Mark Barenberg, a professor of law at Columbia University and a renowned expert on international labor law, authored a trade petition on labor rights in China for United States representatives Benjamin L. Cardin and Christopher H. Smith in conjunction with the AFL-CIO in 2006. In it he argued that Chinese labor practices enable the exploitation not only of the Chinese but of workers throughout the developing world. Barenberg told me that the “very success of China makes it all the more difficult for smaller, poorer countries” to get or sustain a grip on manufacturing opportunities. China lures manufacturers with an undervalued currency and serious tax incentives, but the low labor costs—about one-quarter the cost of Mexican workers—is the real draw. Americans feared that the passage of NAFTA in 1994 would suck American manufacturing jobs southward, and to some extent it did. But since that time Mexico has lost hundreds of thousands of jobs to China. U.S. Department of Commerce data reveal that from 2002 to 2003 Mexico lost market share in thirteen of its top twenty export industries, nearly always to China. With fewer jobs at home, Mexicans are finding it all the more compelling to cross the border into the United States in search of work. No fence is high enough to bar workers desperate to feed their families.
Labor arbitrage, the contracting out of work to the lowest bidder, has lowered prices, and it has also made workers—including American workers—increasingly vulnerable. China has a reported 780 million peasants (some argue that figure is unreliably low), and as many as a third of these people are what economists call “excessive,” that is, living in dire poverty. People this poor are primed for any sort of employment, regardless of the circumstances or working conditions. For decades to come, 10 million to 20 million of these very poor Chinese will enter the nonag ricultural workforce every year. Put another way, every year China will add more workers to its payrolls than the total manufacturing workforce of the United States. Economic theory dictates that in free labor markets workers earn their marginal productivity—that is, they earn what their output is worth. “But the assumptions underlying this simple theory,” Barenberg wrote, “crumble against the hard realities of China’s political economy. China’s inflation-adjusted wages for the majority of factory workers have fallen or remained flat in the last fifteen years . . . while labor productivity has rapidly increased from year to year—creating an enormous ‘wedge’ between wage and productivity growth that flatly contradicts naïve economic theory.”
Some would quibble with this analysis, pointing out that millions of Chinese have worked their way out of poverty in recent years. Yet, while the nation as a whole has grown wealthier, China’s poor have grown poorer. World Bank economists reported in 2006 that the real income of the poorest 10 percent of China’s 1.3 billion people had fallen by 2.4 percent between 2001 and 2003, to less than $83 per year. And this was during a period when the economy grew by 10 percent and the income of the country’s richest grew by more than 16 percent. China today has greater income inequality than does the United States or, incredibly, Russia. The rich are decidedly richer, and the poor unimaginably poor.
The shotgun wedding of capitalism and Communism has not resulted in the best of times for scores of millions of Chinese laborers. As Shanghai journalist Wang Chang Chu told me, “We do not yet have the luxury to concern ourselves too much with things like human rights.” But this begs the question of whether the West should continue to regard the working conditions of China’s workforce as “collateral damage,” a situation to be ignored, tolerated, or—in some regrettable cases—even encouraged for the sake of low price.
Workers in China and the United States have more in common than many Americans would like to admit. In both countries real wages for manufacturing workers have stagnated and job security has weakened in the past decade, even when productivity soared. In 2004, the AFL-CIO filed a petition showing how denying workers’ rights in China had severe negative repercussions for workers in the United States. The petition demanded that President Bush impose restrictions on Chinese-manufactured goods as long as China failed to comply with internationally recognized workers’ rights. President Bush denied the petition, and the Department of Labor signed letters of understanding with the Chinese government promising “cooperation” in occupational safety and in wages and hours regulation, in which the United States pledged to “fully respect the national laws and legal provisions” of China. Rather than demanding that the Chinese improve their labor practices, the United States agreed to “fully respect” the Chinese status quo. Two years later, in February 2006, a report from China’s own Work Safety Administration conceded that aggregate unpaid wages had risen to record levels, setting off thousands of demonstrations, labor shortages, and increased child labor as adults refused to accept the growing injustices. Meanwhile, the vast majority of foreign-invested and domestically owned enterprises have no health or safety controls at all.
