What the ‘China Price’ really means

 

1. Introduction

Do workers in rich countries have any right to complain about the bankers and corporate managers who get high salaries, when they themselves enjoy huge benefits from the cheap labour of millions of workers in the Third World? Can their protestations be taken seriously? Are they fighting for justice, or do they just want to grab a larger slice of the cake? It is an elementary fact of politics that one cannot fight against exploitation and injustice at home while persistently enjoying the fruits of exploitation and injustice abroad.

In Britain and the US, as in most advanced countries, the difference in living standards between workers and corporate bosses is less than that between the worker and his Chinese or Indian proletarian counterpart. Statistics compiled by the US Bureau of Labor Statistics on international wage levels make shocking reading for any socialist and expose talk of the ‘unity of the workers of the world’ as hypocritical cant.

The poor, of course, have always been with us. But whereas in the past the Third World poor were mainly victims of backwardness and underdevelopment, today they are the victims of a highly developed system of wage-slavery, producing sophisticated goods in factories that are often more technologically advanced than those in the ‘West’. Plasma TVs, iPhones, washing machines, computers - you name it, their sweat produces it. They are the victims not of backwardness and poverty, but of our very modern systems of exploitation. In this article I will explain how to understand the role of the ‘China price’ – the economic label given to cheap goods from poor countries - as part of the economics of imperialism today.

(Acknowledgements to Andrew and Susil for valuable comments on an earlier draft of this article)

2. Ten-, twenty- and thirty-to-one

Employees in rich countries complain that the salaries of their bosses are many times their own. They give much less attention to the fact that they may be earning 10, 20, 30 or more times the wage of workers in poor countries. In this section, I show some of the findings on international wage differences produced by the US Bureau of Labor Statistics (BLS).[i]

Source: US BLS, Monthly Labor Review, April 2009

BLS data reported here are centred on the manufacturing industry and cover average hourly compensation costs. ‘Compensation’ means not only wages paid, but also the additional employer payments for social benefits such as unemployment insurance, medical insurance, and old-age pensions. The idea behind these surveys is not to do a study on employee welfare, but to calculate the total costs of employing workers in each country for US corporations. Employee benefit costs are much higher in the richer countries than in poor countries; it is not only the actual wages paid.

The first chart (the BLS’s Chart 2) gives index numbers based on 100 equalling $29.98 for the average hourly compensation paid to US manufacturing workers in 2006. Countries’ labour costs are shown as bigger or smaller bars, with the height of each bar proportional to the cost in the US (set at the 100 level). For China, average hourly compensation costs were $0.81. This was just 2.7% of the costs of US manufacturing employees in the same year! Hence the bar is short, barely noticeable. The Philippines is not much higher, nor Mexico, nor East Asia (ex-Japan) taken as a group. The US, Japan and the countries of the euro area tower above all the others. While the euro area group is more than 20% above the US, the reason is that Germany, France and the Benelux countries have labour compensation levels well above the US. In this same group, Portugal’s and Slovakia’s levels are well below. The UK is not shown in the charts, but other BLS data indicate that UK compensation levels are around 90% of those in the US.

Source: US BLS, Monthly Labor Review, May 2010

The second chart (the BLS’s Chart 4) shows a different geographical mix, adding India, Sri Lanka, Brazil and Eastern Europe. These data are for 2005, when the US index of 100 equalled $29.74 per hour, very similar to the 2006 base used before. India is shown at close to 3% of the US compensation figure, similar to China. Sri Lanka is barely visible.

Even these minuscule labour costs exaggerate the actual earnings of workers in India. The Indian data are boosted by including only the so-called ‘formal sector’, that is the sector made up of generally larger, more organised companies that have some form of regulation and government supervision – including being included in statistical surveys! By contrast, the ‘informal sector’ is unorganised, on a much smaller scale and may include a family ‘business’ that consists of the parents, children and dependent relatives. This sector is not included in most data surveys, but it accounts for a large share of employment at much lower wages than in the formal sector. The BLS reports that 80% of India’s manufacturing employment is in the informal sector.

