It turns out that the end of history was really the end of workers' bargaining power.
In other words, it wasn't just capitalism that won when the Berlin Wall came down. It was capital itself. That's what adding a billion new workers to the global economy all at once will do. Suddenly CEOs had the leverage to keep wages down in rich countries since they could always threaten to move jobs someplace cheaper like China—which they did.
And that's really what we're talking about when we talk about globalization. Sure, Latin America, eastern Europe, and southeast Asia have all become key cogs in the world economy in the past quarter century, but China has remade it. Manufacturers have moved their factories there, suppliers have too, and this whole ecosystem has helped pull more people out of poverty than at any other time in human history.
The flip side of this happy story, though, is that it's very much come at the expense of American workers. Now, I know: ask any economist, and they'll tell you that this isn't the way things work. That people who have their jobs outsourced will, for the most part, find new ones that pay just as much if not more. And, to be fair, that was a pretty accurate description of the world for a long time—but not right now. Economists David Autor, David Dorn, and Gordon Hanson have found that, between 1990 and 2007, the American communities most exposed to Chinese competition saw their manufacturing workers pushed into persistent unemployment, their non-manufacturing workers pushed into accepting lower wages, and everyone pushed into relying on the safety net, whether that was welfare, disability, or food stamps, more than before. In all, trade with China alone was responsible for about a fifth of the manufacturing jobs we lost during this time—or 1.5 million to be exact.
The truth is that nobody knows why trade has hurt so much more now than it did before. Maybe it has something to do with low-skill workers being the hardest hit. Or maybe, as economist Adam Ozimek says, it's that people either can no longer afford or fathom moving somewhere else for work, so they get stuck in dying towns. Or maybe the simplest explanation is the right one: it's just that China is big. As in really, really big. The global economy has never seen a shock like China's rise, and never will again.
Now wait a minute. Don't Africa and India both have a billion workers who have or about to enter the wider economy themselves? Why yes, yes they do. What they don't have, though, is what has turned China into the workshop of the world. That's a single market, a single set of rules, and basically a single language. But maybe more important than all of that is that China has a government has invested in the infrastructure it needs to be integrated with the rest of the world. Think about it like this. It doesn't matter if you have the workers and the factories if you don't also have the roads and bridges and air and seaports to connect with the other parts of the global supply chain.
China does and these other countries don't. And the that fact that it does means that companies have not only moved their operations there, but the companies that supply those other ones have as well so they can give them what they need faster. It's what Paul Krugman calls the economics of agglomeration: specializing in a small thing can cause big changes, since companies that sell things to companies that sell things to companies that sell things to American customers will all cluster together. And that closeness will create cost advantages that pile up. So you end up being a lot better at something because you started out being a little better at it.
What we're saying, then, is that China had so many more workers and so much more infrastructure than any other country that has or possibly could join the global economy that it overwhelmed everybody else. It was too much too fast for, say, American factory workers to adjust to. After all, by the time they learned a new job, that one might have been outsourced too.
But there is some good news for American workers. What is that? Well, there's only one China, and even it is starting to disappear. Here's what I mean by that. Thirty years of a one-child policy has turned China's labor glut into a looming shortage. (That's why they just doubled it to a two-child policy). There aren't as many people moving to the cities as there were before, so companies are having to fight over workers by offering higher and higher wages. And that, in turn, is eroding China's cost advantage. Indeed, Chinese-made goods are now only 4 percent cheaper than American-made ones when you adjust for how much each worker produces. The result is that companies are starting to leave no-longer-low-cost China for, say, still-low-cost Vietnam—and sometimes even the United States. That doesn't mean, though, that manufacturing jobs are going to come back. They aren't. China took jobs that robots are taking now, just robots that run in the U.S. So where was that good news again? It's that higher wages in China means there's less downward pressure on wages in the U.S. It's true that other countries—in southeast Asia today and maybe Africa tomorrow—will keep wages from rising too much, but they just aren't big enough or have enough infrastructure to be anything like China.
So history might not end without people getting raises after all.