Keep the jobs
| By Shang Zuo Factories are closing down and moving to new locations due to rising wages and strict labor laws. Unemployed workers are hiring lawyers to sue their former bosses … Does it all sound familiar? This news is not from America, however, but from China. Outsourcing, off-shoring, and consequent job losses have been a key political topic this election year. Should Americans blame globalization or countries like China and India? The answer is not within the boundary of the U.S. Even though China is supposed to be the destination of manufacturers, the industrial migration can happen everywhere — and it is happening — even in China. Guangdong province has been a front runner in manufacturing since China’s economic reform. But this year, media reported unusualy high factory closings in the Pearl River Delta of Guangdong. According to the Federation of Hong Kong Industries, 10 percent of an estimated 60,000 to 70,000 Hong Kong-run factories in this region will close this year. The change already started occurring in the past few years. Starting in 2002, labor intensive industries, including clothes and toys, experienced labor shortages. (Apparently, there was no absolute labor shortage in a country of more than 1 billion people.) But factories found it more and more difficult to hire enough experienced workers at the low salaries they offered. This year, the labor market was profoundly reshaped by a new labor law. This law requires that employees be on formal-term contracts, and that they can only be terminated for cause. It is closer to Japan’s “employment for life,” than the U.S. practice. Another factor is the revaluation of China’s currency. Chinese Yuan, or RMB, used to have a pegged rate of RMB8.27 to US$1. The policy served well for its export-oriented economic development. In a floating exchange rate system, when a nation’s export volume surges, its currency tends to rise against other currencies. This appreciation will inversely repress further increase of export, because their products become more expensive. So a floating exchange rate system works like a stabilizer of international trade and present world order. Understandably, developed countries favor this system, while new emerging economies see it as an obstacle to overcome. A pegged exchange rate is a double-edged sword, however. With a devalued currency, a country can sell cheap. On the other hand, it has to pay more for imported goods. Many economists believe that RMB is undervalued. In 2005, RMB started to appreciate, and it will continue, it seems. Since the beginning of this year, RMB has raised 4 percent against the U.S. dollar. This, too, will increase Chinese factories’ costs. Yet another new phenomenon is high inflation. China had been growing fast under reasonable inflation for over a decade until last year. Inflation first appeared in the price of pork, when animal disease caused a pork shortage. Just when people thought the price hike had passed, a nation-wide snowstorm this February caused food prices to rise again. The government has frozen key prices — ranging from food to gasoline. It no longer matters whether the inflation was initiated by a series of accidents or by fundamental economic change. When the expectation and momentum of inflation is formed, it is difficult to control. The closedown of many factories might also be a foreseeable result of policy change. China used to encourage export by giving these companies tax rebates. Now, tax breaks are diminishing, and taxes have increased from 5-8 percent to 12 percent in some factories. Guangdong provincial officials, feeling competition from Shanghai and Yangtze River Delta, are trying to persuade low- end businesses to move to inland counties, where wages are lower, so that well-developed cities can upgrade their industries. New labor law, currency revaluation, inflation, and policy change; all these factors add up. The industry’s cost is increasing unexpectedly. This comes at a bad time, when the U.S. economy, the largest client, is slowing down too. Some companies are considering relocating to other countries, while some simply shut down. The most dire situation would be, that all these factories move out of China, leaving nothing but a memory of a short period of prosperity. China still needs labor intensive industries to keep the unemployment rate down. To maintain their competitiveness, companies are investing more in technology, management, and their employees. The productivity of Chinese factories is still much higher than other developing countries. Another advantage is economy of scale. Businesses tend to live closer to their suppliers and clients. If an entire industry is in China, it costs a company more to relocate to another place alone. Industrial migration will eventually happen. But if the factories can be gradually guided to inland provinces, and the country can develop a service-based economy and a mature domestic market in time, people will benefit from the shift. In his book “The Age of Turbulence,” Alex Greenspan says that even mighty economies like the U.S. and China cannot prevent globalization. I think this progress is not automatically good for everyone and will cause sacrifice. But the outcome depends on how smart everyone plays the game. There will be a lot of challenges awaiting the U.S. and Asian countries alike. Will China’s lessons, good or bad, be learned by the rest of us? |
