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The “China Price" and Weapons of Mass Production

The China Price. They are the three scariest words in U.S. industry. Cut your price at least 30% or lose your customers. Nearly every manufacturer is vulnerable—from furniture to networking gear. The result: a massive shift in economic power is underway. In this chapter, you'll examine the nine key drivers of the China Price.
This chapter is from the book

"The China Price. They are the three scariest words in U.S. industry. Cut your price at least 30% or lose your customers. Nearly every manufacturer is vulnerable—from furniture to networking gear. The result: a massive shift in economic power is underway."
Business Week1

"China has an official policy for the economy to grow at 7%–8% per year, the rate which the ruling mandarins calculate is needed to create about 15 million new jobs a year, to absorb new entrants into the labor market and discards from the shrinking state sector. Every policy, from the value of the Chinese currency to the delay in closing an unsafe coal mine, is calibrated to ensure that economic output continues to expand at this rapid pace."
Financial Mail2

Since 1980, China’s Adam Smith-on-steroids economy has grown by almost 10% a year—doubling an astonishing three times. During its ascent, China has far outperformed Japan’s 1980s “economic miracle.” It has also run circles around the vaunted “Four Dragons”—Hong Kong, Korea, Taiwan, and Singapore—even in their economic heydays.

Any complete understanding of the Coming China Wars must begin with this observation: China’s hyper-rate of economic growth is export driven; and the ability of the Chinese to conquer one export market after another, often in blitzkrieg fashion, derives from their ability to set the so-called China Price.

The China Price refers to the fact that Chinese manufacturers can undercut significantly the prices offered by foreign competitors over a mind-bogglingly wide range of products and services. Today, as a result of the China Price, China produces more than 70% of the world’s DVDs and toys; more than half of its bikes, cameras, shoes, and telephones; and more than a third of its air conditioners, color TVs, computer monitors, luggage, and microwave ovens. The country also has established dominant market positions in everything from furniture, refrigerators, and washing machines to jeans and underwear (yes, boxers and briefs).

Given China’s demonstrated ability to conquer one export market after another, the obvious question is this: How has China been able to emerge as the world’s “factory floor”? The answer lies in China’s primary “weapon of mass production”—the China Price. The nine major economic “drivers” of the China Price are as follows:

  • Low-wage, high-quality work by a highly disciplined, educated, and nonunion work force
  • Minimal worker health and safety regulations
  • Lax environmental regulations and enforcement
  • The supercharging, catalytic role of foreign direct investment (FDI)
  • A highly efficient form of industrial organization known as “network clustering”
  • An elaborate, government-sanctioned system of counterfeiting and piracy
  • A chronically undervalued, “beggar thy neighbor” currency
  • Massive government subsidies to numerous targeted industries
  • “Great Wall” protectionist trade barriers, particularly for “infant industries”

In analyzing the nine key economic drivers, I show you that only one—network clustering—is truly legitimate from the perspective of a global economic system that is supposed to be based on free and fair trade. Each of the other eight China Price drivers violate one or more of the many “rules of the trading road” that have been established by organizations such as the World Trade Organization and treaties such as the General Agreement on Tariffs and Trade or that are embodied in international labor and environmental standards.

The broader point that should emerge from the foundation chapter is that by engaging in a comprehensive set of unfair trade policies and by wielding its primary “weapon of mass production,” the China Price, China is enjoying unprecedented rates of export-driven economic growth—and thereby trouncing the competition in global markets. In the process, China is effectively sowing the economic seeds of the Coming China Wars with the rest of the world. And, in the worst “wars from within” scenario, China is also setting itself up for its own environmental, political, and social destruction.

Low Wages for High-Quality Work

  • What is stunning about China is that for the first time we have a huge, poor country that can compete both with very low wages and in high tech. Combine the two, and America has a problem.

