Rising Wages in China Having No Impact on U.S. Trade Deficit

http://www.reuters.com/article/idUSTRE6511TT20100602

The above-linked Reuters article takes note of growing labor unrest in China and makes the case for a silver lining – that such unrest will drive wages higher, ultimately leading to increased domestic consumption in China and the reduction or elimination of global trade imbalances.

A rare burst of labor unrest in China has been resolved with hefty pay increases, illustrating how the balance of power in the country’s vast factories is slowly but surely tilting toward workers.

Rising wages in the workshop of the world might seem to pose unsettling implications for the global economy in the form of thinning profits for companies and cost inflation for consumers.

But this disregards more important, positive developments. By spreading the fruits of China’s stunning growth more evenly, higher incomes will help to boost domestic consumption and rectify imbalances that have dogged the global economy.

Contrary to what most economists believe, wage increases in China will have little or no effect on trade imbalances, most notably the huge imbalance in trade between China and the U.S.  Yes, rising wages will boost consumption some in China.  But their over-crowding will keep a lid on those gains.  Consider the consumption of automobiles.  Rising per capita consumption of cars in a nation so densely populated will quickly make roadways so congested that people will soon eschew them in favor of public transit. 

In addition, as domestic consumption rises in China, more factories will be built and more people will be drawn in from rural areas, vastly increasing the overall productivity of China’s labor force.  In other words, their labor capacity will increase just as quickly as their domestic consumption. 

In fact, wages have been rising in China at a brisk pace for years now and there’s been no noticeable improvement in the U.S.-China trade imbalance.

Pay for China’s 150 million or so migrant workers increased 19 percent in 2008 and 16 percent in 2009, even though exporters were hit hard by the global financial crisis, …

… Chinese workers have made big strides in recent years in absolute terms as their wages rose about 8 percent a year.

After falling by almost 50% in February of 2009, thanks solely to the global near-depression, our trade deficit with China has since rebounded 25% and remains above $200 billion per year. 

If low wages are the driving force behind the trade imbalance with China, then how does one explain our much larger trade deficits in manaufactured products (expressed in per capita terms) with wealthy, high-wage nations like Japan and Germany?  Or how does one explain the fact that, of our top twenty trade deficits in manufactured goods (in per capita terms), fourteen (including all of the top ten) are with wealthy nations? 

The explanation is that nearly all of them are much more densely populated than the U.S.  It’s disparities in population density that drive trade deficits, not low wages or currency manipulation.  This assumption that China can boost its domestic consumption sufficiently to soak up its excess labor capacity and begin importing more U.S. products is naive and flies in the face of all the evidence to the contrary.  If wealthy, densely-populated  nations like Japan, Germany and a dozen others have never been able to boost their domestic consumption sufficiently to absorb their excess labor capacity, does anyone seriously believe that it will happen in China?

As with the well that gushes oil into the Gulf of Mexico day-after-day, week-after-week (and soon-to-be month-after month), Obama stands idly by and watches our trade dollars gush overseas, draining our financial resources faster every month, putting our economic fate into other nations’ hands and in blind faith in some magical trade fairy that will make our economic problems vanish.

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6 Responses to Rising Wages in China Having No Impact on U.S. Trade Deficit

  1. Mark Hall says:

    Pete:

    It was announced today that Bejing is raising the minimum wage from 800 renminbi per month to 960 renminbi or $140 per month (which equates to $7 per day using 20 working days per month).

    Current U.S. Minimum Wage:

    $7.25/hr X 8 hr day = $58.00/day

    Future Bejing Minimum Wage:

    Assume Annual 25% Increase

    2010 = $7.00/day
    2011 = $7.00/day X 1.25% = $8.75/day
    2012 = $8.75/day X 1.25% = $10.94/day
    2013 = $10.94/day X 1.25% = $13.68/day
    2014 = $13.68/day X 1.25% = $17.10/day
    2015 = $17.10/day X 1.25% = $$21.38/day
    2016 = $21.38/day X 1.25% = $26.73/day
    2017 = $26.73/day X 1.25% = $33.41/day
    2018 = $33.41/day X 1.25% = $41.76/day
    2019 = $41.76/day X 1.25% = $52.20/day
    2020 = $52.20/day X 1.25% = $65.25/day

    Thus, using 25% annual increases, it will still take nearly 10 years before China’s minimum daily wage surpasses our CURRENT minimum daily wage.

    What do you think Pete?

    CAN WE HOLD OUT THAT LONG?

    • Pete Murphy says:

      Won’t matter, since labor costs aren’t the source of the trade deficit.

      • Mark Hall says:

        I know.

        However, that is ALL that our government officials and corporate execs focus on.

        They ONLY say that we are not competitive and that ONLY signing more FREE TRADE agreements will create jobs in the U.S.

        WE HAVE BEEN SOLD OUT TO THE “CHEAPEST” BIDDER.

        WHEN WILL THE TOTALY, UNRESTRICED FREE MARKET ECONOMIC LUNACY EVER END?

        IF WAITING FOR GLOBAL ECONOMIC PARITY IS THE OUTLINED SOLUTION, THEN IT WILL BE THE FINAL SOLUTION FOR OUR OWN DEMISE.

      • Pete Murphy says:

        Mark, forgive me for belaboring the point, for I know that you do understand and I don’t want to risk irritating a loyal follower. You say “I know” but then say “We have been sold out to the ‘cheapest’ bidder.” Though labor rates in China are low, the logistics and energy involved in shipping products from a myriad of cities, towns and villages in China to their seaports and then across the Pacific Ocean and then, in many cases, across the U.S. are far more costly than shipping from American production sites. We haven’t been sold out to the cheapest bidder. We’ve foolishly attempted to trade freely with countries incapable of consuming products at the same rate as us, but every bit as productive as we are. The work of manufacturing is spread evenly across the combined labor force while per capita consumption remains as unevenly distributed as before. The result is an automatic loss of jobs, whether it’s a function of trade with a relatively low wage, densely populated country like China, or high wage, densely populated countries like Japan, Germany, Taiwan, Switzerland, Denmark and lots of others.

        I know it’s hard to expunge from our thinking the “cheap labor” aspect and focus on population density instead. But I have to keep trying. The “cheap labor” cry only encourages free traders into thinking that, if we just stick with it long enough, labor rates will rise and the problem will take care of itself. It hasn’t worked with any other densely populated country that we’ve been trading freely with for decades and it won’t work with China. It’ll never work and it’s pointless to try.

  2. Mark Hall says:

    Pete:

    My main point of contention still remains:

    WHAT WILL IT TAKE FOR OR GOVERNMENT TO FINALLY BE CONVINCED THAT OUR “UNRESTRICTED FREE TRADE ECONOMIC PLAN IS NOT WORKING”.

    Thus far, we have Mass Unemployment, Mass Homelessness, Mass Hunger, Mass Despair and Mass Government Deficits AND still they are not convinced.

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