The world may not be flat, but it is integrated and interdependent. With mega-retailers demanding ever lower prices of their vendors, manufacturers have no choice but to move their operations to where they can find cheaper and more compliant workers. Holding the line is not an option, particularly when some of the largest chains have begun contracting directly with foreign factories. Best Buy, Home Depot, and Lowe’s all have sourcing offices in China. Wal-Mart has its global procurement headquarters in Shenzhen.
All this might be happening out of sight and earshot of most Americans, but it is not without serious consequence to us. Global corporations squeezing labor in China and other developing countries are today brandishing the threat of low-wage competition to roll back decades of hard-won gains in wages, benefits, and dignified treatment for workers in the United States. As Americans lose traction in an increasingly uncertain economy, Mark Barenberg’s parting words take on a special resonance. “The severe exploitation of China’s factory workers and the contraction of the American middle class,” he told me, “are two sides of the same coin.” Those 41-cent pairs of shoes, “free with rebate” computer printers, and two-for-the-price-of-one pen-and-pencil sets are costing us a lot more than we know.
CHAPTER TEN
THE PERFECT PRICE
The frugal man has the advantage over the man of pleasure in facilities for self-improvement, for doing his duty to his country, and for securing general happiness.
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PLATO, SOCRATIC DISCOURSES
If you hang around economists long enough, you hear a good deal about their intellectual heroes: John Stuart Mill, Adam Smith, John Maynard Keynes. Among the more controversial of these heroes is Joseph A. Schumpeter, the Harvard economist who in 1943 published the iconic
Capitalism, Socialism, and Democracy
. The seventh chapter of that work, entitled “The Process of Creative Destruction,” is for many academics a sacred text. “The process of creative destruction,” Schumpeter writes, “is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.” Creative destruction is an elegantly simple idea describing the industrial mutation of old structures into new ones. The department store evolves from and “creatively destructs” the country store; the auto industry evolves from and replaces the horse and buggy business, automation makes many factory and farm jobs obsolete but creates new jobs in information technology, engineering, healthcare, and biotech.
Creative destruction is a critical and necessary driver of progress. In the stampede toward ever greater efficiencies we have come to expect that institutions will get torn down, factories closed, stores shuttered, workers made redundant, and lives detoured. And that is as it should be: Nostalgia aside, we know deep down that the good old days were not always so good. Few of us would want our own children operating a dangerous machine in a hot, dirty factory or spending blistering summers under the sun behind a plow. But in the Age of Cheap we have lost our balance: Creative destruction is as destructive as ever. It’s the creative part that is in doubt.
“One of the great insights of twentieth-century economics is that you need excessive profits to create innovation,” Harvard trade economist Robert Lawrence told me. “When prices are kept too low, innovation is nearly impossible.” Underlying this is what economists call “perfect competition,” a state characterized by a multitude of buyers and sellers, many products that are essentially interchangeable, and few if any barriers to entry in a given market. Under this condition, prices are determined by supply and demand, which sounds like a good thing. But when price is the only distinguishing characteristic among products, competition does not necessarily lead to the innovation of better products or to stronger, more highly evolved industries. Often it leads where we wish it would not go: to a price war that discourages the very creativity, entrepreneurship, and invention that we revere.
Low price was made possible by massive innovation in distribution and information exchange, computer-driven supply chain wizardry, and streamlined transportation systems. These new efficiencies brought many things within reach of consumers around the world and powered titanic progress. But in today’s global market, producers have far less leverage than they once did to bargain: If a company increases its selling price, consumers can turn to the nearest competitor for a better deal. Hair-trigger price sensitivity shrinks profit margins, and when margins get too thin, producers don’t have the means or the will to be creative.
