Why China became “the world’s factory”?

Today, China is known as “the world’s factory”. China accounts for more than 28% of global manufacturing output. There are many economic reasons to explain this such as illustrated in this article. https://blacksmithint.com/how-did-china-become-the-worlds-factory/ But, the rise of China has also been led by a lot of other factors, few of these events did play a vital role which has resulted in today’s global scenario.

  1. Nixon-Kissinger’s visit to China, and adopting the policy to create a wedge between Soviet Union and China
  2. Japan’s rise in late 1970’s and 1980’s as an economic giant, based on the capitalism and unique Japanese industrial model.
  3. Globalization and financialization of America after Reagan’s win to Presidency
  4. Fall of Soviet Union in 1991, leading to the complacency towards China after winning the cold war
  5. Tech revolution in silicon valley, California
  6. Bush accidental election in 2000, 9/11 and the subsequent dragging of America in Iraq-Afghanistan war
  7. Finally, the global recession in 2007-08

It all started with Nixon and his cunning advisor Henry Kissinger. In order to defeat the Russians in the cold war, they thought to create a wedge between the communist powers, USSR and China. This is because America had already suffered severe setbacks in Vietnam war ( due to the covert assistance of Soviets and Chinese to the Vietnamese communists). Then, India had defeated the US supported Pakistan in the 1971 Bangladesh liberation war, and to the very disgruntled Nixon, it was like a punch in the face. Besides, civil protests, anti-war movement against US involvement in Vietnam and new age movement had ravaged the public perception of Nixon ( though Watergate scandal surpassed all the limits later). Hence, this move to befriend China was initiated to create a diversion in US foreign policy which until had been vehemently focused on Soviet Union and Vietnam during the 1960’s decade. Though this did work later, but in the long run, as we see, this decision acted as a trigger for a whole new conflict, erupted today.

But as US needed China against Soviet Union, so did China needed USA as well. This is because of the rise of Japan as an economic power. Japan had started dominating in industries such as electronics and automotive, with the capitalistic model blended with Japanese work ethic. As China and Japan had been rivals for a long time, and China had not forgotten the brutal massacres and genocides committed by the Japanese forces during world war 2, it was natural for China to fear about history to get repeated again. Though, post WW2 Japan had been significantly different as compared the pre WW2, but the economic model of manufacturing, self-reliance and capitalism with unique Japanese culture acted as a symbol of Japan’s resurgence in the Asia, and thereby becoming once again the dominant power as it was before. Japan took less than 3 decades to transform from a poor, devastated country after WW2 to become a rich, industrial superpower. On the other side, China also had been ruined by the WW2, and on similar parallel, they had still remained a poor, backward country as compared to Japan. Due to Mao’s embrace of communism, China neither became an industrialized nation, nor a self-reliant one. Of course, there were vast differences between both the nations in terms of population, size, resources etc. But the fact that a resource deficient, small country like Japan can rebounce in such a small duration, with the capitalistic, manufacturing model compelled China to drift away from USSR’s communism and embrace capitalism in order to lift its humongous population out of dire poverty. Hence, finally, China under the leadership of Deng Xiaoping, opened up in 1979.

The next factor which accounted for the rise of China as a manufacturing hub is the globalization and financialization era which had started after Ronald Reagan got elected to become the President in 1980. It was during his presidential two terms, that the theories of Milton Friedman http://umich.edu/~thecore/doc/Friedman.pdf, https://medium.com/@jonmertz/on-business-milton-friedman-is-wrong-about-social-responsibility-9fef2c749643 and other conservative republicans got implemented in the American economy. The companies started manufacturing in other parts of the world such as China, Taiwan and Korea, and companies in US got more involved in simply making profits as per Friedman’s theory. By manufacturing abroad, laying off local employees, shutting down local branches and disbanding trade unions, USA handed over a large chunk of manufacturing to China. As China provided an ideal condition of cheap labor, along with long hours, lack of regulatory compliance, low taxes and fast production, American companies ( which means shareholders and investors) were more than happy to mint dollars. Even Japanese competition compelled Americans to manufacture in China to reduce cost of production and labor, and thereby compete with the Japanese. Due to which, many American SME’s got shut down or eventually went bankrupt amidst this. One of the famous examples for a successful manufacturing company to transition to a financial firm is GE to GE Capital, under the leadership of Jack Welch. The company not only lost its manufacturing share, but also suffered from bankruptcy ahead in 2008 crisis. Here is one insightful article on GE’s failure: https://chiefexecutive.net/who-killed-ge-not-jeff-immelt/

Then, the fall of Soviet Union and the end of cold war in 1991 proved out to be another factor for the continuation of US reliance on China for manufacturing. Due to the unexpected disintegration of former USSR, USA suddenly became the world’s only remaining superpower. This led to complacency in US outlook towards the other countries of the world. As no nation after Soviet Union (Japan did so only economically, but suffered stagflation in the beginning of 1990’s) had the capability to challenge USA ( USSR had confronted and even exceeded USA in many fields. Refer to my post for more info on this: https://abhiknotes.wordpress.com/2020/07/15/why-did-soviet-union-lose-the-cold-war/) Hence, USA continued the scaling up of the manufacturing in China and even naively assumed that like Russia, China would also embrace democracy as Russia had done so in 1990’s ( which failed on an epic scale). Also, as China’s economic model was based on capitalism, and having allowed American companies to manufacture and invest in China, the industrial lobby did not want for another conflict to arise in Asia. Thus, wall street led economic interests led to the continuation of the “Made in China” policy.

