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.