For China, the BLS calculations of hourly compensation at 81 US cents do include estimates for the ‘informal sector’. In Chinese statistics this is listed under the heading of ‘town and village enterprises’ (TVEs), whereas the larger, more regulated, sector is under the heading of ‘urban enterprises’. The TVEs account for 70% of the total workforce, with 79.1 million workers employed in 2006; the urban enterprises sector employed the other 30%, or 33.5 million workers. Not surprisingly, the average hourly compensation was just 53 cents in the TVEs compared to $1.47 in the urban companies.[ii]

American and other foreign corporations will tend to set up in the formal sector, and will likely be paying the ‘higher’ wages. But they will still benefit from the mass of even cheaper labour from poor families who work indirectly for them, either by providing services for the larger companies, or by being what Marx called the ‘reserve army of labour’ for the formal sector.

The numbers shown in the previous charts describe the situation five or six years ago, but the extreme divergence in labour costs has not changed since then. Some increase in poor countries’ wages and benefits - even the large wage rises reported in China over the past few years - variations in currency values and other factors have not altered the picture. Take, for example, China’s reported $0.81 per hour labour costs in 2006. If we assumed there was a 200% average wage increase since then (it has been much less) and allow for the rise in the Chinese currency’s exchange rate since 2006, this would still leave Chinese labour costs at only around 6-7% of the US level in 2011.

The divergence in labour costs for other poorer countries than China and India may be less extreme. But it is still a huge gap that reflects the system of domination in the world today. There is an old saying that if you want to be rich, you have to choose your parents well. The evidence here shows that you have much less risk of being dirt poor if you live in an imperialist country.[iii]

3. Low wages because …

Why does this huge gap in wages exist, and why does it persist? This is too big a topic to analyse in any detail here, where my focus is on how to understand the ‘China price’ in the word economy today. But it is worth making some brief comments that are relevant to this article.

The key point is that countries trying to escape from low levels of development and poverty today have to do so in a world economy dominated by a small number of major powers. The major countries have each used their wealth, influence and force to organise a global division of labour to suit their interests. If a poor country can fit into this system, then it will get some capital resources from outside, and perhaps it will be able to develop its domestic economy. But often the country’s role in the division of labour is one-sided and determined only by imperial needs. In the former colonial system, for example, roads and railways were built only from the mine or plantation to the port. Almost all export revenues were concentrated in a few commodities and domestic manufacturing was restricted by the colonial power. The result was a narrow, stunted development. Today, the global division of labour is somewhat more sophisticated, though much the same things continue to happen in countries like Nigeria, exploited for its oil.

Today’s more sophisticated division of labour for countries that fit the menu for imperialism consists in them having a slightly wider role in manufacturing. This happened as capital from the major powers looked for lower labour costs abroad. In some cases, this has boosted economic development dramatically (particularly in East Asia). But even those countries often find that their specialisation is narrow and their fortunes are at the whim of a volatile market. Very few have managed to position themselves more independently from the demands of imperialism and to develop their economies. Even China, the biggest success story in this respect, has a mass of industry whose operations are based on supplying the whims of western consumers at rock bottom prices.

So, development is very uneven in the imperial global economy. Many countries do not develop at all, some make one-sided progress and very few manage to show potential for breaking out.[iv] That is basically why the wage gaps persist, particularly in countries where there is very high unemployment and where the lack of social welfare systems means that people are forced to take whatever work is available, at whatever rates of pay.

4. Low wage apologetics

As you might expect, there are other arguments used to explain, or try and justify, the huge wage gap, arguments that do not refer to the imperial world economy. Here are three of them.

The first argument is that living costs are much lower in China, for example, than in the US. So a wage of $2 per hour may be equivalent to having a wage of $8 or $10 per hour in the US, given what can be bought for the $2 in China. The conclusion from this argument is that reported low wages greatly exaggerate how poor people really are. It is true that living costs may differ a lot between countries, so that very different wage levels can deliver a similar standard of living. But this is a technical argument that obscures the real issue.

