, shrinking opportunities for labor cost arbitrage. Southeast Asia has maybe 15 years to go before losing its edge; Brazilian wages already match China’s. As wage gaps narrows, tax policy can be decisive. We should slash taxes that punish employment by making Social Security taxes less regressive. Cover more—or all—the SS budget from general revenues. And put the corporate income tax to rest entirely. With competitive labor costs and a zero % corporate income tax the U.S., more than ever, would be the best place in the world to do business. Regards, [Richard Vigilante] Richard Vigilante The Metaverse Story You’re NOT Hearing… [Click here to learn more]( Everywhere you turn, people are raving about the Metaverse. Facebook’s now called Meta. Microsoft’s CEO says, “The Metaverse is here.” Apple’s all in too. But there’s a critical piece of the Metaverse story you’re NOT hearing about… [Click here now for the full details](. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( Gilder's Daily Prophecy is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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