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WORLD: We must count the true cost of cheap China

by Richard McGregorFinancial Times
August 2nd, 2007

When an erstwhile colleague tried to illuminate the controversy over cheap imports from China, he positioned himself outside a Wal-Mart store in Illinois, asking shoppers if they should thank poorly-paid Chinese workers for providing such low-cost goods. In response, as James Kynge records in his recent book on China's global impact, most shoppers gave him puzzled looks or simply scurried away.

That was two years ago. In the wake of the multiple scandals over tainted Chinese food and drug exports in recent months, such an exercise might now provoke outright hostility rather than uneasy indifference. The scandals have ensured that Chinese goods now have an indelible image of being not just cheap, but life-threatening as well.

The current wave of outrage was set off this year when pet food tainted by deliberately mislabelled Chinese-made additives began poisoning thousands of cats and dogs in the US.

The fact that wrongly labelled foods, liquor and pharmaceuticals have routinely sickened and even killed people en masse in China has been largely overlooked.

In this respect, powerless consumers in China should be thankful for pampered pets in the west. Without the outrage generated on the animals' behalf, the Chinese authorities would not have acted so quickly to promise stricter regulation of the industries.

The increased regulation itself may have some perverse consequences too. The west has generally cheered on the growth of entrepreneurs in China. But regulation, by raising industry standards and barriers to entry, tends initially to reduce competition, by squeezing out smaller operators, who in China are synonymous with the private sector. The beneficiaries may be big state companies, whose close ties to the ruling Communist party will help mould any regulations to suit their interests.

The greatest, and most welcome, impact of the food and drug scandals, however, might be to shake up the cognitive disconnect that bedevils the debate about the fallout from China's economic surge.

The huge windfalls for western consumers have been paralleled by wailing about how cheap Chinese goods are destroying local jobs, to the unambiguous benefit of China.

This crude dichotomy misses the nub of the issue: that the benefits of growth have been unevenly, and often un-fairly, spread around. This is a point Beijing has been at pains to acknowledge inrecent years, even if its policies toadd-ress it have been largely ineffective.

Ordinary Chinese, especially city dwellers, are much better off than they were before the market reforms nearly 30 years ago. But proportionately, their share of national income has declined. An International Monetary Fund paper found that the fall in the wage share of national income since the mid-1980s had been pronounced, from 67 per cent of gross domestic product to 56 per cent now. The World Bank found an even sharper drop, of 9 per cent, in the wage share from 1998.

Chinese leaders publicly stress the priority of job creation, but economic incentives continue to favour capital intensive industries, not the job-generating service sector. The huge profits these industries have made in recent years have flowed back to state investors and officials, not the workforce. The other winners have been foreign multinationals, often in local joint ventures, using China as an export base.

Labour costs have been rising in China for years but remain low because of countervailing rises in productivity and the inability of workers to organise to win quantum improvements in their conditions.

But the much-feared "China price" has always been about much more than cheap labour. The phenomenon has been underwritten by lax or non-existent enforcement of environmental rules, cheap finance and multiple incentives offered by regions competing for investment.

For companies making low value-added goods, the cheap finance and investment incentives are being wound back by a central government that wants companies to focus on developing indigenous technologies.

The enforcement of environmental rules and the establishment of a genuine regulatory regime promise to be much thornier tasks. Local autonomy, and the desire of every city and town in China to enjoy the fruits of economic growth, make effective regulation all but impossible any time soon.

Commentators are correct to argue that Chinese pollution is already a global problem. But if Chinese pollution is the price of keeping Wal-Mart stocked with cheap goods and US consumers happy, perhaps the costs should be shared. For starters, some of the green- house gases emitted in China could be counted on the ledger of the countries whose consumers buy the goods.

It is an idea that would startle, and maybe even anger, shoppers in Illinois, but it might be a healthy reminder of where the low prices they enjoy really come from. One way or another, the cost of China to the world is going to rise.



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