When was the last time you looked at the label on just about anything? Chances are, if the item cost you less than $30, you just participated in the global phenomenon we’ve come to know and love as the Low-Cost Chinese Import. Entire retail franchises have already been built built around this new breed of price-conscious shopper, and while consumers are absolutely beaming at the prospect of $1 placemats and flashlights and coffee pots, little time is spent reflecting on where those items are actually made, and how little the workers are getting paid to actually make them.
The funny thing is, given two items of identical value, informed consumers will typically buy the one that costs them less, regardless of their own apparent nationalism or aversion to foreign trade. $15 for a Gap t-shirt is still $15 for a Gap t-shirt, no matter which tax-free Asian sweatshop actually stitched it all together. While that isn’t necessarily surprising to all but the endlessly rich, it does highlight a fundamental shift in the way we furnish ourselves with the material “necessities” of life, and raises several important questions about the way that shift is changing the very fabric of our global socio-economy.
Give and Take
Oddly enough, this whole economic exercise started out with a few reasonably straightforward questions about a $1 “Made in China” bungee cord that I found at a dollar store in suburban Ottawa:
1) what is the actual cost of that bungee cord?
2) how can they afford to sell it for only $1? (particularly when “Made in Canada” equivalents retail for up to 7 times as much?)
3) does that “Made in China” price include the indirect cost of displaced Western jobs?
4) should we really be outsourcing industrial production to our “less-unionized” global neighbours? (read: “Mexico and most of Asia”)
5) is it really a good idea to swap a fully-functioning (but relatively expensive) workforce for a slew of low-cost…well…just about everything?
In the spring of 2000, President Clinton addressed Congress with a rather impassioned letter invoking a simple approach to the future of American trade: “If congress makes the right decision, our companies will be able to sell and distribute products in China made by American workers on American soil, without being forced to relocate manufacturing to China…we will be able to export products without exporting jobs” (my italics). The message was loud and clear. America’s balance of trade can and should be reciprocal.
But with unionized wages on the rise, and a slumbering Chinese labour force that is just beginning to wake, that rare but dangerous combination of high-cost labour and high-cost lifestyle has presented the west with a very simple choice. Without hesitating, the West chose “lifestyle”, and quietly begun selling off its industrial labour pool $1 at a time. Not to say that it doesn’t make sense from a strictly macro-economic perspective (i.e. countries should produce what they’re better-suited to produce, and they should trade for whatever they’re not), but it does suggest that a number of “unquantifiable” outcomes might some day materialize which don’t necessarily fit into a standard economic model.
Put simply, when production decisions are made on domestic soil, the impact on general inflation and economic activity can be much less severe. As a natural consequence, rewarding China for lowering the price of socks and solar lighting by consuming them en mass at the dollar store illustrates perfectly how short-sighted consumers can often become in their relentless quest for the “best price around”. In fact, China’s production of low-cost exports ends up costing the West a whole lot more than it ever saves us, both from its direct impact on global commodity prices and from its indirect impact on foreign exchange. The benefits of trade, it would seem, may have been grossly over-estimated.
A Primer on International Trade
Just this week I glanced down at the label on a small box of waterproof matches, and while it didn’t read “Made in China” as I fully expected, the origin of this particular item was even more perplexing. I immediately asked myself the obvious question: why does Canada import its matches from Australia when we have plenty of trees here at home?
In this case, modern trade theory has a reasonably sound answer: a country should only produce those goods that it is comparatively best-suited to producing, like Chinese textiles, Japanese electronics, Saudi arabian oil, and co-incidentally, Australian matches. Given Canada’s abundance of trees and its thriving lumber industry, it might seem counter-intuitive to import tiny splinters of wood from half-way across the world. But the truth of the matter is, our wood is simply too valuable to be chopped up into little bits, dipped in sulfur, and used to light things on fire.
To our obvious benefit, nature has furnished Canada with a much greater variety and volume of arboreal species than most of our global peers. Our spruce, pine and fur make fantastic construction-grade lumber, the elegant oaks and maples of Upper and Lower Canada produce some of the world’s most beautiful furniture, and our pulp and paper manufacturing infrastructure is virtually second-to-none. On the other hand, Australia has relatively fewer lumber-grade trees (given its unique geography and climate), and its most popular native species is better suited to chemical “sludgification” than it is to furnishing your dining room.
Eucalyptus typically isn’t straight enough to produce reliable cuts of lumber, nor is it aesthetic enough to use in furniture production on any significant scale. Both countries have the facilities and the industrial know-how to produce just about any wood derivative there is, but it makes more sense for Canada to export lumber and finished goods to Australia, and import products like matches and pulp, so that both countries can take better advantage of their relative trade specializations and optimize the use of their natural resource endowment.
The “China” Price
At just over $5,000 of GDP per capita in 2004, China is still ranked #121 in the world in terms of its raw economic output per citizen. Think for a moment about the 1.3 billion people they’re using as a denominator. Now think about how much higher that number will get when the country finally reaches its industrial stride (for example, when it starts paving all the roads between its major industrial centers). Finally, think about how its export industry, even at this nascent point in the industrial cycle, already cranks out more gross product than Canada and Mexico combined.
China’s competitive advantage with the world, unlike Canada’s in relation to Australia, is a function of modern economic Darwinism, not of geographic resource allocation. Chinese retail prices can often be up to 50% below the lowest production cost here in North America, not because China has better trees or minerals or agriculture, but because its rural workers survive on less than a dollar of income a day. At this point, the world is willing to trade its competitive disadvantage in labour for its current advantage in technology.
