[DEBATE] : (Fwd) China's input squeeze

[Patrick Bond]

(Chicken Little or careful conclusion?: 'The stark conclusion here is 
that the world economy is now functioning on a knife edge.  On one side, 
it risks a rapid fall into an inflationary spiral.  On the other side 
lies descent into recession or worse.  No real coordination of 
development to prevent either disaster occurs.')

from MRZine (edited by e-debater Yoshie Furuhashi)

China Shapes/Shakes World's Economies
by Richard Wolff

Over at least the last decade, employers in the West have been able to
enlarge profits dramatically by taking simultaneous advantage of the
following three opportunities: raising workers' productivity
(computerization, etc.), merging to reduce costs (vertical and
horizontal), and keeping wages from rising much or at all (outsourcing
jobs and importing ever-cheaper consumer imports from China).  Under
those conditions, profit increases did not require price increases.

But current challenges to China's economic growth now threaten to change
those conditions.  China faces rising costs for input raw materials
including energy, rising wage demands of workers becoming used to
industrial employment, and pressures to raise the exchange value of the
Chinese currency.  Producers of China's exports -- most of which are
western enterprises with Chinese subsidiaries or partners -- have
therefore begun to raise their prices.  To take one of countless straws
in the wind, an August 15 press release from the Xinhua News Agency
reports that the majority of the 81 surveyed Chinese producers of
automobile brake parts for export plan 5-10 per cent price increases
over the coming year.

Especially in the United States but also globally, Chinese exports of
consumer goods (clothing, toys, appliances, and components for countless
other goods) have been a crucial offset to stagnant wages.  Employers
could keep money wages from rising very much or even falling because
workers could buy more of the ever cheaper imports from China.  Of
course, this practice depends on an absence of challenge to growing gaps
between wages and profits.  Political tensions and economic inequalities
have not emerged to stop this process.

If China-based export producers raise prices to secure profits, then the
buyers of Chinese products will have to pay more.  Firms will face
rising input costs and possible increases in wage demand.  No longer
will their stagnant money wages be offset by falling Chinese import
prices.  Likewise, western companies buying Chinese exports as
productive inputs will pass through their higher input costs by raising
their prices.  That too will pressure employees to seek higher wages.
This will especially affect the US where already enormous levels of
personal debt and a declining real estate market leave most consumers
unwilling or unable to respond to rising consumer goods prices with more
borrowing.

As Chinese wage rates drift up in local and appreciated currency terms,
the advantages of outsourcing to China decline.  Western employers will
likely become somewhat less tempted to respond to their employees'
demands for wage increases by outsourcing.  While other low wage
producers may gain some momentum, macro price effects are likely to
develop.  Shifting outsourcing and production from China to India,
elsewhere in Asia, etc., would be costly in itself.  Moreover, since
those regions face the same upward prices pressures as China, the
problem represented by rising Chinese wages and export prices is
unlikely to disappear anytime soon.

Of course, western employers, flush from record profits over the last
decade, could decide to absorb the rising prices of what are still
relatively cheap imports from China and to absorb rising wages of what
are still inexpensive Chinese employees.  Then they might not raise
their prices.  In other words, there is no mechanical necessity of an
international inflationary spiral simply because the foreign and
domestic enterprises in China are raising their prices.  If prices don't
rise, however, profits will likely come under enormous pressure.

The contemporary political and cultural dominance of business in general
alongside continuing conglomeration suggests that employers may
successfully resist strategies that return them to profit levels of
earlier years.  They will then absorb neither rising prices of their
inputs nor rising wages.  Instead, they will raise their prices and
thereby engage in the gamble of self-reinforcing price-wage spirals.
Once launched, these spirals pit the abilities of business to raise
prices against the abilities of workers to raise wages.  Whoever raises
further sooner wins.  Indeed, inflationary economies can be times of
sharp profit increases too.

What might derail the brewing inflation spiral are not the tepid
inconsistencies of a hesitant Federal Reserve.  Rather, the serious
problems of the US economy -- the effects of its fast deflating housing
bubble and its dependency on huge capital imports -- could draw the
global economy into a serious general slowing or decline.  Then all bets
are off as the downward spiral of competitive dumping contradicts the
inflationary scenario.

The stark conclusion here is that the world economy is now functioning
on a knife edge.  On one side, it risks a rapid fall into an
inflationary spiral.  On the other side lies descent into recession or
worse.  No real coordination of development to prevent either disaster
occurs.  Rather, each enterprise and country plots strategies mixing
self-advancement and self-protection.  This does not suggest a happy
outcome to knife-edge conditions.

Understandably, in such circumstances, some will rediscover the
comforting idea that each enterprise pursuing its own self-interest will
somehow guarantee an optimum outcome.  Others will equally predictably
reassure themselves that institutions like the Federal Reserve. OECD,
G8, etc. will recognize the problems and implement appropriate
solutions.  However, realists will redouble their efforts to watch
developments henceforth with close attention and rising anxiety, hoping
at least to minimize the damage when economies on knife edges tumble and
when spirals spin out of control.


Rick Wolff Rick Wolff is Professor of Economics at University of
Massachusetts at Amherst. He is the author of many books and articles,
including (with Stephen Resnick) Class Theory and History: Capitalism
and Communism in the U.S.S.R. (Routledge, 2002) and (with Stephen
Resnick) New Departures in Marxian Theory (Routledge, 2006).  This
article originally appeared under the title "Chinese Exports and
Knife-Edge Economies" in Global Macroscope on 28 August 2006. Comment |
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