The only fair trade is free trade

An article over at the Financial Times declares China’s competitiveness ‘on the decline’. They base this headline on the fact that labor prices in China are rising, after several years of deflation.

This is a great sign, despite the dour headline. Why? It means that the standard of living in China is rising.

[...] an average 2-3 per cent increase in the once unbeatable China price its US and European clients were willing to pay. He pointed to a “double-digit” rise in Chinese labour costs, the revaluation of the renminbi and higher oil and energy costs for the shift.

“China’s costs are all going up,” Mr Fung said. “It is no longer the most cost-effective country in the region...Anything [sourced] from China has a higher inflation component than from other places around the world.”

A “double-digit rise in labor costs” can only come from one place: higher wages. These higher wages increase the buying power of a large swath of the population, bringing them out of poverty and creating a consumer class.

This development is entirely natural in a free market. You’ve probably heard arguments which claim that the pursuit of inexpensive labor is exploitative and that we should follow “fair trade” standards. While well intended, these are typically counterproductive when trying to improve living standards.

Consumers — not just Wal-Mart shoppers but large labor consumers like manufacturers — will seek out the best product at the best price. The cheapest labor comes from the poorest countries, and this is not at all coincidental. This dictates a greater likelihood that flows of capital will go to the places that most need it. To me, that is the essence of “fair”: a system which directs wealth to those which need it most.

Based on this thinking, if China is becoming more expensive, what might we expect? From the article:

Beneficiaries of China’s rising prices have included textile and garment manufacturers in India, Bangladesh and Cambodia, which were expected to lose orders to China after the quota regime governing textile production expired in January 2005. [...]

“In Bangladesh factories are so overbooked – it’s like China used to be,” added Bruce Rockowitz, the president of Li & Fung’s trading arm, who oversees sourcing operations on four continents.

It seems to me that we should make the benefits of globalization as broadly-based as possible. The best way to do this is to let the market operate freely, and we are watching it unfold in southeast Asia.

By contrast, “Fair Trade” arguments typically demand that manufacturers pay a higher wage than the market demands. This is a nice sentiment, but does not offer the developing world a net benefit. By raising labor costs artificially, consumers buy less labor. This means that fewer people get jobs, and more to the point, fewer poor people get jobs. (The same dynamic is evident here with minimum wages.)

China’s moving up the economic ladder is entirely predictable and desirable, and will continue to the extent that we liberalise the market. Their poorer neighbors are seeing new manufacturing jobs being created, along with the hope of future prosperity. Oh, and the Wal-Mart shoppers get better prices, too.

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Update: The NY Times has picked up on this as well:

The shortage of workers is pushing up wages and swelling the ranks of the country's middle class, and it could make Chinese-made products less of a bargain worldwide. International manufacturers are already talking about moving factories to lower-cost countries like Vietnam. [...]

The changes also suggest that China may already be moving up the economic ladder, as workers see opportunities beyond simply being unskilled assemblers of the world's goods. Rising wages may also prompt Chinese consumers to start buying more products from other countries, helping to balance the nation's huge trade surpluses.

Ah, let’s look at that last bit. Chinese consumers, with their increasing wealth, will look to other countries to buy products. However, their buying power is diminished, since the yuan is artificially devalued. Basically, the effort to make Chinese producers cheaper on the world market has the corollary effect of making Chinese consumers effectively poorer in the same market.

My hope is that this will increase pressure on the Chinese government to free up the yuan to float to its natural value. This will benefit Chinese consumers and will remove distortions in the market. In turn, this will likely reduce the US’ current accounts deficit.

Comments

[Ericleo]

For twenty-five years I worked in the textile printing industry. I started a screen-print company in 1976 with a friend. It grew to be the second largest textile printer in North Carolina. It was a good life that became very profitable and at one time I employed as many as eighty people.

About 1999 my company began seeing increasing pressure on our customers to move their production to Central America and China in order to compete with their competition on price. By 2001 I had to sell out my company as the last of my major customers had moved their production to China.

The purchasers of the company have since had to greatly scale back their operation as there is very little domestic production available. Most of the employees I had before the sale are now out of work or having to take jobs below their former incomes.

We could compete on the quality of our work and the service we provided our customers. The problem is we paid our employees well for our industry . Like other companies that are finding they have the same problems we complied with environmental regulations, OSHA safety regulations and provided a living wage to our employees.

What I have seen is that China and Central American companies do not have to operate under the same rules. This is the basic problem. Free trade should be based on a equal playing field. Where is our government in requiring that companies that provide goods and services to the US
have to provide a living wage to their production employees. The same rules that US companies have to operate under should be applied to all.