    —Professor Richard Friedman, Harvard University3

It is difficult to estimate accurately wage levels in China because much of the data is of poor quality. In addition, the government wants to hide the fact that numerous companies illegally pay their workers far less than the stated minimum wage.

Estimates that do exist put the average hourly earnings well below a dollar. Interesting, however, is that in many other countries, wages are as low or even substantially lower than in China. These countries, scattered all over the world, range from the Dominican Republic and Nicaragua in Latin America and Bangladesh and Pakistan on the Indian subcontinent to Burma, Cambodia, and Vietnam in Southeast Asia. Despite their lower wages and often equally wretched working conditions, none of these countries can compete effectively with China. One important reason is simply that manufacturers in China get a lot more productivity bang out of the wage buck. Chinese workers are relatively better educated and, more important, far more disciplined than the workers found in the poor barrios of Caracas or Rio de Janeiro or the slums of Soweto or Lesotho. This means that dollar for dollar and yuan for yuan, China can provide higher-quality, more-disciplined workers; on a productivity-adjusted basis, their workers are highly competitive with virtually every other country in the world.

There is, however, a far more subtle part of this wage story—one that seeks to answer the question: How is it that year after year, indeed decade after decade of record economic growth, Chinese wages do not really rise much? Or to put it another way, how can Chinese manufacturers continue to pay such low wages for a high-quality work force in the face of rapid growth that in other countries would quickly tighten the labor market and cause wages to spike?

At least part of the answer lies in one of the great ideological, economic, and darkly comic ironies of our time. In a country that was built on a foundation of Marxist doctrine, there exists the largest “reserve army of the unemployed” ever created in human history. In this regard, one of the central tenets of Marxist theory is that the exploitation of workers by capitalists is made possible because capitalism will always generate significant unemployment. The inevitable presence of this “reserve army” of unemployed workers will always depress wages and allow the capitalists to exploit their workers in other ways, too (for example, poor working conditions).

On this count, and at least at this time in China’s history, Karl Marx got it absolutely right. The size of China’s reserve army is breathtaking and, at least on first hearing, almost unbelievable. This reserve army of surplus labor numbers significantly more than a hundred million workers. To put this in perspective, this means that China has almost as many unemployed and underemployed workers as America employs in total.4

Now, here is what is perhaps most interesting about this surplus labor: Despite two decades of double-digit GDP growth, China’s reserve army continues to grow, not shrink. The next question is how this huge pool of surplus labor that so effectively depresses wages and benefits in China got to be so large—and why it continues to grow. The answer may be found in four important elements that explain China’s labor market advantage: continued population growth in the world’s most populous country; a massive privatization of the work force that has cast off tens of millions of industrial workers from the security of the “iron rice bowl” system; a government-decreed, rapid urbanization that is moving hundreds of millions of farmers into Chinese factories; and a system, in many cases, of quasi-slave labor facilitated by the outlawing of labor unions.

Population Growth and Privatization

  • Mao Zedong would shudder at the vibrant free-market energy of Chinese city centres, their rush-hour gridlock, packed restaurants, glitzy shopping malls and young fashionistas chattering on the mobiles they change more often than their shoes. But they are ringed with rusting “iron rice bowls”—the unviable, revenue-draining state-owned enterprises (SOEs) whose progressive closure is a key to market reform. China has shed 41 million SOE jobs and 21 million more from co-operatives; no wonder it regards America’s 6.1 percent unemployment rate dry-eyed. These iron rice bowls provided not just jobs for life, but housing, healthcare . . . , education and pensions.

    The Times (London)5

As you might suspect, population growth in China has played a critical role in generating surplus labor. In truth, however, two other elements are much more important in creating China’s reserve army of the unemployed. The first is the privatization of industry as part of China’s economic reform process. The second is a rapid rise in urbanization of the population—a rise driven in large part by chronic rural poverty.

