Or so claims MS Money’s senior editor Jim Jubak, who lays out an interesting argument that fiddling with the yuan will have next to zero impact. The key, he argues, is ensuring Chinese laborers earn more money. Period.
The solution isn’t in trying to reduce demand for cheaper Chinese goods by somehow raising the price of these goods enough so world consumers stop buying them. Even if that were a good idea in itself (and I don’t think trade wars are ever good ideas), the cost gap is so huge that I don’t think there’s anyway to shrink it enough to reduce demand for Chinese goods.
Instead, we should be going after the other end of the trade deficit by increasing the demand for U.S. and other goods from the developed world. We can’t achieve that by putting the currency markets on the job. Private consumption in China last year averaged $520 a person. Think that average Chinese spending $520 a year is going to fill a trade gap running at $170 billion a year if there’s a 10% drop in the price of U.S. goods?
To get that average Chinese to spend more, period — and to spend more on U.S. goods — he or she has got to make more money. Average real wages did climb 11% in 2004, and that did increase labor costs per hour by about 15% in 2004. But that only took the national average labor cost per hour to $1 from 87 cents.
Jubak isn’t too clear about how the unions would be set up and administered but it’s still a quaint notion. I agree with him that, while it won’t be a panacea, it would certainlyt benefit the government, the workers and the world trade community alike. Whether it could ever possibly happen is another story. Since this is China we’re talking about, the government would have to run the unions and they’d soon become as corrupt as the teamsters under Jimmy Hoffa. So ios the idea totally off the wall?
(As some readers know, I usually shy away from economics because I simply don’t have enough facts and figures at my fingertips to make my arguyments cogently and persuasively. Some have asked that I try to focus more on China’s economic issues, however, so I’m giving it a try. No laughter from the peanut gallery.)
Update: Jubak, by the way, is very much in favor of letting China by Unocal. That earns him points for me.
1
By Budding Sinologist
This seems to me to be very similar to American trade unions protesting (or paying professional protestors to do it for them) that third world countries don’t make enough therefore the WTO (or whoever) should force those poorer countries to pay their people a ‘living wage’ before they can enter the global market. In reality the purpose is simply to prevent Americans (eg: the trade union guys with their cushy jobs) from having to compete with the cheaper labor. Countries like China have a comparative advantage in their cheap supply of labor, which is why all of the outsourcing is occuring. If China has unions or drives up their labor costs in any other way beyond other countries (eg: Vietnam), then the factories will up and move. I suspect this article is about the same thing… after all it is being sold as a way to end the trade imbalance. In summary, if you raise their costs of labor high enough we don’t have to lower ours to compete. Seem like a good idea?
July 16, 2005 @ 5:18 pm | Comment
2
By American man
The average Chinese worker is already overpaid.
July 16, 2005 @ 5:35 pm | Comment
3
By Barbarian Envoy
Putting Politics Back Into Reform
I agree with Richard TPD: the Asian blogosphere needs more economics. But, not the kind with pie charts (ok, they’re cute), or tall tables of dull stats. Bloggers need to think about how economics and politics go together. Unfortunately, MSN…
July 16, 2005 @ 7:58 pm | Comment
4
By pete
AM: lol, hehe.
How about not buying so much stuff from China? A snowball’s chance in hell is better than getting free and unfettered (uncompromised to the CCP) labor unions in China.
July 16, 2005 @ 8:49 pm | Comment
5
By American man
I was being half serious. Most people don’t DO anything when they “work”. It’s like a nation of 1.3 billion Lighthouse keepers.
July 16, 2005 @ 8:54 pm | Comment
6
By pete
AM
Full employment. Good for the statistics.
July 17, 2005 @ 12:34 am | Comment
7
By American man
Sure is!
July 17, 2005 @ 2:07 am | Comment
8
By JFS
The $520 average disposable income that Jubak is referring to is a red herring. That is one problem with macroeconomics. Everyone thinks that macroeconics is distinct and seperate from microeconomics, which is not true. macroeconomics is just that summation of a bunch of microeconomics. All that one needs to do is walk through Shanghai, or Suzhou, or Hangzhou, or Dalian, or any city in the booming sector of China, and you see a lot of wealth being distributed. People are driving cars, etc. 20 years ago the one people who drove an auto was a politico, then 10 years ago it was the politico and the wealthier businessmen (especially those associated with the SOEs). Now, a neighbor of mine, who is an engineer with a WOFE, can afford a new car (albeit a Chinese one, but that is still the distribution of wealth). The economic development of China is going to increase people’s wealth, not trade unions. I was a member of a trade union (IBEW), there are many good aspects, and good desires of trade unions, but there main purpose of existence is to work as a cartel, and as all cartels, their main effort is to restrict membership (an attempt to artificially restrict supply) and to increase the wage rate above the market rate.
July 17, 2005 @ 3:48 am | Comment
9
By Martyn
You’re a knowledgable guy JFS. Bloody good post. I need to think about it some more.
July 17, 2005 @ 6:15 am | Comment