If you've started your Christmas shopping, it's almost certain you've bought at least one consumer good stamped "Made in China." These days,
that country manufactures two thirds of the world's photocopiers and shoes, half of all its cameras and nearly all of its mass-produced toys. China's price advantage in manufacturing is usually ascribed offhand to cheap labour, but that merely leaves one asking why it should be so cheap and what else enters into the equation. UC-Irvine business professor Peter Navarro and his MBA students have just completed an ambitious China Price Project, which aims to break down the components of China's price edge (using American figures for comparison) and ferret out which ones are likely to last.
Unsurprisingly, labour does come out as the single biggest advantage on the ledger. Hourly Chinese wages are about one-fortieth what they are in the U.S., while American workers are more productive per hour only by a factor of six. Ultimately, wages are bound to catch up with productivity, but not before the "surplus army" of underemployed workers in the Chinese countryside runs out. With estimates of the available work pool running in the low nine digits, that won't happen for decades. On its own, however, cheap labour doesn't account for the entire Chinese advantage.
Actually, claims Navarro, it only explains about 40 per cent of it. China can get away with paying workers an average of 57 cents (U.S.) per hour, but it must still meet world prices for other inputs, such as raw materials. It saves on production costs in other ways--lax environmental and worker-safety regulation, for instance. But even in industrialized countries, these factors swallow just a fraction of overall cost, so they cannot account for much of China's super-competitiveness.
Much of China's present advantage, Navarro believes, comes from increasingly untenable protectionist and socialist policies. The chronically undervalued yuan, untethered from the American dollar last year, still contributes about 11 per cent, but is headed toward parity. China's entry into the World Trade Organization should reduce the nine per cent represented by pervasive counterfeiting of western goods and digital piracy. The WTO also eventually will address the persistence of some of China's anti-competitive tax rebates for exporters; these are assessed at 5 per cent. And Chinese state banks continue to hand out and hold on to bad loans in unknown quantities. Using conservative estimates, Navarro's team assigns about 3.4 per cent of the price advantage to this practice--but it also presents the Chinese financial system with a constant threat of collapse.
The errors in all these estimates are enormous, but as an approximation, the Chinese price edge seems about half legitimate competitiveness and half policy. Call it an even split between "fair" and "unfair"--with "unfair" measures serving as subsidies for foreign consumers of Chinese exports (like, say, Canadian Christmas shoppers). There are signs the Chinese government is gradually recognizing this anomaly and beginning to cede some industrial efficiencies to meet the social-welfare expectations of a growing middle class. Unless the whole thing goes kablooie via revolution or environmental catastrophe, they're bound to end up fat and lazy like us.Western Standard (Alberta)
