Rising China costs no shock for rest of world

• Source: Global Times
• [21:46 June 12 2010]
• Comments

Illustration: Liu Rui

By Zhou Zixun

Foxconn, Honda and other foreign companies in China are raising wages in response to worker unhappiness in their Chinese factories. This has raised concerns about increased Chinese labor costs, and the price the rest of the world will pay for it. But this move is both inevitable and just, and foreign countries that have long profited from inexpensive Chinese goods have no grounds for complaint.

In fact, with the development of economic globalization, the rise of labor costs in emerging economies is unavoidable and wishes for permanently cheap labor infeasible. For a long time, Chinese workers were at the lowest end of value chains. With intellectual property rights owned by developed countries, workers only received 1 to 5 percent of the cost of products, while 30 or 50 percent was taken by developed countries.

Western nations have often criticized China's human rights issues. If these criticisms are sincere, they should pressure their corporations to pay some of their profits to cover the rising wages of Chinese laborers.

Developed countries should accept a reasonable decline in profits to enable a rising standard of living for Chinese workers.

However, the lure of profits is obviously not so easy to resist. Foreign corporations, accustomed to high profit margins, will use every possible means to avoid the burden of rising Chinese labor costs.

Western countries will keep manufacturing while reducing imports to balance the new price pressures of goods made in China. Simultaneously, Western companies will strengthen their negotiation with Chinese export companies to keep the export price of such goods low.

Some foreign companies with local production plants in China will ask local governments for more preferential policies. If their requirements are not satisfied, they will threaten to move plants to India or Vietnam. Divestment was a useful threat that rarely failed to work on local governments.

If Western companies aim to invest in countries with lower labor costs, there are not many choices globally. It is not easy to enter Southeast Asian countries, which lack a mature industrial base and supply chains. And India's legal framework and level of social development are just not comparable to that of China.

Moreover, driven by Chinese demand, those countries' economic recovery has actually exceeded the original expectations. Being close to the Chinese market and consumers will obviously benefit the development of those companies.

Therefore, the establishment of enterprises outside China will not only face many practical difficulties, but can also lead to possible losses in the Chinese market.

Equipped with this knowledge, local governments can play hardball and should not easily compromise with foreign companies' threats of divestment.