What then?

Tim Bray at ongoing writes that

[The Chinese are] walking away from those “cheap labour” manufacturing jobs that have served as one of the main economic drivers of the last couple of decades. At the end of the day, cheap labour doesn’t stay cheap. And while there are probably some more “cheap labour” places for businesses to move—India, Africa—the consequences for China have to be profound. And I can see the day coming, maybe not in my lifetime but not that much further out, when the whole notion of moving businesses around the world so you can pay people less has become, finally, self-defeating. What happens then?
Of course, the first thing that happens then is that we celebrate the end of global poverty of the kind that exists today. It would be a shame to let that go by without marking the achievement.

The way I always look at this question is to compare Japan and Indonesia. Two chains of islands in the Far East. Indonesia is more than double the population of Japan and much larger. Japan is a high-wage economy, the second largest in the world. Indonesia is a low-wage economy, visible to us as an exporter of textiles and cheap manufactured goods.

What would happen to Western economies if Indonesia were to sink beneath the waves tonight? What if Japan were to do the same?

The first would be a blow; the second a catastrophe. Japan is more valuable to us than Indonesia. If Indonesia (and China, and India, and Africa) were to become like Japan, we would be richer.

To descend to the "micro" scale, the competition for cheap labour (as a whole) comes from more-productive expensive labour in more capital-intensive industry. Goods currently produced in labour-intensive ways will be produced in capital-intensive ways with less, but costlier, labour. Workers currently producing low-value goods will be producing more value.

Cheap-labour manufacturing has a "sweet spot" of goods that are easy enough to make that you don't need highly skilled labour, but difficult enough that you can't do it with virtually no labour. This is a moving target: I have heard (anecdotally) that socks are not made in places like Thailand and Indonesia; they are made in the developed world because the process is so automated that unskilled labour isn't needed. As cheap labour becomes less cheap, the sweet spot will disappear.