The China Price: The True Cost of Chinese Competitive Advantage

Facing growing social unrest, trade tensions, excess capacity across many sectors and environmental degradation, Beijing has pledged to reposition its economy away from heavy reliance on exports. The new policy reflects a recognition that China’s rapid growth will be more sustainable if it is rooted more in domestic consumption. In December 2004, Chinese leaders at the Central Economic Work Conference, an annual event, agreed to shift the economy away from reliance on investment and exports toward domestic consumption - what one Chinese report called a move away from the two “strong horses” of investment and international trade and toward the “weak donkey” of consumption. The government has been slashing incentives for exporters in energy- and resource intensive industries and heavily polluting sectors, lowering or removing tax rebates on thousands of categories of exports, expressly to take the wind out of trade conflicts in sensitive areas like textiles. Simultaneously, it has been raising rebates for exporters of high- technology products.

As part of its attempt to raise the growth of domestic consumption relative to the growth of exports and investment, Beijing is increasing its spending on rural health care, for example, and introducing pilot programs to insure urban residents. Still, some economists reckon that despite all efforts by the government to increase its spending, stimulate consumption and reform the currency, so far they haven’t had much impact. The Chinese economy is still hooked on exports. And so is the rest of the world.

The human legacy of this mutual dependency will remain long after low-end manufacturing has moved on to other countries. Chinese workers’ slice of the profits from global supply chains has and will continue to lift countless families out of poverty. The lure of a better life in the cities will continue to stretch the horizons of young men and women. But the country will also face a mounting health care bill in caring for the hundreds of thousands, if not millions, of people who have fallen ill as a result of exposure to environmental pollution or occupational hazards. Caring for these casualties of the country’s rapid economic expansion will put extra burdens on the country’s ailing health care system.

Updating the supply chains in industries with lagging safety and health standards will cost money, too. A.T. Kearney, the management consultancy, has estimated that upgrading China’s food safety process to improve standards, training, transportation and warehousing will cost $100 billion. For sure, that will add to the cost of food from China.

Some of the enduring costs of the China price are harder to measure in figures. If China continues to produce low-quality exports that violate safety standards, it could risk losing some of its manufacturing business.

At the same time, the willingness of individuals to stand up for their rights in public could act as a brake on economic growth by derailing projects that might have helped nudge China’s GDP even higher. It could also make China less attractive to foreign investors seeking political stability and predictability. As China becomes more tightly knit into the fabric of global commerce, its choices about how it responds to popular protests carry consequences for its international reputation.

Ultimately, however, this kind of individual rights awareness has an effect that is at once prosaic and momentous: It makes China more like other countries. It forces government officials in China to consider the public’s views, at least occasionally. That isn’t democracy, but it’s a step toward a more balanced political system.

The government’s efforts to introduce a new labor law and encourage the establishment of ACFTU branches are evidence of Beijing’s recognition that the downsides of the China price threaten its interests. But there are more fundamental challenges ahead, the most substantial of which is improving the rule of law and the legal system. China needs to end official collusion with industry at the expense of workers’ and ordinary citizens’ health, safety and livelihood. It needs to make the legal system a reliable, predictable channel for people to resolve disputes. It needs to substantially expand inspections of factories and mines for labor and environmental law violations and make its punishments stick. It needs to create an organization that truly represents workers, particularly migrants, in their negotiations with government agencies, the judicial system and employers. It’s not unthinkable that this organization could be the ACFTU, but the state- backed union would need to undergo substantial reform in order to serve workers more effectively. It needs to loosen the reins on the media so it can serve as a watchdog on polluting industries, law- breaking factories and corrupt officials. China needs to dramatically improve its capability to prevent and treat occupational disease. The health care system, particularly in rural areas, is ill equipped to handle the volume of sick workers the country is producing. Likewise, it must increase its research on the environment’s impact on health.

Reforms of this magnitude will take decades, if they happen at all. Ironically, one of the factors that first lured foreign investors to China - the bottomless pool of labor - could make it harder for China to improve its labor and environmental record. The need to keep such a large number of people employed could work against the need to strengthen enforcement of labor laws and regulations, as well as the need to move up the value chain to less labor-intensive industries.

That said, when the Chinese government puts its mind to a certain task, it gets the job done. If China applied the same elbow grease to policing its factories that it does to policing political debate on the Internet, it would improve the standard of its manufacturing base, reduce the caseload of lawsuits and protests by disgruntled workers and ease tensions with its trading partners. Indeed, any country that has to go to the lengths that China is having to go to control its economic growth could afford to sacrifice some of its competitiveness through more consistent enforcement of the law.

In the end, as much as the responsibility seems to lie with Beijing, it also lies with the global consumer. Our appetite for the $30 DVD player and the $3 T- shirt helps keep jewelry factories filled with dust, illegal mines open and 16-year-olds working past midnight. We all pay the China price.