When it comes right down to it, the real reason we’ve managed to price ourselves right out of the global marketplace has more to do with Britney Spears than it does with high-tech factories (unless, of course, those factories are manufacturing her CD’s). In reality, our “Western Lifestyle” is just too expensive. It requires average salaries per capita that are up to 20 times higher than our closest trading partners in the developing world. It’s no wonder, then, that we can’t afford to keep our jobs at home. The more Western consumers buy, the more they inevitably shop for “deals“. And the more they shop for deals, the more competitive exporters like China will ultimately become, as demand for their lower-cost goods replaces demand for our higher-cost domestic equivalents.
Realistically speaking, it’s only a matter of time before that same low-cost “know-how” is applied to more advanced assembly processes. Sticker prices for “Made in China” merchandise will inevitably move above the imaginary $30 “Made in China” barrier. Companies like Visionary Vehicles of Brooklyn, New York are already rolling out their first Chinese roadsters and minivans and SUVs — at prices almost 30% below their equivalent Japanese, German and North American peers. In the next few years, should the list of Chinese imports continue to grow in scale and scope, the true future of Western production will finally begin to materialize.
Income = Outcome
At the root of it all is a crisis of consumerism and a failure of the American Dream. The West simply can’t support its own bloated social infrastructure. A rise in paper wealth (these days, it’s mostly real estate) has ultimately spurred one of the most extended periods of economic “exuberance” since the late 1980s. As portfolios shifted from the equity markets to the debt markets in early 2000, and then again from the debt markets into real estate over the ensuing five years, the same wealth “bubble” that fueled the dot.com boom managed to bury itself deep within the brick walls of middle-class suburbia. With big screen TV’s in virtually every household, multiple family vehicles in virtually every garage, and extended designer vacations that would make even the most itinerant journeyman long for the comforts of home, it’s safe to say that North American’s are betting on a steady increase in their basic net worth.
But as jobs continue to migrate to the world’s cheapest markets, and the Western standard of living becomes a little too expensive for those unemployed consumers to bear, the market will reach a natural tipping point. The “greater fools” will no longer support the fragile infrastructure of a luxurious MTV lifestyle, and almost instantly plunge the developed world into a downward spiral of diminished spending, as “The Wealth Effect” finally loses its “pull”. Until western markets fall back into line with a more rational standard of living, the foundations for future economic integration and global prosperity will just have to wait.
Given all this industrial turmoil, the only countries that have any chance of avoiding the painful fallout are the ones that aren’t completely dependent on America’s insatiable demand (here’s a hint: there aren’t many). The Netherlands, Belgium, Hong Kong — even those match-makers from way “down under” — might be spared the biggest financial shock in the early going. But when $1.5 trillion worth of global demand suddenly loses its footing, there isn’t a single principality or fiefdom or protectorate on the planet that won’t feel the rumble of that fall.
When, not if, that catastrophy actually materializes, China will have to come to terms with its new role in the world. As their exports return to more sustainable long-term levels (i.e. single-digit economic growth with only moderate American consumption) the rising Asian tiger will continue to supply the world with anything it can’t produce for itself at a competitive price. That goes for anything from cameras to cars to custom-built homes, and all of it stamped with a “Made in China” tag. Western “production” will ultimately remain offshore where economic theory suggests it should be, and enlightened innovation will become our only remaining engine for growth.
Even today, at a time when “globalization” seems to be looming behind every corner, it still isn’t easy to shift the world’s capital to the places that need it the most. Factories can’t just lift off the ground and float their way to Asia. That process takes time. And while it isn’t quite as laborious, a migration of the world’s major workforces also takes a considerable organized effort, one that can place a lot of social strain on all of the countries directly involved. No developing nation wants to see its best and its brightest exported to some far away place in exchange for factories and pollution and chronic labour abuse. And no developed economy wants to lose a large portion of its industrial productivity because someone half a world away is willing to make the exact same thing for considerably less.
When the dust finally settles over the trade routes of our modern macroeconomy, a more reasonable equilibrium will inevitably materialize: one where China does what it does best, America produces and spends within its basic financial means, and India joins the party with its own fresh bag of capitalist tricks. And that’s as close to a perfect scenario as we’ve seen so far: a world where countries simply do what they do best, and trade for anything they don’t; a world where resources are matched rather naturally with their ideal methods of production; a world where labour and capital are free to flow toward their preferential geographies at a reasonable social cost; and a world where the cooperation of all nations produces enough raw product and value-added service to supply our entire global population with the basic necessities of a comfortable life. Basically, a world with all the makings of an economic shangri la.
But as it is with all utopian scenarios, the reality is anything “ideal”. Politics and sociology usually prevent any practical application. And as a species that operates (mostly) within the confines of reality, we have to resign ourselves to a life of economic asymmetry. “Made in China” sneakers and subways and semi-conductors aren’t necessarily a bad thing. “Made in China” nukes are a different story altogether. As long as we embrace all of the many factors that make a $1 bungee cord possible, and understand that our local Dollarama will never start selling ex-Soviet weaponry at that same discount price, then we probably don’t have all that much to worry about. In the end, capital always flows on the path of least resistance, and until something drastic happens to change the overall cost structures of the West and its major trade partners (like, say, labour unions forming throughout the rest of the developing world), “Made in China” everything is likely here to stay.