Employers warn of a “China shock” — but what does it mean?

After the New Year, unions and employers will begin negotiating your new pay.

How much can wages rise? That depends, of course, on the scope for wage increases: how much companies can afford to pay.

Their ability to pay ultimately depends on productivity growth — in other words, how efficiently they produce. Efficiency, in turn, may depend on investment in new technology, how work is organised or whether employees develop their skills through training.

But productivity is not the only thing to watch. There is also the wider world. And China in particular.

What does China’s emergence as an industrial superpower, making competition harder for Swedish manufacturers, mean for your job and wage growth? Employers say it will be decisive. In the spring, the Confederation of Swedish Enterprise, Svenskt Näringsliv, presented the report, “The Second China Shock and the Challenges for Swedish Competitiveness”.

The report set out the homework employers wanted done ahead of wage negotiations.

It argued that “greater account of global competitive pressure” must be taken when assessing the scope for future wage increases. The message was clear: the China shock must hold back wage growth.

Unions, on the other side of the negotiating table, point to Sweden’s strong economy and long-term productivity growth as arguments for raising real wages. China’s development matters, but perhaps not in the way employers suggest.

A battle over how to see the world: that could describe the debate before every round of collective bargaining. It is a debate over which account of reality should guide assessments of the scope for wage increases.

Right now, the debate concerns the consequences of what has become known as the second China shock.

The first shock came 25 years ago. China took over most of the world’s labour-intensive production: manufacturing that requires large numbers of workers and that the older industrial countries had not yet streamlined using new technology.

Back then, China could compete on low wages. But that was then.

Now it competes on advanced technology.

Chinese industry is racing ahead with products that are often more advanced than those made in Europe: electric cars, solar panels, batteries and, soon, artificial intelligence and humanoid robots. China also has a monopoly on processing the rare earth metals essential to both weapons systems and electric cars.

China’s lead reflects the returns it is now reaping from earlier investment in research and development.

Chinese companies also benefit, of course, from various forms of domestic state support. Regional authorities compete to offer companies favourable loans and free land.

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Here is what the shock looks like: before the pandemic, China exported just under a million cars; today it exports 7 million, mostly electric vehicles. Over the same period, Chinese exports of solar cells have increased sixfold.

How should Europe respond to this new China shock? And what does it mean for your job? These questions are being discussed across Europe: in the European Commission and national governments, and among economists, employers and trade unions.

The China shock has also occupied the Industrial Economic Council: four independent economists who produce an annual report on the outlook for Swedish industry on behalf of industrial unions and employers.

This year’s report, “The New Competition from China”, makes uncomfortable reading.

These economists usually choose their words with great care, offering cautious, balanced assessments. But long passages of the new report are dramatic, at times ominous.

The council sounds a warning: European industry faces a serious risk of a deep structural crisis. Put simply, businesses could be driven out of the market.

A structural crisis is very different from a normal cyclical downturn. It threatens the future of entire industries.

The European car industry in particular faces a difficult future, having fallen behind in electrification and technological development.

Intensifying competition does not mean all is well in China’s industrial sector. State support has its problems. Industrial policy has led to too many factories being built and investment going into projects that deliver little benefit.

There is now overcapacity — simply too many factories. This puts pressure on prices: companies cut them, reducing profitability. Overcapacity also lowers productivity, undermining efficiency and long-term competitiveness. Companies are also burdened with heavy debts, after years of cheap borrowing.

It is a combination that cannot be sustained in the long run.

Overcapacity in China is prompting companies to sell their goods at cut prices on the world market. Swedish industry is therefore finding it increasingly difficult to sell in Germany, its most important export market.

After the EU, China is Swedish companies’ most important market. Even there, competition from Chinese firms has intensified, according to the Industrial Economic Council.

For now, however, Swedish industry is still gaining from trade with China. At least that is the assessment of two union economists: Erica Sjölander, head of the secretariat at Facken inom industrin, the joint organisation of industrial unions, and Daniel Lind, research director for the industrial unions’ productivity commission.

Their assessment draws on new statistics now used internationally. These measure value added — wages and profits — throughout the production chain for industrial goods.

By their calculations, Sweden has benefited from trade with China, running a substantial surplus over the past thirty years. Today, trade with China supports more than 80,000 jobs in Sweden.

That makes it “difficult to defend doomsday prophecies about China driving Sweden out of the market and taking our jobs”, the union economists say.