The point is not that some corporation is doing detailed calculations to work out what level of wages will allow a standard of living in one country to be close to that in another. The point is that the capitalist system will drive down labour costs (for them, the costs paid for a given output) in order to raise profitability. In poorer countries, foreign capitalists start with a lower level of costs, and also with more power and freedom to use violence to discipline the workforce to accept harsher exploitation. They are freer to arrest or shoot militants, ban unions or break strikes than they are in richer countries. This freedom is readily used by imperialist investors, or more often used on their behalf by the local state, even if they would shrink from using such methods back home. They push labour costs as low as they can get away with, and do their best to raise exploitation to an ever-higher limit. These are factors we do not find in the usual calculations of comparative wage levels. Here, what Marx called the ‘historical and moral element’ in the determination of wages is squashed by capitalism.[v]

The second argument is used by companies investing in, or depending on supplies from, poorer countries: the ‘low productivity’ of the workforce means they cannot pay wages anything like what they pay back at home. This argument might have some semblance of truth if the technology used to assemble computers and perform other manufacturing operations consisted of a couple of screwdrivers, and the work was done in a shed with no electricity. But somehow it does not ring true for companies such as the Taiwan-owned Foxconn that has vast factory complexes in China, one employing some 400,000 workers in 15 factories.

Foxconn has distinguished itself as the premier labour camp for imperialism in China.[vi] In the 19^th century, Marx wrote enthusiastically about the successful struggle for the 10-hour working day in England. In the 21^st century, we have this company pressuring workers to take only one day off in 13, and where overtime can be 100 hours per month, versus a ‘legal limit’ of 36 hours per month. Many workers do at least a 12-hour day, and one died of exhaustion after a 34-hour shift. Badly performing workers are humiliated in front of colleagues and crowded workers' dormitories sleep up to 24. One worker was forced to sign a ‘confession letter’ after using a hairdryer. This was against the rules.

Apart from its military discipline and a number of suicides by its workers, the Foxconn company is best-known for producing iPhones and iPads for Apple. Other clients include Motorola, Hewlett-Packard and Dell (all US companies) and also Nokia of Finland. Similarly, the major countries usually take a stake in, or are supplied by, closely integrated producers from low-wage countries. The level of technology is not so different from that which would be available in the home country, but the conditions of labour exploitation are certainly far more extreme than in the home country.

What also gives the lie to the corporate view that very low productivity from those foreign workers means that they have to stay cheap is that the profit rates of major corporations investing in these countries is typically much higher than in the richer countries. So, then the third argument is made that the risk of the investment in ‘unstable’ areas requires such a high rate of return. “Just think”, they might say, “My investment of $50 million could be expropriated or destroyed by political instability. This means that I need to recover the cost of that investment soon, just in case some revolution or government policy takes all my money”. Of course, ‘stable’ here means stable conditions of capitalist exploitation. But even if a momentary lapse of attention made you accept that argument, there is some other evidence to consider.

Firstly, the imperialist powers – especially the US, Britain and France – make sure to protect the value of their investments with a sizeable military force, either in the relevant country, or hovering close by, in evident readiness to defend their privileges and property. Secondly, the rates of return on the investments in the poorer countries are often so lucrative as to mean that, even if they lost all their investments in five or six years, then they would still be ahead. Thirdly, rates of return on investment in poorer, dominated countries are significantly higher than those on investment in the richer, powerful capitalist countries. Not just in one year, but almost in every year. The idea that such high rates of return are needed to offset ‘risk’ is invalidated by the facts, even if you were to accept their property rights and fears.

In my first article on this site (see ‘The Economics of British Imperialism’, 22 May 2011 on this blog), I detailed Britain’s rates of return on direct investment in different countries. Those figures back the argument I am making here. So do the data I will show now for the dominant imperialist power, the US, which has total overseas investments nearly three times the value of the UK’s. Table 1 gives details of US foreign direct investment returns for selected countries over the past few years. I have included a wide range of countries, both in terms of geography and in terms of their hierarchy in the global economy. Some of the major imperialist powers are shown in blue type, more easily to distinguish them from the other countries.

