Umm, Yeah, About That Whole "Race to the Bottom" Thing...

One of the more prevalent protectionist myths out there is that free trade leads to an inevitable "race to the bottom" for global labor and environmental standards.  The theory goes something like this: evil, profit-hungry corporations will seek out the least-regulated places on earth to do business, and those locales will "fight" for the corporations' evil business by racing to lower their already-awful labor/environmental regulations; the corporations will greedily profit, and the entire developing world will turn into one giant toxic dump full of sweatshops that use slave and/or child labor (or something).  This "race to the bottom" concept is pretty simple, but - unfortunately for protectionists (and fortunately for the developing world) - it's also totally wrongheaded.  I've already blogged a little bit on how this overused theory just doesn't jive with economic reality, as history shows that free trade begets economic growth which begets increased domestic consumption and demand which begets upward pressure on wages through, among other things, bottom-up demands for better working and living environments.

Two recent articles about Chinese labor conditions, however, really hit my arguments home, I think.  That they occur at protectionists' ground zero is an added bonus.  The first is a report from last week's Wall Street Journal that a recent strike at a Honda plant in coastal China could be a harbinger of a broader trend:

The dynamics of China's economic development are moving inexorably in favor of the country's workers. China's recent economic growth has mostly favored owners of capital, but demographic trends mean labor shortages are set to grow, tipping the income equation in labor's favor....

That labor supply is running dry might seem strange in a country of 1.3 billion people. But the trend's been discernible for a while, as the effects of an aging population and China's one-child policy kick in. In the past 10 years, the population of 20-to-39-year-olds -- from which most manufacturing labor is drawn -- has fallen 22%, Merrill Lynch says.

Making it more difficult for coastal manufacturers to attract workers, without offering higher wages, is that Beijing's economic stimulus efforts have favored the country's middle to western regions -- drawing labor away from the east coast. High housing prices in China's major eastern cities also discourage potential migrants from moving without the promise of adequate reward.

Many economists see the upward pressure on wages as a good thing. Higher incomes for households could help their consumption take a greater share of the economy, reducing the need to rely on investment and net exports. If companies respond by moving their manufacturing bases inland -- as they have started to do -- this could also help reduce regional disparities in economic development....

Most of all, perhaps, China's leaders will have to become more tolerant of institutions, such as labor unions, which can maintain a dialogue about the wishes of workers without getting bogged down in the kind of unrest now seen at Honda.

Honda's problems are a signal to Beijing that it is going to have to become more flexible.

A story from yesterday's New York Times echoes the Journal's findings and adds some other insights about what's going on in China right now:

Coastal factories are increasing hourly payments to workers. Local governments are raising minimum wage standards. And if China allows its currency, the renminbi, to appreciate against the United States dollar later this year, as many economists are predicting, the relative cost of manufacturing in China will almost certainly rise.

The salaries of factory workers in China are still low compared to those in the United States and Europe: the hourly wage in southern China is only about 75 cents an hour. But economists say wage increases here will eventually ripple through the global economy, driving up the prices of goods as diverse as T-shirts, sneakers, computer servers and smartphones.

“For a long time, China has been the anchor of global disinflation,” said Dong Tao, an economist at Credit Suisse, referring to how the two-decade-long shift to manufacturing in China helped many global companies lower costs and prices. “But this may be the beginning of the end of an era.”

The shift was illustrated Sunday, when Foxconn Technology, one of the world’s largest contract electronics manufacturers and the maker of well-known products that include Apple iPhones and Dell computer parts, said that it was planning to double the salaries of many of its 800,000 workers in China, beginning in October. The new monthly average would be 2,000 renminbi — about $300, at current exchange rates....

Last week the Japanese automaker Honda said it had agreed to give about 1,900 workers at one of its plants in southern China raises of 24 to 32 percent, in hopes of ending a two-week strike, according to people briefed on the agreement. The new monthly average would be about $300, not counting overtime.

And last Thursday, Beijing announced that it would raise the city’s minimum monthly wage by 20 percent, to 960 renminbi, or about $140. Many other cities are expected to follow suit.

Analysts say the changes result from the growing clout of workers in China’s economy, and are also a response to the soaring food and housing prices that have eroded the spending power of workers from rural provinces. These workers, without factoring in the recent wage increases by some employers, typically earn $200 a month, working six or seven days a week.

But there are other reasons. Analysts say Beijing is supporting wage increases as a way to stimulate domestic consumption and make the country less dependent on low-priced exports. The government hopes the move will force some export-oriented companies to invest in more innovative or higher-value goods.

But Chinese policy makers also favor higher wages because they could help ease a widening income gap between the rich and the poor.

Big manufacturers are moving to raise salaries because they are desperate to attract new workers at a time when many coastal factory cities are struggling with labor shortages.

A Foxconn executive said last week that the turnover rate at its two Shenzhen campuses — which employ over 400,000 people — was about 5 percent a month, meaning that as many as 20,000 workers were leaving every month and needed to be replaced.

Marshall W. Meyer, a China specialist at the Wharton School at the University of Pennsylvania, says that demographic changes in China are reducing the supply of young workers entering the labor force and that this is behind some of the wage pressure.

“Demography will do what the Strategic and Economic Dialogue hasn’t: raise the cost of Chinese goods,” he said, referring to United States-China talks on Chinese currency reform and other economic issues. “There is no way out.”

Economists say many of the same forces that were at work in 2007 and 2008, when China’s economy was overheating, have returned and even intensified this year.

Local governments have stepped up enforcement of labor and environmental regulations, driving up production costs....

Economists say a necessary restructuring is under way, one that should allow the nation’s huge “floating population” of migrant workers to better share in the benefits of growth and stimulate domestic consumption....

So to recap: trade with China has spurred economic growth, domestic demand and job creation.  Combined with China's demographics and some government policy, these things have caused upward pressure on wages, a reduction in income inequality, and a move to higher-value (and cleaner) production.  And such dramatic changes are causing even an authoritarian government like the one in China to contemplate - gasp! - permitting labor unions.  Oh, and these market-driven events are accomplishing what years of top-down, diplomatic yammering between the US and Chinese governments couldn't. 

Now, there's no doubt that plenty of problems in China remain (like this one), but that doesn't change one very simple fact illustrated by the examples above and many others: free trade has definitely caused a "race" to be run in China (and elsewhere), but it sure ain't to the bottom.