Tuesday, April 29, 2008

Use your tax rebate to fund cheap Chinese?

Here are two pieces of news from this week: One, the federal government has started sending out those tax rebate checks, designed to ease anxieties and checkbooks and spur the economy. Two, the mainstream media has suddenly noticed that with the dollar heading downward, the days of cheap Chinese imports may be heading to a close.

About your tax rebate: TNS Retail Forward did a quick survey to see how people were planning on using that refund. Although most people said they’d be putting it into savings, not surprisingly, the wealthier consumers were much more likely to say they’d be making a high end purchase (jewelry, computer, HDTV). Those already feeling the sting in their pocketbooks said they’d be most likely to pay a credit card bill, or buy groceries and gasoline. Some hopeful stock analysts are prognosticating that the timing of the rebates in early summer may translate into increased vacation spending (keep those Disney stocks up!), though more realistically, Kathleen Pender of the San Francisco Chronicle looked at all of the recent surveys, (scientific and not) and found that, overwhelmingly, people say they’re going to try and pay off their debts.

But dancing to the second story: the news about global labor suggests it might be a better value not to be spending your rebate on what is commonly known as “cheap Chinese” – and I don’t mean pork dumplings and chow fun noodles (Mmmmm)...

Apparently the media has suddenly noticed that the days of inexpensive manufacturing and exporting from China are coming to an end. While some bemoan this as a great loss, cutting short what felt like an endless supply of cheap workers and goods, perhaps it might make more sense to recognize that historically, economically those conditions were short lived and illusory anyway. Morally, in the long run, it's not such a bad thing. And for all the die-hard capitalists out there: wouldn’t it make more sense if all global workers all made enough to spend their surplus on a few luxury items? Sure it might mean having to wait a while for the audience to develop, and there are bound to be some rough patches along the way, but the payoff comes in the form of billions of people with spending money in their pockets.

Alexandra Harney’s new book The China Price does a great job laying out the relationships that make such a situation inevitable. First, the supply of "surplus" labor (rural Chinese who move to urban areas and work in factories) is less than predicted. In fact, the government has been making a stab at bolstering rural economies and farmers in order to limit unrestricted urban growth and reduce the impact on their domestic food supply chain. Second, campaigns to expose the sweatshop conditions in many Chinese factories have been more successful of late – Apple, Nike, and even Wal-Mart have been shamed into promising better oversight and more social responsibility.

But here’s how they come together: In an era where people on both ends of the globe are feeling their earnings dribble out and barely cover their basic expenses, Wal-Mart and other retail manufacturers might want to distance themselves from the relationship between low cost and low wage. Better to blame the high cost of oil now rather than wait a few years and try and explain how they ran out of cheap labor to exploit.

So what's supposed to happen when a country with lots of cheap labor gets less attractive, whether due to government intervention, a rise in wages, or simply less workers? Up until now, multinational companies with a taste for cheap labor have been content to simply find a new country. As GM CEO Jack Walsh once famously said, "Ideally you'd have every plant you own on a barge,” ready to move if any national government tried to impose restraints on the factories' operations, or if workers demanded better wages and working conditions.

Thus it’s no surprise that corporations are already looking elsewhere, prepping a new country to be the barge . Indeed, even Chinese manufacturers are trying to head it off by investing in low cost labor in nearby Vietnam, where wages are as much as 30% cheaper than China and the countries have similar communist policymaking. In 2006, Chinese investment in Vietnam totaled $312 million. You can see the future in the present, with the changing composition of Vietnam’s exports – no longer rice and coffee, but furniture for Pottery Barn, textiles for Wal-Mart, and footwear for Nike.

Unfortunately, we're at a point in time where simply shifting labor resources can have a potentially disastrous effect on seemingly unrelated things. For example, have you heard about Wal-Mart, Costco and others having to limit purchases of rice these past few weeks? Rice is one of those commodities that many countries were resistant to import, especially in Asia, where particular breeds are more heavily prized than others, and the crop is central to national identity. If Vietnam -- traditionally a rice exporter -- switches over to sneakers and t shirts now, imagine how the food crisis could look in a few years.

But no country is a barge and no population is free of history, needs, and desires. Vietnam may have a large “supply” of young workers in the 20 – 30 age range, but they are also generally literate and healthy, having the benefit of more standardized education and steady food supplies, but it's still only a fraction of the size of China's population. And despite hardline governments in both places, the Vietnamese have a recent history of successful labor protests, which suggests that it will be much harder to keep wages down on this particular floating barge.

My probably not-very-popular advice about your tax rebate? Save some, spend what you must, and donate a little to those who don't benefit from the current situation.

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