US foreign investment overseas has characteristics similar to the UK’s that were discussed in the earlier article (see Section 5 of that article). Most of the investment is located in other rich countries: more than 60% is in Europe and Canada, for example. As in the case of Britain, the rates of profit in the poorer countries are significantly higher than in the richer countries. The past few years witnessed a drop in profit rates throughout the world, but the premium profit margins persist. In 2009, for example, the global average rate of return calculated was 9.7%. But it was only 3 to 5% in Germany, France and the UK, and close to 20% or above in Chile, Venezuela, Nigeria, Indonesia, Malaysia and Thailand. The average rate of profit earned in the rich countries is far less than that earned in the poor ones, based on the much higher rate of exploitation of labour in poor countries.[vii]

Table 1: Rates of return on US direct investment overseas *
	2006	2007	2008	2009
Average for all countries **	12.9%	12.8%	12.3%	9.7%
Europe	11.8%	11.4%	10.9%	9.1%
France	9.4%	8.0%	6.7%	2.9%
Germany	8.3%	9.6%	8.0%	5.2%
United Kingdom	7.1%	5.1%	6.2%	4.9%
Latin America	13.4%	14.9%	13.7%	11.0%
Brazil	16.3%	18.5%	20.5%	14.6%
Chile	13.4%	35.3%	28.3%	30.0%
Venezuela	28.0%	9.0%	20.0%	19.2%
Africa	28.3%	22.1%	19.5%	12.4%
Egypt	19.7%	22.9%	22.9%	16.5%
Nigeria	114.7%	74.9%	59.8%	23.4%
Tunisia	10.0%	21.5%	23.6%	7.0%
Middle East	26.7%	29.2%	30.0%	14.8%
Saudi Arabia	39.9%	50.5%	44.1%	18.3%
United Arab Emirates	16.1%	14.7%	13.0%	10.0%
Asia and Pacific	15.4%	15.7%	13.7%	10.4%
Australia	9.2%	10.3%	9.4%	5.2%
China	22.5%	20.6%	15.8%	13.1%
India	20.1%	18.6%	11.1%	11.2%
Indonesia	34.3%	26.8%	22.2%	20.8%
Japan	9.2%	9.3%	8.2%	8.7%
Korea, Republic of	13.4%	12.8%	14.5%	13.3%
Malaysia	24.9%	27.0%	31.5%	22.3%
Thailand	19.1%	19.2%	20.6%	19.0%
Source: US Bureau of Economic Affairs and author’s calculations. Notes: * The rate of return is measured in the standard way, by income in that year divided by the average of that year’s and the previous year’s stock of investment (historical cost basis).          ** The data are based on a total of over 200 countries. The regional totals include all countries in the region, with some individual countries listed beneath. Several imperialist powers are listed in blue to highlight the rates of return in these countries compared to elsewhere.

The figures for profits on direct investment do not give the full story for exploitation of workers in poorer countries. Corporations also rely on deals with foreign companies that act as part of their supply chain, and may not even have any stake in the other company apart from a supply contract. Here, the foreign company does the direct exploiting, but the major corporation uses its market power to drive its purchase prices down and secure cheap inputs. The result is the same: higher profits than they can get by other means. But the benefit is that they do not have the embarrassment of doing the extreme exploitation themselves. So the corporate videos can be filled with images of happy workers and smiling consumers. The blood stains are somebody else’s responsibility.

5. Sharing the benefits of exploitation

The story so far has been about cheap labour and cheap goods from poor countries that benefit consumers and boost investor profits in the richer countries. This is not a controversial thesis. It is widely known, for example, that Apple’s iPhone materials and labour costs are usually less than half the retail selling price. In the case of the iPhone 4, total supplies per unit, including flash memory and processing chips, are reported to have cost around $188, while labour assembly costs in China (at the infamous Foxconn factory) were less than $7 per unit.[viii] Hardly anything of the $400 or so that made up the rest of the $600 retail price went in shipping costs. So where did the $400 surplus end up – aside from Apple’s huge profits?