It is beyond the scope of this book to provide a detailed history of China’s economic reforms. Suffice it to say here that prior to these reforms, which began in the late 1970s, the Chinese economy was organized along the lines of an “iron rice bowl.” In this Marxist system, all state-owned enterprises (SOEs) guaranteed workers not just a livable wage, but also housing, health care, pensions, and other benefits. The system was modeled on the Soviet-style collectivization of industry and embraced by Mao Zedong and the Communist Party shortly after their rise to power in 1949. The big problem with the iron rice bowl system, however, was that it was marked by extreme levels of inefficiency and waste; with their wages and pensions guaranteed, employees in SOEs had little incentive to produce.

Beginning in the 1990s, the Chinese government accelerated dismantling its iron rice bowl system in favor of free market enterprises fueled largely by foreign direct investment (more about FDI later in this chapter). The purpose of what was a rapid and dramatic privatization of much of China’s work force was to make Chinese industry competitive with the rest of the world. The practical effect of these reforms, however, has been to help create the largest “floating population” (liudong renkou) of unemployed and underemployed workers ever seen.

Almost all estimates of this vast migration population exceed one hundred million and comprises the largest part of the core of China’s “reserve army of the unemployed.” The reforms are not the only contributor to this army. In fact, prospectively, it will be the Chinese government’s decision to rapidly urbanize its population that will keep this surplus army growing ever larger—and always behind even the most rapid pace of economic growth.

China Urbanizing Imperative

  • Some say they want to be a driver, a scientist or a teacher. But nobody wants to go on being a farmer.

    Even a wretched job is better than no job . . . Most rural workers find their life in cities bearable because they have hopes and dreams: a color TV, a brother with a college degree, a new house to live in, or even a new apartment in one of the cities.

    —Du Nengwei, teacher, Shuanghu, China6 Professor Qumei She, Wanli University7

  • Demographer estimates indicate China’s urbanization rate will reach 50 percent by 2030, when China’s total population is expected to jump to 1.6 billion. Factoring in such a calculation, approximately 15 to 16 million itinerant farm workers will annually head to the cities in the next 30 years.

    The China Daily8

China’s urbanizing imperative is one of the most critical components of the Coming China Wars. It is the result of a huge, fundamental, and ever-growing disparity between the income levels and prospects of China’s massive rural peasantry and the much more affluent and upwardly mobile young urban professional “Chuppies” or Chinese yuppies.

China has so many farmers and so little land that most Chinese farmers have very small plots—often less than an acre or two. This land constraint makes it a virtual certainty that the best most peasants can do is to simply eke out a subsistence living.

Moreover, from a big-picture point of view, the extreme decentralization of Chinese agricultural makes it difficult for Chinese farmers to operate efficiently and create large economies of scale. To understand the problem, consider that in the U.S., less than 2% of the population is engaged in farming, whereas in China more than half the population works in the agricultural sector.9 Despite this difference, the grain production in the two countries in any given year is roughly comparable.10

From the perspective of the Chinese central government, rural poverty is a ticking time bomb, both economically and politically. Economically, a poor and aging peasant population will put tremendous strains on the government’s social welfare budget—as these farmers’ health and welfare needs must be addressed. Politically, as income disparities grow between the rural and urban areas, so, too, grows peasant discontent. In this regard, the Chinese government is all too aware of Mao’s warning that “a single spark can start a prairie fire” and that it was Mao himself who rode into power on a wave of rural discontent.

The broader point is that as a matter of policy, China has embraced rapid urbanization as a panacea for all its rural ills. Over the next several decades, the goal of the Chinese government is to move 300 million or more peasants off their small farms and into China’s teeming cities and factories. To put this migration in perspective, the number is equal to the entire current population of the United States and double the size of the current U.S. work force.

Now here’s the rub: Even if China continues to grow at a rate of close to 10% a year, China’s reserve army of the unemployed is not likely to shrink significantly and may even swell. Moreover, if the Chinese economy slows down, unemployment—and political discontent—will skyrocket. Is it any wonder that the Chinese government is so intent on fueling rapid economic growth?

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