Cheap Chinese Labor: How Can U.S. Businesses Compete? Part II

From Thinking Outside the Boxe’s Sydney Correspondent: In the first part of this article we saw the many difficulties that American manufacturers are faced with in trying to compete with their Chinese counterparts. It is difficult, if not impossible, to tell an employer who is forced to lay off a large number of workers or close his or her business that he or she should try to understand the situation in China and see if there are any opportunities there. However the reality is that China is a nation with over 1 billion consumers. Not only is it a country that produces 1/5th of the world’s goods, it also now the world’s second largest importer. And notably it is the third largest export market for the U.S. It is not necessarily the responsibility of every American manufacturer to be aware of the changing situation in China, but the Government should do as much as possible to encourage American manufacturers to view China as an opportunity rather than just a competitor while continuing to put pressure on China to introduce measures to ensure trade between the two countries is fair and open.

Traditionally, exports have been one of the main drivers of Chinese economic growth. However, China’s export growth as stalled, partly due to difficult economic circumstances following the Global financial Crisis of 2008. Most notably, as highlighted in an article in the China Daily written by Diao Ying, “Cheap labor costs used to be the main advantage for manufacturing in China but now workers’ wages are rising. The country is also facing fierce competition from Africa and other emerging economies”. It is clear that for China to continue to prosper there needs to be a greater emphasis on imports and importantly an increase in domestic consumption of products that are made in China. This emphasis on increased domestic consumption should provide opportunities for some American manufacturers to break into the Chinese market and take advantage of this changing situation.

As was highlighted in the first part of this article, the devalued Chinese currency has long been a source of frustration for American manufactures. It is interesting to consider the Chinese view on this matter, and it is not surprising to find that they do not agree. An article published in the People’s Daily Online quoted Ministry of Commerce spokesman Shen Danyang as saying that Barack Obama’s recent criticisms regarding what the President called the ‘inadequate’ appreciation of the Yen were groundless and unreasonable and that the value of the Yen was not the cause of lopsided trade flows. The article pointed out that the Yen had appreciated by 10% in the previous year, after appreciating by 30% from 2005 – 2008. The President, and other critics, would be right in arguing that by being pegged to the greenback the Yen would always provide the Chinese with an advantage. However, the more important point that the article makes is that China’s trade surplus with other countries has been in decline whereas the one with the U.S has constantly risen. Chinese critics believe that the reasons for this are defects in America’s own economic structure and America’s limitations on high – tech exports to China. The key then, as always, is to innovate and provide the Chinese consumer with a product they want at a reasonable price. It is difficult to believe that, as the Chinese people grow wealthier and demand ‘western’ products, this is not achievable.

Diao Ying also writes in the article cited earlier that Chinese travellers abroad often have a difficult time buying souvenirs, because although they look ‘exotic’ at first, many are actually Made in China. This is another reason for the American manufacturer to think about what the Chinese consumer wants to buy. Surely it would seem Chinese tourists would be willing to pay a little more for a product that is actually Made in the USA. Of course, this point made by Diao Ying demonstrates the relationship between supply and demand. American consumers would not buy Chinese made products if we didn’t want to pay the cheapest possible price. Ying points out that “by buying products from China, people in the United States saved $600 billion over the past decade”.

So what does the future hold? The Chinese Government will not float their currency any time soon. China will continue to import more and more goods, especially from the emerging economies of Brazil, and various African nations. Presumably Chinese tourists will keep looking for ‘authentic’ souvenirs. Diao Ying notes that in order to increase imports, tariffs and taxes on consumer goods are likely to be lowered. It is interesting to learn that an iphone costs much more in China than it does in America. As a consequence, Chinese shoppers often have to buy a variety of popular products overseas. American manufacturers will need to continue to innovate to remain competitive and not be afraid to regard China as an opportunity rather than a threat.

Sources:

http://www.chinadailyapac.com/article/putting-more-emphasis-imports

http://english.people.com.cn/90778/7648134.html

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