What is the true cost of the China price?

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?

Further information: the FT’s review of the book, a short extract and a video about the book.

Ms Harney answered your questions Wednesday April 9.

How much control does the central government really exercise over the provinces and are local officials prepared to enforce environmental, labour, or safety regulations?
L H Lowe, New York

Alexandra Harney: The central government can make laws and establish policies, but enforcement is up to local governments. Historically, local officials have been willing to look the other way when companies violated environmental, labour or safety regulations. This was for rational reasons: because their career advancement depended on their ability to attract investment and promote economic growth, officials had an incentive to create what they considered a favourable investment environment. In many cases, local officials have put economic growth above all other priorities, which has contributed to the environmental degradation, safety problems and labour issues we see in China today.

This is starting to change. I met an investor who was turned away by officials in the southern city of Shenzhen, for instance, because the leather tannery he wanted to build there would have been too polluting. I visited another factory that was forced to move its most polluting operation to another part of town because of pressure from the local populace petitioning the local government. The key to lasting change will be when local governments decide that the side effects of economic growth pose big enough problems that they need to more consistently enforce these laws.

What is the best approach to deal with the problems related to the working conditions and environment in China?
Viktor O Ledenyov, Ukraine

Alexandra Harney: The most effective approach would be stronger enforcement of labour and environmental laws by the Chinese government. China has good, strict laws on the environment and labour. But it needs to do a better job of enforcing those laws. One step in that direction would be to increase the number of government labour and environmental inspectors - right now, there just aren’t enough people to do the job properly.

At the same time, companies that buy from China need to think about how they deal with factories there, and whether their business practices are helping or hindering an improvement in working conditions and the environment. I often heard from factory managers in China that they were under so much pressure to lower prices that it was impossible to follow all the labour and environmental laws and still make money.

As consumers and investors, we can ask more questions of the companies we own shares in and buy products from. More pressure from consumers for information about where and how their goods are made would be very powerful in forcing international companies to think about these issues more deeply.

There is an increasing feeling among many people in China that western media and governments are eager to see the Chinese economy falter and are prepared to push any button to see that happen. Do you think that western reporting on China, for example over the issue of safe products, is fair and unbiased?
Conor Griffin, Shanghai

Alexandra Harney: I have heard that view as well, and clearly there are people in the west who are worried about China’s rise. But having been a reporter working in China for the Financial Times, I never saw any evidence that anyone in the western press wanted the Chinese economy to falter. And I don’t think governments in the west would like to see the Chinese economy in trouble, because the global economy is so interdependent. China plays a hugely important role in the global economy today - not only in producing so many of the goods we use every day, but also in terms of purchases of US debt, global commodity markets, and as a key growth market for many multinational companies.

All of that said, I did hear among my friends in the media some criticism that some of the international reporting on the Chinese product safety issues was over-hyped. It’s important to acknowledge that western companies bear some responsibility for what happened in some of those cases.

Isn’t the true cost of Chinese competitive advantage recession in the US service-based economy? If workers remain poor in China, and are poorer in the US, who is winner?
Michel Xima, France

Alexandra Harney: I see the situation slightly differently. I don’t really see the economic relationship between China and the US as a zero-sum game. The US has continued to excel in innovation, in high-technology, and in the profitable areas of branding and marketing, even as China has thrived as a producer of so many goods. But I do think that there are real, painful adjustments that globalisation necessitates, as jobs move swiftly to lower-cost locations in other countries. Both China and the US are grappling with these fundamental issues that globalisation poses.

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.

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.

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.

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.

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.

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.

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.

Do the social and environmental issues involved in Chinese production pose problems only in China or also across other low-cost manufacturing countries in Asia?
Calum Austin, Madrid, Spain

Alexandra Harney: The short answer is yes. Although much has been said about the jobs lost in developed countries to China, there have been many factory jobs lost in developing countries in Asia to China as well. To the extent that China’s neglect of its labour and environmental laws gave it a competitive advantage, it put the countries that enforced their laws in Asia at a disadvantage. So there was an immediate social impact in that respect, as people displaced by the movement of factories to China had to find other work. At the same time, Japan and South Korea breathe in the effects of Chinese environmental pollution through their air.

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.

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