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Asia’s Chains that Bind

TOKYO – Asian manufacturers have always migrated in search of cheaper labor. Until recently, China seemed their ultimate destination, claiming an ever larger share of investment by Asia’s huge production networks. But three developments in China – rising wage inflation, the coming of a new five-year plan that will seek to shift dramatically the Chinese economy’s focus from exports to domestic consumption, and a cut-off in the supply of rare earths to Japanese companies – may auger significant changes in how these networks invest and function in the years ahead.

Although China is now routinely seen as the workshop of the world, it is Asia’s vast and integrated production networks that are the beating heart not only of Chinese growth, but of economic growth across Asia. Indeed, not long ago, it was thought that many of the production networks that span Asia would move almost all of their manufacturing facilities into China. That trend now appears to be waning.

The key reason is that wages in China began rising much faster than in other low-wage Asian economies, and companies within Asia’s production networks are finding it difficult to retain their most talented Chinese staff, particularly in the country’s booming coastal regions. Indeed, today, average wages in manufacturing along China’s eastern seaboard are higher than in the Philippines and Thailand, countries that once had much higher wages in the export sectors.

China’s government responded to this by encouraging manufacturers to move into the country’s vast hinterland, where wages are much lower. Yet the farther inland producers went, the less skilled the employees and the higher the costs of transporting goods to market became. Some now argue that, in many sectors, the era of the “China price” – set by exporters who could offer the world's cheapest goods – may be coming to a close.