What is the true cost of the China price?---PART 2

What is the true cost of the China price?


By Alexandra Harney
Tuesday, April 15, 2008

In
a new book, The China Price: The True Cost of Chinese Competitive Advantage, journalist Alexandra Harney describes the practices used by unscrupulous companies in China to extract greater profits from their western partners, to the detriment of their own employees and western consumers alike. The result is unsafe working conditions, a polluted environment – and the goods that reach the hands of Western consumers are often badly made and sometimes downright dangerous.
Not all of Chinese manufacturing should be measured by this yardstick, but Ms Harney raises serious questions. How aware are western companies of the “shadow factories” that lurk behind the show factories foreign visitors see? Can the west cure its addiction to cheap goods? Are the good actually cheap, when the real environmental and economic costs are taken into account? And who has the power to change things – consumers, Beijing, provincial governments?
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I get the distinct impression that China knows it is in a strong position and hence can flex its economic and political muscles to get what it wants - at the expense of the wellbeing of its own people, the quality of its exports and the rest of the world. Do you think that the London and Paris protests linked to Tibet and the Olypmics have in any way made China think they have a reputational risk they have to manage?Mani Pillai, London
Alexandra Harney: I believe it's important to see these issues from China's perspective. When China exports its goods overseas, it's not trying to flex its muscles, it's trying to help its economy develop and raise the standard of living of its people. The quality problems, in my opinion, are a reflection of a combination of factors: the lack of law enforcement in China, the pursuit of ever-lower prices and faster delivery times by international buyers, the level of complexity of international supply chains, and the desire of various people within those supply chains to save money where they can.
Separate to that, I am sure that the protests in London and Paris have given officials in Beijing pause, and it will be very interesting to see how they respond.
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How can socially responsible investors begin to discount the price of externalities (pollution, carbon emissions, etc) that should be considered the true costs of Chinese production?Joseph Basralian, New York, NY
Alexandra Harney: I think all investors - not just the socially responsible ones - should be asking more questions of the companies they invest in. There is much more to be learned about the hidden environmental and labour costs that are not yet fully accounted for, whether it be the emissions from the factories that they are using or the amount of overtime they are having suppliers' employees work. The answers to questions about conditions in factories provide excellent insight into the way a company operates as well as the amount of potential hidden costs in the supply chain. And asking these questions has the added benefit of encouraging greater transparency among listed companies.
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China, besides paying ridiculously low salaries, practises on some items dumping and produces with no regulations on pollution etc, making fair competition impossible. Don't you think that the only way to protect protection against cheap imports from China is imposing import duties, as the US is already doing? Roberto Castellano, Salsomaggiore, Parma, Italy
Alexandra Harney: I agree that it is very difficult indeed for other countries to compete with a country that doesn't adequately enforce its labour or environmental laws. But it is also the nature of modern supply chains and capitalism that companies will move their orders to the country with the lowest overall costs, as we see happening today as costs rise in southern China. If one country erects import barriers against another, cheaper country, companies will move their orders to the next cheapest country.
If the aim is to protect and nurture industry in one country, say the US or Italy, then import duties seem to me a short-term solution. Far better to think creatively about how to strengthen the competitive advantage of US or Italian industry, given the reality that another developing country is always waiting in the wings to produce goods at low prices.
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What happens when China can no longer compete on cost? Having driven down to nil the job prospects of factory workers in late industrializing countries, will the Chinese worker join the queue of global, urban, jobless poor unable to afford rising living costs or, will there always be a supply of rural-urban migrant willing to take the lowest global wage? Will the State use its surplus to provide? Will domestic growth take up the slack?Jimmy Greer, London, UK
Alexandra Harney: This is a fascinating question because to a certain extent, this is already happening in southern China. Thousands of factories are closing in southern China's Guangdong province because of the combination of the appreciation of the renminbi, the rise in raw material costs, increasing wages and a new labour law.
So far, workers in southern China displaced by these closures seem to be having little trouble finding work: with the economy growing at double-digit rates, there are plenty of jobs to go around. And today, as you mention, there are still plenty of migrants coming out of the countryside into the cities to look for work.
However, in the future, demographic shifts already underway will have a big impact on what is happening within China's factories and the Chinese economy generally. The supply of young workers is slowing as a result of the country's ”one child” policy instituted in 1979. Many of the Chinese migrant workers in their 20s I met during the research for my book wanted to get out of the factories and do something else. They wanted higher wages, better treatment and skills, rather than just money for food. I believe this ”Generation Y” will shape the prospects of Chinese workers in the future.
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Given that China is looking to increase agricultural production and already has grain reserves of 200 million tonnes, we can expect it to corner further export markets for foodstuffs. That being the case what can the west do to guarantee the safety of such food after, for example, the recent cases of food poisoning in Japan linked to Chinese dumplings that were laced with insecticide?Tony Makara, Manchester, UK
Alexandra Harney: China needs to look carefully at its food safety, as it has already started to do, if it wants to take an even larger role as an exporter of food, and particularly if it wants to export more expensive foodstuffs. But countries that import food should also look at improving their inspections, which could well add to the cost of food.
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At the beginning of 2008, the price of things increased quickly in China. What do you think about this? And do you think the government can make the situation better?Li Dengfeng, Guangzhou, China
Alexandra Harney: You're absolutely right that things are getting more expensive in China very quickly. I think some of this relates to the extraordinary growth of the Chinese economy, and all of the money that has come into the country. There are clearly also some one-off events, such as the snowstorms earlier this year, that affected prices of everything. I know from talking to Chinese friends that rapid inflation is having a real impact on people's lives by making the products they use every day more expensive.
In addition to what it means for the Chinese economy and ordinary Chinese people, the question that fascinates me is how China's inflation will affect the rest of the world, which it is starting to do. We are already starting to see prices for Chinese-made goods rise in the US. From talking to factory managers in China and buyers of Chinese products, my sense is that this is only the beginning. Prices of goods from China will be rising for years to come.
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China has some industrial companies, factories and mines that are illegal for central government, but sometimes supported by local or provincial authorities, with costs for human lives, the environment and so on. How important is this illegal economy in China?Marco Antonio Tourinho Furtado, Ouro Preto Federal University, Brazil
Alexandra Harney: There are indeed illegal companies and mines in China that enjoy the support of local officials - this is an issue that the central government has acknowledged and is trying to crack down on, particularly among the mines. You're absolutely right that these factories can have very dangerous working conditions and serious environmental issues.
I saw both illegal mines and illegal factories in China, and it would be very difficult to quantify their role within the larger economy. But people I spoke to in industrial areas said that ”shadow factories” or illegal subcontractors were very common, and in the mining areas, everyone knew there were illegal mines in the hills nearby.
I believe it's really important to understand that the people operating both the factories and the mines are ordinary human beings like you and me, just trying to make a better life for their children. People operate ”shadow factories” for the same reason they operate legal subcontractors - to cut costs. And illegal mines exist in part because there is such a voracious demand for coal, and so much money to be made in the process.
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About the expert: Mandarin-speaker Alexandra Harney has been writing about Asia for a decade. From 2003 until 2006, she was the FT's South China correspondent and has also written for The Wall Street Journal, Far Eastern Economic Review and CNN.com.