Higher Labor Costs are squeezing Margins for Chinese Export Manufacturers

Posted by PITHOCRATES - March 4th, 2012

Week in Review

China is still able to exploit their cheap labor to maintain a healthy export market.  But for how long (see China exports may stay strong despite weak Europe by Zhou Xin and Nick Edwards posted 3/1/2012 on Reuters)?

An estimated 200 million jobs — a quarter of China’s workforce — are directly dependent upon the external sector, hiking the political risks of an export slowdown to a leadership hypersensitive to any hint of social instability that might threaten the one-party rule of the Communist Party…

Ye Dingsong is an exporter who has relied on sales to Europe, but his primary headache is pricing, not falling orders.

“There are orders, but the problem is that it’s hard to get good prices. European buyers have become sensitive to prices, but costs are rising quickly so I have to ask for higher prices,” said Ye, the owner of Dadong Shoes in Wenzhou.

His shoe factory, which at its peak employed more than 100 people, currently has only half as many after workers walked out for better wages elsewhere when Ye said he could manage only a 10 percent rise…

Wenzhou exported 265 million pairs of shoes to the EU last year, roughly one pair for every two EU residents, according to data from the local customs office. But total sales were just $1.6 billion, or $6.04 per pair, meaning margins are very narrow even as a starter’s monthly wage can easily exceed 2,000 yuan ($320).

Ye is one of the many exporters Beijing is trying to help through tough times with tax rebates and easier bank credit.

The state capitalists in America look to China with awe and admiration.  They would love to expand state control of the economy in America to the level in China.  So they, too, can produce those magnificent GDP growth rates.  Which they think they can do.  With a union work force.  Even with the high wages and generous benefits of union workers.  Which, of course, they cannot do.  For the only thing maintaining China’s export market is that cheap labor.  Which is far below the union wages and benefits in America. 

In America a Chinese type state capitalism will not result in higher GDP growth rates.  Only in higher wages and benefits for union workers.  Along with a collapsing GDP growth rate.  Thanks to an uncompetitive American work force becoming even more uncompetitive.

But even in Communist China they are having problems keeping their labor cheap.  But they will do everything they can.  Including brutal state oppression.  And Keynesian economic policies.  Urging businesses to borrow money and expand production.  Even in the face of rising prices.  Which one day will lead to falling sales.  Leaving the Chinese with some nasty asset bubbles in their economy.  The kind the Japanese had in the Nineties.  And the kind the U.S. just recently had in the housing market.  Both bubbles popped.  And a horrible deflation set in to undo all the Keynesian mischief that caused the bubbles in the first place.

There is no way for the Americans to do what the Chinese are doing.  Unless the state capitalists do like the Chinese.  And outlaw all unions.  And that’s about as likely to happen as Keynesian economics policies actually working without causing inflation and asset bubbles.

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