Turning Cheap Imports Into an Expensive Decline
Of course I’m being flippant, but there’s some veracity to this statement. As we offshored to low-cost labour markets (mostly China) in Western economies, we were meant to move up the value chain economically. And we did. We became information- and services-based economies, and the short-term economic flow resulted in households earning more, and the West getting richer.
That said, mostly, we got richer through a few simple economic forces:
We dug resources out of the ground, sold them to China, then bought back their value-added products from our own retailers, who don’t really have any competitors because our market is too small. Then we used our increasing incomes to invest in property — mostly because our government encouraged this through a crazy tax policy favouring assets over work. This was financed by four big banks — which are now among the most profitable in the world. The properties were built by a construction industry with ballooning costs, as we were running out of tradespeople — the type of tradespeople that previously would have been trained via a deep manufacturing industry and publicly owned infrastructure and utilities….
See above — cheap T-shirts with a housing Ponzi scheme.
And now the next generation, who, despite having the highest education levels (in many of the wrong areas) in our country’s history, can barely find a job which makes life affordable. They’ll never afford a house, and are staring down the barrel of a world where AI has the potential to replace large swaths of high-paid white-collar work. They might be wondering what happened.
The short answer: We built a financialized economy which lacks any real economic depth.
Think of it a bit like an invasive species taking over. An ecosystem where very few ‘species’ remain viable, a few take over, and the others die out. The lessons of business can all generally be seen in nature, if we pay close attention. And while I’m explaining the Australian experience, it’s not too dissimilar to the US and other Western markets.
The numbers are quite telling.
Australia’s manufacturing peak was about 25% of GDP in the 1960s / early 1970s; today it is about 5.5%. According to Harvard’s Economic Complexity Index, Australia ranked 55th in 1995 and is now down to 105th. This puts Australia behind Botswana, Senegal, Bangladesh, Uganda and Zambia, just in case you were wondering.
This matters a lot, because more complex economies tend to have stronger multiplier effects (money flowing deeper and wider into the economic fabric, allowing money to multiply). This allows an economy to absorb economic shocks better. If you’re wondering why it matters, $3.00-a-litre petrol is a clue.
After WWII, the US produced more than half the world’s goods — about 60% of global industrial output at its peak. Today, it still manufactures at scale, but its share is down to roughly 17–19% of global output. The middle class has been eroded in the US and most Western markets, and increasingly their economy is one which rewards financial manoeuvring and ownership of assets. Labour, and old-school capitalism — where profit comes from selling actual goods — has been usurped by financial leverage and trading against existential asset bases.
Given you are reading my Substack, there’s a good chance your social feed is filled with leading technology coming out of China.
I can’t remember the last time I saw any leading-edge tech — outside of large language models (ChatGPT, Gemini, Claude et al.) — come from a Western economy.
It’s all China.
Their techno-leadership list includes humanoid and industrial robots, shipbuilding, lithium batteries, electric vehicles (EVs), solar panels, high-speed rail, drones (UAVs), quantum communication, 5G infrastructure, graphene, radar and satellite navigation, and advanced manufacturing. If you just type one of these topics and “China” into YouTube, you’ll see how far behind we are in the West.
When China opened up its economy, circa 1979, with its special economic zones, we literally taught them how to make things. The West showed them how to produce quality, and at scale. Mostly through joint ventures. First with manufacturing, and then with Big Tech (search, video, social media, messaging) — who they first allowed into their market and copied before shutting them all down. They learned how to modernise their economy and create their own middle class. The irony is not lost on me. We got to consume more things (albeit temporarily), and erode our middle class as a bonus. Eventually, China got better than the West at making pretty much everything. They then invested in tomorrow’s technology, and became the economic centre of the world — despite what the GDP rankings might tell you. China is currently ranked 2nd behind the US.
We are now at an inflection point.
China itself is getting close to replacing its low-cost labour. Mostly with automation and humanoid robots. Which means the West can reverse the thinning of its economies, reboot manufacturing, and reduce its exposure to the vagaries of tight supply chains defined by a globalised economy.
How? We can employ their robots in our markets and rebuild internal supply chains of high-value items. Firstly through deployment, and eventually by getting their robots to build our robots. A kind of futuristic reverse irony.
I know it sounds odd — even a little petty — but if we fail to rebuild economic depth, today’s inequality will only intensify. The social fractures already tearing through Western democracies — left versus right, old versus young, rich versus poor — will deepen, threatening the very foundations that made the West prosperous, stable, and free.
More to come on this topic…. (Much of it in my new book I’m currently writing).
Keep thinking,
Steve.
*Get me into do an Keynote at your next event. I’ll use this as my testimonial!