To the clients and friends of ProfitScore:

The period following the 2008 financial crisis was marked by historically low interest rates, a trend that appears to be reversing in the current economic landscape, suggesting that high interest rates may persist over an extended period. This shift is partly attributed to the massive COVID-19-related stimulus packages that significantly increased government debt, but other subtler dynamics also play a crucial role, often overlooked in mainstream discussions.

One such under-discussed factor is the “Gift of China.” Below, we explore several elements related to China’s changing economic role that may contribute to sustained higher interest rates:

Shift in China’s Economic Role: 

  • Increase in Manufacturing Costs: China’s role as a global manufacturing hub has historically kept international inflation rates low due to its inexpensive production costs. However, since the 1990s, China’s manufacturing costs have increased ninefold, making labor in countries like Mexico cheaper by comparison. This change is reducing the deflationary impact of Chinese goods on global markets.

Supply Chain Realizations During COVID-19: The COVID-19 pandemic’s disruption highlighted the risks of over-dependence on Chinese manufacturing. The sudden stoppages in production exposed significant vulnerabilities, leading to a trend toward reshoring and diversifying manufacturing locations. While these changes may stabilize supply chains, they also risk increasing production costs and inflation.

Challenges in Technology and Intellectual Property:

  • IP Theft: According to the Office of the United States Trade Representative and the Commission on the Theft of American Intellectual Property, China’s IP theft costs the U.S. economy between $225 billion and $600 billion annually. This widespread theft impacts over 45 million American jobs in IP-intensive industries, which collectively contribute more than $6.5 trillion to the U.S. economy. As everyday things start including technology, such as the once simple doorbell, now an internet-connected video recorder. The urgency to protect intellectual property intensifies. This necessity drives up prices as manufacturers take costly measures to secure their technologies.

These factors, among others, underscore the potential for higher interest rates to remain a fixture for managing inflation and adapting to structural changes in the global economy.