This is an exceptionally sharp and important response to Michael Pettis’s long-running argument about China’s trade surplus, wage suppression, and European competitiveness.

I strongly agree with Professor @Branko Milanovic’s challenge to Pettis’s persistent claim that China’s industrial competitiveness is fundamentally built on suppressed wages and household income.

When France and Germany used more advanced machinery, higher productivity, and stronger industrial capabilities to outperform developing economies, they described those advantages as efficiency, technological progress, and economic modernization. Now that China can manufacture better industrial products at lower cost, Europe increasingly describes the same outcome as “unfair competition.”

Europe once treated its own industrial superiority as evidence of efficiency. It now treats China’s industrial superiority as evidence of distortion.

Professor Milanovic’s most incisive contribution is to shift the discussion away from the claim that “Chinese workers are paid too little” and toward a question that Western economic debate rarely asks:

Are Western corporate profits too high?

For decades, institutions such as the Financial Times and The Wall Street Journal defended labor-market flexibility, wage restraint, weaker union bargaining power, and policies that shifted income from labor toward capital. Yet many of the same institutions have suddenly discovered a deep concern for the wages, welfare, and purchasing power of Chinese workers.

The hypocrisy is difficult to miss.

If Western companies genuinely believe that their competitiveness is deteriorating, why is reducing profit margins almost never part of the discussion? Why must the adjustment always come through higher Chinese wages, larger Chinese social transfers, or lower Chinese industrial investment?

Why should Chinese workers bear the responsibility for restoring the competitiveness of Western capital?

Recent data make this contradiction even more striking. Labor’s share of national income in the United States has fallen to a historic low, while China’s labor-compensation share has remained broadly stable over the past two decades.

Western capital has spent forty years weakening labor’s claim on productivity growth at home. It now presents itself as the defender of Chinese workers abroad.

Pettis’s repeated accusation that China gains competitiveness by suppressing wages therefore rests on a blatant moral double standard. Western companies are encouraged to maximize margins, raise shareholder returns, automate production, weaken labor bargaining power, and reduce costs. Yet when China organizes production more efficiently and achieves lower industrial costs, the result is described as an economic distortion that other countries are entitled to correct.

There is also a deeper weakness in this explanation.

China’s rising industrial competitiveness does not primarily come from low wages. It comes from the interaction of three structural advantages whose combination is extraordinarily rare.

First, China possesses the world’s most comprehensive industrial system and the densest manufacturing supply-chain ecosystem ever assembled.

Second, it has the world’s largest market across a vast range of industrial products, intermediate goods, machinery, infrastructure equipment, and consumer products.

Third, it has built the world’s largest and most concentrated pool of engineers, scientists, skilled technicians, industrial workers, and manufacturing talent.

The United States possessed a comparable combination during its own industrial rise. But China has assembled these advantages today at an extraordinary scale, density, and intensity.

Low wages cannot explain this system.

Industrial density can. Market scale can. Engineering depth can. The continuous interaction between production, demand, technology, infrastructure, capital, and human talent can.

Reducing China’s industrial rise to “wage suppression” avoids confronting the much more consequential reality:

China has built an industrial system whose competitive advantages are increasingly structural, technological, and organizational.