China’s current economic difficulties can easily be interpreted as evidence of long-term decline. Consumer spending is weak, the property sector remains under severe pressure, unemployment and underemployment are significant concerns, and the country faces a substantial demographic contraction.
At the same time, China continues to expand its industrial capacity, increase exports, invest heavily in automation, and strengthen its position in technologies ranging from robotics and batteries to renewable energy and advanced manufacturing.
These developments are not necessarily contradictory. In fact, they may be closely related.
China appears to be building an economic model designed in part to compensate for its demographic and structural weaknesses through automation. If successful, the consequences could be significant not only for China but also for American industry, employment, trade, and economic policy.
Solving a Demographic Problem With Technology
China faces a demographic challenge that will become increasingly important over the next several decades. Its population is aging and declining, which means fewer workers will be available to support its enormous manufacturing economy.
One response is immigration. Another is increased productivity.
China is placing a substantial bet on the second.
Automation is already spreading through Chinese factories, ports, transportation systems, agriculture, and energy production. Industrial robots are becoming more capable, while artificial intelligence is increasing the range of tasks machines can perform. The articles describe automated ports, factories employing thousands of robots, autonomous agricultural equipment, driverless transportation, and rapidly increasing production of industrial robots.
The economic objective is straightforward: produce more with fewer workers.
If productivity increases rapidly enough, China could maintain or even expand industrial output while its working-age population declines.
This would turn one of China’s greatest economic liabilities—demographics—into a manageable problem.
China’s Weak Consumer Economy
China’s difficulty is that its industrial strength is not matched by equally strong domestic consumption.
Chinese households consume a relatively small share of national output compared with households in the United States and other developed economies. The collapse of property values has compounded the problem because real estate represents a large portion of Chinese household wealth.
The result is an economy with enormous productive capacity but insufficient domestic demand to absorb everything it produces.
Exports therefore become increasingly important.
Recent economic figures illustrate the divergence. Property investment and domestic consumption remain weak, while industrial production and exports have performed considerably better. Production of industrial robots, lithium-ion batteries, and other advanced industrial products continues to expand.
Automation could widen this imbalance.
A highly automated Chinese economy would be capable of producing even larger quantities of manufactured goods at progressively lower costs. If Chinese consumers cannot absorb that production, much of it will have to be sold elsewhere.
That has important implications for the United States.
The Next China Shock Could Be Different
The first major China trade shock was largely based on labor costs.
American and European companies shifted manufacturing to China because Chinese workers could produce many products at substantially lower cost. Consumers benefited from cheaper goods, while many manufacturing communities in developed economies experienced factory closures and employment losses.
The next China shock could operate differently.
American workers would no longer be competing primarily against lower-paid Chinese workers. They could increasingly be competing against highly automated Chinese factories.
That changes the economics considerably.
Robots do not require salaries, health insurance, pensions, vacations, or overtime. They can operate for extended periods and become more productive as hardware and software improve.
If China combines automation with its existing manufacturing infrastructure, supplier networks, transportation systems, and economies of scale, Chinese companies could achieve production costs that are difficult for foreign competitors to match.
The immediate beneficiaries would be consumers. Automobiles, appliances, batteries, electronics, machinery, solar equipment, and potentially agricultural products could become less expensive.
The challenge would fall on competing producers.
Manufacturing May Return Without the Jobs
This also raises an important issue for American industrial policy.
The United States is attempting to rebuild domestic manufacturing capacity in semiconductors, batteries, critical minerals, energy equipment, and other strategically important industries.
That effort may succeed.
But rebuilding manufacturing capacity does not necessarily mean restoring traditional manufacturing employment.
A semiconductor plant or automated factory built in the United States today may produce considerably more output with far fewer employees than an equivalent facility required several decades ago.
Consequently, the objective of American industrial policy may need to change.
The relevant measure may no longer be simply the number of manufacturing jobs created. It may increasingly be whether the United States controls sufficient productive capacity in industries essential to its economy and national security.
The distinction is important.
America could experience a substantial manufacturing revival without experiencing an equivalent revival in factory employment.
Economic Interdependence Is Becoming a Strategic Liability
The United States and China remain deeply economically connected, but both governments increasingly view that interdependence as a potential vulnerability.
Washington is attempting to reduce dependence on China for critical minerals, advanced manufacturing, batteries, pharmaceuticals, and other strategically important products.
Beijing is attempting to reduce its dependence on the United States and its allies for advanced semiconductors, software, financial infrastructure, and other technologies.
Neither country necessarily wants to eliminate trade. Both, however, want to reduce the ability of the other to disrupt their economies during a political or military confrontation.
The result is an unusual form of economic competition.
The United States and China continue to trade while simultaneously investing billions of dollars to make that trade less essential.
Automation could accelerate this process by making domestic or politically aligned production economically more practical.
China Still Has a Serious Problem
None of this means China’s strategy is guaranteed to succeed.
Automation addresses the production side of an economy. It does not necessarily address the consumption side.
Robots can manufacture products. They do not purchase them.
If automation reduces the demand for labor without creating sufficient new sources of household income, China’s consumption problem could become even more pronounced.
The country could therefore develop an extraordinarily productive industrial economy while simultaneously struggling to generate enough domestic demand for its output.
That would increase pressure to export.
Other countries may respond with tariffs, quotas, subsidies, local-content requirements, and other forms of industrial protection. China’s technological success could therefore produce greater international trade friction rather than resolving its economic problems.
The central economic question is whether China can increase productivity while also increasing household income and consumption sufficiently to create a more balanced economy.
Two Different Approaches to AI
There is also an important difference in emphasis between the American and Chinese technology strategies described in these articles.
The United States is investing heavily in artificial intelligence as an information technology: large language models, software, data centers, scientific research, finance, and the automation of knowledge work.
China is also pursuing those technologies, but it is simultaneously emphasizing the integration of AI with the physical economy: manufacturing, robotics, transportation, agriculture, energy, and infrastructure.
The distinction should not be overstated. Both countries are pursuing both strategies.
But the difference in emphasis could have significant economic consequences.
Artificial intelligence that improves software productivity can create enormous economic value.
Artificial intelligence connected to machines can also change the cost of producing physical goods.
The second development could have particularly important consequences for international trade.
What This Means for the United States
The United States may therefore need to reconsider what success in the technological competition with China actually means.
Leadership in artificial intelligence is important, but technological leadership alone may not be sufficient if the United States becomes increasingly dependent on another country for the physical products required to operate a modern economy.
Semiconductors, transformers, pharmaceuticals, machine tools, batteries, electrical equipment, vehicles, energy infrastructure, and industrial machinery remain essential regardless of how sophisticated software becomes.
American economic strategy will increasingly need to combine innovation with production.
That means maintaining leadership in AI and advanced computing while also developing automated manufacturing, reliable energy supplies, critical-material processing, robotics, and resilient domestic or allied supply chains.
It also means accepting an uncomfortable reality about the future of manufacturing.
The objective cannot simply be to recreate the industrial economy of the 1950s or 1960s. That economy depended on large numbers of human workers performing tasks that machines will increasingly perform.
The factories may return.
Many of the old factory jobs may not.
The more important economic question will be who designs the technology, who owns the productive assets, where the critical goods are manufactured, and who controls the supply chains on which the rest of the economy depends.
For much of the past generation, globalization was largely organized around the question of where labor was cheapest.
Automation is beginning to change that calculation.
The defining industrial question of the next generation may instead be who owns and controls the machines that make everything else.
China is investing heavily on the assumption that this transition is coming.
The United States should plan on the same assumption.