The answer to that question is difficult to pin down. But an excellent article in a German newspaper, Die Zeit, documented the story for another, far less glamorous product: the T-shirt. This example is a typical picture for the goods imported into rich countries produced by workers in poor countries. The selling price in Germany of a particular T-shirt made in Bangladesh was 4.95 euros, kept just below the 5 level to encourage sales by the Swedish retailer Hennes & Mauritz (H&M). This is how the selling price was broken down in the stages from the cotton raw material to the shirt ending up in a bag at the sales desk:[ix]

• 0.40 euros: cost of 400g of cotton raw material bought from the US by the factory in Bangladesh;
• 1.35 euros: the price H&M paid per T-shirt to the Bangladeshi company;
• 1.41 euros: after adding 0.06 euros per shirt for shipping costs to Hamburg in Germany;
• 3.40 euros: after adding some 2.00 euros for transport in Germany, shop rent, sales force, marketing and administration in Germany;
• 4.16 euros: after adding some 0.60 euros net profit of H&M and some other items;
• 4.95 euros: after adding 19% VAT, paid to the German state.

The 4.95 euros for the T-shirt and the 60 cents profit per shirt are, of course, multiplied by the many millions: this is a mass market business. The Bangladeshi factory makes 125,000 shirts per day, of which half are sold to H&M, the rest to other western retailers. One worker at the factory, even after a 17% pay rise, earns just 1.36 euros per day, based on a 10-12 hour day. The machine she works with produces a target of 250 T-shirts per hour. Not enough information was given in the article to work out the labour cost per T-shirt, including the other workers involved, but it is well within the 95 cents margin that the factory receives from H&M after the cost of the cotton (ie 1.35 –0.40). The 95 cents covers labour costs, power costs, the cost of materials needed (other than cotton), depreciation of machinery and other items, plus a margin for the local manufacturer’s profit. A reasonable estimate would be that the average labour cost to produce one T-shirt is around 10-15 cents.[x] *** In that case, H&M’s profit margin is four to six times what is paid to the workers in Bangladesh making the T-shirts.[xi]

[ *** Note added on 25 September 2014: This estimate of the average labour cost of a T-shirt at 10-15 cents is too high. Based on further information found about productivity in the cotton textile industry in Bangladesh, and some other factors, I would now put it at around 2-3 cents per shirt, possibly even lower. See 'T-Shirt Economics Update' on this blog, 24 September 2014.]

However, what is just as striking in the details is the fact that a large chunk of the revenue from the selling price goes to the state in taxes and to a wide range of workers, executives, landlords and businesses in Germany. The cheap T-shirts, and a wide range of other imported goods, are both affordable for consumers and an important source of income for the state and for all the people in the richer countries. The daily wage of the Bangladeshi worker is less than what many people in richer countries spend on a morning cup of coffee in Starbucks. Clearly, if the Bangladeshi worker were to receive the US worker’s average wage of $30 per hour, rather than 1.36 euros per day, then there would be no more T-shirts costing less than 5 euros! But the low wage they do receive is one reason why the richer countries can have lots of shop assistants, delivery drivers, managers and administrators, accountants, advertising executives, a wide range of welfare payments and much else besides. The wage rates in Bangladesh are particularly low, but even the multiples of these seen in other poor countries point to the same conclusion: oppression of workers in the poorer countries is a direct economic benefit for the mass of people in the richer countries.[xii]

One argument used to try and counter this basic truth is that “there is only one thing worse than being exploited by capitalism, and that is not being exploited by capitalism.” In this context, the argument would be that although workers in poor countries have had a bad deal, things are getting better, as can be seen by some improvements in living standards (for example, the wage increases conceded after strikes and protests). This argument does have some validity, and it should be recognised as progress for a worker to escape from backward village life. For example, the Die Zeit article cited above notes the improved lives of some women who have more freedom outside the previous social confines, even though the exploitation via factory work is harsh.

