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The Leveling Playing Field: China’s Middle Class Rises as US Declines

I picked up an issue of the Gulf News while in Dubai in January, and I found an article that was of interest related to China’s economy and the trade position of that country. It was in the January 25, 2011 issue, and was entitled “Higher Costs in China Filtering into the Global Economy,” and was authored by Alan Wheatley.

Among the most salient points were:

  1. China’s minimum wage continues to escalate at a rapid pace. “Guangdong, the biggest exporting province, said last week that it would increase minimum wages by around 19 per cent in March. In late December Beijing ordered a 20 per cent rise in the capital, just six months after a similar increase.”
  2. China’s non-labor costs are also on the rise. “The cost of energy, buying land and complying with environmental legislation is also steadily rising as China strives to increase the puny share of national income that goes to labour and to reduce pollution. ”
  3. The price of China-sourced products is expected to rise roughly 10%, in fact, during the first half of this year according to experts cited.
  4. While a surface look at this series of events might lead one to expect that US sourced goods would experience the beginnings of a resurgence in this environment, having a net positive impact on employment levels and income for the American worker, the article warns instead that we may all suffer even more, saying: “China is starting to pass on the rising cost of labour and other manufacturing inputs as it restructures its economy, creating a potential new inflation headache for Western countries already grappling with surging commodity prices.”
  5. The author amplifies by saying that: “Excess capacity and high unemployment in the United States and Europe mean that most companies will be unable to pass on higher costs from China and will have to accept lower profit margins instead.”
  6. His overall point? “after a two-year pause, China is on track to become an inflationary force for the global economy again.”

So here is a conundrum: As we observe the standard of living in China continuing to rise, we can almost simultaneously see the opposite effect here in the United States. (See my blog entitled: “Are Your Children Being Impacted by the Economic Downturn?”) Asserting that the US always comes out ahead in international buying and selling just doesn’t pass the sniff test.

As the standard of living – especially as it relates to manufacturing and other traditionally middle class jobs – in China continues to improve, prices rise for Chinese goods – causing inflation for the Americans who are buying those goods. At the same time, Americans who lost their jobs as manufacturing work moved from the US to China are clearly taking a substantial hit in their income levels. So the US worker is taking it on the chin twice, squeezed between escalating prices for the products they buy, and lower income levels resulting form job loss and subsequent income depletion. Got it? Prices are going up, and wages are going down in the US at the same time. Now, on the other side of things, I think it’s only fair to point out that the last time I was in China (a few years ago), the hourly wage for skilled factory workers with the rough equivalent of a bachelor’s degree was running about $2.50 US, and a Ph.D. level employee commanded about $5.00 US. So we are still seeing a pretty significant disparity between average US wage and Chinese wage levels.

With all these things in mind, what steps do you think the US should take? One option would, of course, be to do nothing and allow the economic course to continue unabated. Another would be for the US to require American work content in all products sold within the United States’ borders. (Other countries do this all the time, and US companies comply – which, of course, is one of the reasons that US manufacturing jobs move offshore – so that they are allowed to sell their products in that national market.)

Does it seem farfetched to you that the US would impose such a measure? Actually there was an interesting article in Bloomberg Businessweek’s January 3-9 issue pertaining to this very matter.

It turns out that in some cases, Chinese companies are investing in the US to circumvent trade barriers and take advantage of other new US legislation such as clean energy requirements. The article was entitled: “Chinese Plants Grow Up on US Turf”. As the article points out, “Buy American” requirements that are part of some US Government contracts are a compelling reason for companies from other countries, in some cases to stand up operations on US soil. Among the companies described are China’s Suntech Power Holdings, (who manufactures solar power cells in Goodyear, Arizona), Wanxiang America (an auto parts company in Elgin, Illinois), and others such as Tianjin Pipe, Pacific Century Motors, and Nexteer Automotive.

Here is an excerpt from the article that I was especially intrigued by: “Suntech is using more advanced manufacturing equipment in its Goodyear plant than in Wuxi [China}, allowing 30 Arizonans to produce the same number of solar modules as 100 Chinese (US production costs are still about 10 percent higher.) “If it works very well, we can integrate the same manufacturing technology in China”, Guo says. “This would help Suntech China make a manpower reduction.” Jobs for Americans and pink slips for the Chinese just one more turnabout in the US – China relationship.” Fascinating, right? Several things about this intrigue me. First of all, the Chinese are now beginning to make small US manufacturing investments. Secondly, China’s investments are resulting in advanced manufacturing technologies continued migration to China, making Chinese producers still more efficient, and thirdly these efficiencies are now projected to impact the labor requirements in China. Still, these investments – in the scheme of overall US business, and more importantly in the scheme of overall Chinese business – are very small, and will take in indeterminate number of years to substantively impact our national economy.

How should the US address the growing pressure on middle class Americans resulting from all these factors, or should we just allow nature to take its course, and bow to an inevitable decline in the standard of living of Americans as it levels out to match the middle class standards of living in other countries?

What do you think?

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