The fifth factor to add in this is the tech revolution in silicon valley. The 1990’s decade was the dot com era and internet was the buzz word in the valley. Hundreds of startups were opened everyday, and today’s tech giants such as google, ebay, paypal, amazon were started during that era. Later, facebook, twitter, snap, whatsapp dominated the 2000’s decade of tech revolution. Due to this tech boom, the traditional manufacturing dependent US economy was replaced by the software revolution. Manufacturing became out of fashion, and with the sole exception of Elon Musk, everyone was busy starting companies and funding the software and social media startups. Hence, this also proved detrimental for the US to cut down its manufacturing, and embrace service based model. Even hardware giants like Apple and Dell switched over to manufacture their Iphones and PC’s in China. As famously said by Peter Thiel, “We wanted flying cars, instead we got 140 charactershttps://som.yale.edu/blog/peter-thiel-at-yale-we-wanted-flying-cars-instead-we-got-140-characters Only Elon Musk stood out of the silicon valley’s internet savvy crowd with his bold attempts to get his hands dirty in manufacturing by starting Tesla and SpaceX. Today, fortunately for America, Elon Musk stands as an inspiration for “Make in America” movement ( though he came in US as an immigrant…unrelated to this topic, we can cover later someday..)

Then, Bush election, 9/11 and US involvement in Iraq-Afghan war led to tremendous military expenditure and drifted US away from looking into the flaws it had created by its dependence on China. Bush and his team boasted over-confidently about US superiority and due to the Bush & Family obsession with Iraq, Saddam Hussein & oil, China took advantage of the US policy, copied US products, and violated the trade agreements by the continued IP theft. On the other side, China started its own companies to compete with US ( such as Alibaba against Amazon).

Finally, the global recession and sub-prime crisis in 2007-08 led to the eventual collapse of many US firms ( financial as well as manufacturing), and which thereby led to increased dependence on China for imports. In 2010, China’s global manufacturing exceeded more than USA. Since 2008, Chinese dragon has transformed itself into a giant, and unlike the passive Chinese policy before 2008, China today has been very aggressive in pushing its policies across the world. It has achieved”World’s factory” status and with its Belt & Road Initiative (BRI), it has challenged USA and the western world (+Japan) with its gigantic construction projects of railroad, bridges, ports, highways, pipelines in different parts of the world. Having world largest US Dollar reserves apart from US, China’s strategy to loan money to poor countries and then forcefully acquire their strategic resources under the pretense of loan repayment default has widely gained notoriety (Sri Lanka had to handover the Hambantota port https://www.csis.org/analysis/game-loans-how-china-bought-hambantota

Starting from 1979 with the opening up of China to the world, until 2019, when the trade war between USA and China had boiled up, and by the end of year, coronavirus from China made the news, it took 40 years for China to rise to the current economic superpower status. The dragon has risen, and its ambitions are like expulsion of fire to engulf the world. That fire has burnt ( still burning..) the world in the form of coronavirus. Also, there are many other reasons besides economic one to get concerned of chinese ambitions.

  1. China, has border conflicts with most of its neighbors such as India, Taiwan Vietnam, Hong Kong etc.
  2. It has consistently supported North Korea, a terrorist state and assisted its nuclear programme.
  3. With its “String of Pearls” theory, it plans to block India and thereby control the Indian ocean. This is of high security concern, not only for India, but also for the other QUAD nations, including USA, Japan and Australia.
  4. China has committed human rights violations against the Xinjiang province Uighur muslims
  5. China uses face recognition and AI technology to spy on its own citizens and has transformed the country into a “ironwall”
  6. China manufactures and exports products ( and virus as well..) to other parts of the world, but does not allow other countries imports to compete with its own products. We can see google being banned in China, and replaced by Baidu. Similarly, Wechat, Tiktok, Alibaba, Huawei have replaced its US and other customers, with the assistance of communist government.
  7. Most recently, the suppression of information regarding coronavirus, and its delayed acceptance of the existence of virus, coupled with yielded influence of China over WHO has alarmed the world of China’s menace.

Thus, it has become imperative for the world to adopt a new policy towards China, and actively confront in the realpolitik game.

Below is the youtube video link explaining China’s economic rise (for Indian audience in Hindi) https://www.youtube.com/watch?v=gFmRP3whXmU

Author: Abhi

Hello, this is Abhishek. I am an Electrical Engineer by education, and worked for an Energy Management company in Atlanta, USA. After staying for 5 years in United States, I have moved back to my country, India. Besides work, I am a bibliophile and enjoys reading about history, current affairs, and biographies. I practice ‘Sudarshan Kriya Yoga‘ meditation and volunteer for a NGO, Art of Living. I am a vegetarian, and also a fitness enthusiast. I intend to work for spreading awareness about Cancer. Finally, I enjoy writing and I hope to integrate this interest into my career with more experience. Please like, share and subscribe to my blog. Thank you for visiting!

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