University of California historian Nelson Lichtenstein said that in the last decade, discount retailing had replaced General Motors as the “template industry of our era.” Given the difficulties faced by GM, this may sound like a good thing, but looking closer, the challenges become clear. Thanks to their enormous power, discounters have set de facto wage and benefit standards, subordinating the manufacturing sector. Discounters have generated, Lichtenstein said, the “most profound transformation in the spatial and demographic landscape since the emergence of suburbia in the immediate post-World War II years.” In this new environment, many manufacturers are essentially penalized for innovation.
Innovation is by definition risky, and it is made all the more so when stockholders overlook the long view and demand a jump in profits every quarter. When competition is mostly about price, innovation too often takes a backseat to cost cutting. Laying off workers and hiring cheaper ones is one sure way to enhance the bottom line. Another is to scour the world for low-wage workers, especially those in countries with lackluster enforcement of environmental and workers’ rights regulations. Neither of these tactics is innovative, and neither in the long run contributes to growth. And both contribute to an erosion of income that leads to debt and a decrease in spending.
Technology-powered globalization is often touted as a boon for business and citizens alike. There is no question that this has been true for the consumer side of us, the bargain-hunting side. Without steady access to the fruits of low-cost labor from abroad, Wal-Mart, dollar stores, and other discounters couldn’t exist. Globalism has served our consumer side well, but for the citizen side of us—and the worker side—globalism has been a decidedly mixed bag. Lawrence Summers, one of President Obama’s top economic advisors and a vocal booster of free trade, acknowledges that globalism has a troubling aspect. “As the great corporate engines of efficiency succeed by using cutting-edge technology with low-cost labour, ordinary, middle-class workers and their employers—whether they live in the American midwest, the Ruhr valley, Latin America or eastern Europe—are left out. This is the essential reason why median family incomes lag far behind productivity growth in the U.S.”
Summers and most economists agree that on the most basic level, trade should make everyone richer by enabling us to buy goods at the best possible price. Bolstering this claim is the principle of competitive advantage, first proposed in 1817 by influential British political economist David Ricardo, in his landmark
Principles of Political Economy and Taxation
. By Ricardo’s calculations, individual nations in a global economy are most efficient—and most prosperous—when they both produce and trade. To illustrate the point, Ricardo outlined a hypothetical case. Suppose in Portugal it takes fifty workers to make a certain value of cloth and twenty-five workers to make an equivalent value of wine. Suppose that in England it takes fifty workers to make a similar value of cloth and one hundred to make the wine. From this it would seem that Portugal, with its competitive advantage in both arenas, should export both cloth and wine, while England should import both. But in a brilliant stroke, Ricardo showed why it would be better for Portugal to make only wine and England only cloth, and for the two countries to trade their wine and cloth.
Ricardo’s argument went roughly like this: If Portugal transferred twenty-five workers out of the cloth business and put them to work making wine, it would produce one more unit of wine and one-half unit less of cloth, for a total one-half unit increase in overall productivity. If England took one hundred workers out of the wine industry and put them to work making cloth, it would have one unit less of wine and two additional units of cloth, for a total of one unit improvement in productivity. By focusing on what each does best, the two nations in aggregate produce more of both wine and cloth, thereby improving efficiencies and lowering costs. Ricardo concluded that Portugal is far better off trading wine for cloth, and England cloth for wine, than continuing to produce both on their own—showing how trade between nations can increase efficiencies even when one country has a natural advantage over the other.
The law of competitive advantage applies not only to trade but to everyday life. Consider a small law practice comprised of one lawyer and one secretary. Let’s say filing papers each day takes the lawyer one hour and the secretary two hours. Now let’s say the lawyer makes $200 an hour and the secretary $25 an hour. Clearly, the business is better off having the lawyer stick to legal work and the secretary to filing even though the lawyer is more efficient at both tasks.