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China's labor unrest may help U.S. manufacturers

Higher wages could lead to higher demand for goods and services, narrowing the trade gap. But rebalancing the economy could take years.

June 19, 2010|By David Pierson, Los Angeles Times

Reporting from Beijing — Their demands may seem commonplace: Better pay and better conditions.

But the impact of Chinese workers walking off their factory lines in recent weeks could one day reshape China's economic relationship with the United States.

Labor unrest at companies including Honda Motor Co., electronics giant Foxconn and, on Friday, a parts supplier for Toyota Motor Corp. has shifted attention in China toward the gap between rich and poor and the sustainability of cheap labor. It also comes as minimum wages are rising in a handful of provinces and cities.

For those keeping score, such responses would qualify as a step toward rebalancing China's economy — something American lawmakers have been pleading for to help the U.S. win back a larger share of global trade.

Workers have not shared in China's booming economy. In 1999, the ratio of Chinese laborers' income to the gross domestic product was 53%. Today it has declined to 40% — compared with 57% in the U.S.

Many economists have long argued that boosting Chinese household income is a key to resolving the yawning trade imbalance with the U.S., which grew to $19.3 billion in April — up $2.4billion from March.

In theory, getting more money into the hands of ordinary Chinese would spur the buying of goods and services. That would take pressure off Beijing to rely on exports to keep its share of the economy humming and would give U.S. manufacturers a more level playing field.

The problem is that such structural changes in any economy can take years to achieve. Raising wages too fast could decimate manufacturers and their supply chains and spark ever-higher inflation. And despite robust expansion, China's efforts to balance its growth are complicated by mounting risks.

As much as policymakers would like to increase wages, they must weigh the effects of the European debt crisis on exports, of a sizzling property market that could jeopardize the nation's banks and of an end to the Chinese government's approval of new stimulus projects — and then gauge how much slowdown they can stomach.

"The Chinese government is very closely watching the economic picture at home and the state of other economies before we decide on our economic policies, including on the … exchange rate," Zhang Tao, director of the international department of China's central bank, said at a news conference Friday in Beijing on Friday, Bloomberg reported. "The recent volatility in the international financial markets indicates the global economy still faces challenges."

The World Bank — which predicted strong but slower economic expansion in China this year — noted in a forecast released Friday a menu of moves being undertaken by the central government to better balance the economy. Among those moves: bolstering the nation's social safety net, curtailing over-investment in state-owned companies and trying to improve conditions for private enterprises.

The problem with imbalances, said Ardo Hansson, the bank's lead economist for China, is that "it's not one where there's a silver bullet.... It's a slow process."

Rebalancing won't come nearly fast enough to ease Washington's calls for China to revalue its currency. Congress is threatening legislation to urge China to appreciate the yuan if it doesn't do so after the G-20 summit in Toronto this month.

Raising China's exchange rate could immediately make that country's exports less competitive, benefiting U.S. and other international producers.

Some analysts predict Beijing will eventually agree to strengthen its currency this year, but only about 3% against the dollar to combat rising inflation — far below the more than 25% that some U.S. manufacturers believe the yuan is undervalued.

Although it is still somewhat taboo for officials and economists in China to support currency appreciation, speaking in favor of labor and wage increases is acquiring populist cachet.

Chinese Premier Wen Jiabao said this week that conditions for China's 130 million migrant workers needed to improve. And on Thursday the People's Daily, a Communist Party mouthpiece, ran an editorial saying that adjusting the gap between rich and poor was crucial for China's economic development.

In China's tightly controlled media, coverage of the unrest in factories has been muted. There were reports Friday in foreign outlets that strikes were continuing at a Toyota parts factory in the northern city of Tianjin and at a Carlsberg brewery in the southwestern city of Chongqing.

Factory workers at Honda and Foxconn appear to have won wage concessions, but experts are still divided on whether China stands at a turning point in favor of labor.

Some see the declining population of working-age Chinese and recent labor shortages as evidence that companies will have to raise pay.

Others believe that the demand for workers is cyclical and that ample labor still remains in the countryside, waiting to be pulled into factory towns.

The need for workers could also ease when stimulus-financed infrastructure projects are completed and if a widening European financial crisis stalls exports. In addition, domestic consumption will grab a bigger share of China's growth this year as investment in infrastructure such as roads, rail and buildings slow down with the tightening of credit, economists predict.

"The effects of the stimulus will diminish and thus will release more labor," said Yasheng Huang, a professor at MIT's Sloan School of Management. "One danger is that there is a massive rise of labor costs, forcing some firms to go to Vietnam, but in two years the stimulus money wears off and you have lots of labor seeking jobs again."

"I support labor getting their due," he said, "but I have always argued that it is best to do this in a gradual manner."

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