However, this benign conclusion ignores the way that the global economy is run. Not only is the worker exploitation extreme, but the major countries have also imposed their global division of labour. Areas of dominated countries are turned into suppliers of a narrow range of products for the major countries – their consumers are richer, so they count for more. Then these suppliers are dumped when market conditions change: factories close, jobs are lost, lives are disrupted and centres of a previously thriving economy can be gutted and laid to waste. This ‘ghost town’ phenomenon can appear in any country, given the way the capitalist market works. But it is obviously more damaging for countries that do not have a diverse economy, wealth and power to fall back on.

6. Conclusions

The term ‘China price’ first began to be used a decade ago to describe the low cost of goods being exported from China, particularly to the US. It reflected the concerns of domestic US manufacturers that they were being undercut in price by much cheaper imports, but it also highlighted the cost benefits to US consumers. This article has shown that, taken alone, this would be a very narrow conception of what is going on, and not only because the cheap goods also come from a wide range of countries other than China.

A key feature of the imperialist world economy is the gulf between the richer, dominating powers and the poorer, subordinated ones. This division corresponds well with the figures shown above for wage differences. The global division of labour favours the richer powers, even though some capitalists supplying their domestic markets will complain of losing out to the low cost imports. It favours the imperial powers by providing premium rates of profit for their corporations, cheap supplies for their factories, workforces and consumers, and scope for their government to raise tax revenues that help fund state spending.

Some countries may, exceptionally, be in a position to begin to escape from this domination. They may even seek to become imperial powers themselves. China is the main candidate for such a promotion, given its dramatic growth and its accumulation of financial and economic resources (see my blog post on ‘America’s war with China’, 29 May 2011). The prospect of a new rival clearly worries the US and the existing group of ruling countries. Hence the alarm often shown in US discussions of the ‘China price’.

This article has focused on the economics of imperialism. But it is worth concluding with one question on the political implications: how much sympathy can we expect from the working class and the ‘consumers’ in the imperialist countries when higher wages and better conditions for others mean no more cheap T-shirts?

Tony Norfield, 3 June 2011

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[i] See the BLS Monthly Labor Review, p35, April 2009, and p13 May 2010 for the two charts shown below. The BLS articles also detail the character of the labour market in China (April 2009) and India (May 2010). The International Labor Organization also has country data on wages, but not in a format useful for the purposes here.

[ii] See BLS Monthly Labor Review, April 2009. The data are for 2006, and the BLS also notes that the 112.6 million manufacturing workforce in China was nearly eight times the size of the 14.2 million manufacturing workforce in the US!

[iii] This is not to argue that all workers in imperialist countries have decent living standards. However, even the worst off generally have some system of state welfare provision that is absent from the social conditions in which millions live in poor countries. There are beggars on the street in Britain, but there are no old people trying to sell tourists DVDs as there are in China and elsewhere.

[iv] World Bank data on global poverty levels are defined by counting the people living on less than $1.25 per day. The biggest drop in poverty between 1990 and 2005 occurred in China, down from 683 million to 208 million. Elsewhere in East Asia, the numbers fell from 190m to 109m. However, the number of people living in poverty rose in South Asia to 595m and in Sub-Saharan Africa to 387m. See the relevant section of http://web.worldbank.org/.

[v] See Marx, Capital, Volume 1, Lawrence & Wishart 1974, p168 (in Chapter 6, ‘The buying and selling of labour-power’).

[vi] There are many reports on working conditions in Foxconn. Details here are taken from, among other reports, guardian.co.uk, 30 April 2011.

[vii] In addition to the extra profits from the higher rates of labour exploitation, it is important to note the monopolistic rents received by the major powers investing in the oil and gas industries, for example. Analysis of this phenomenon is beyond the scope of this article.

[viii] See The New York Times, ‘Supply Chain for iPhone Highlights Costs in China’, 6 July 2010. See also The Guardian, ‘Apple factories accused of exploiting Chinese workers’, 30 April 2011.

[ix] Details taken from a review article in Die Zeit, ‘Das Welthemd’ (‘The World Shirt’), 17 December 2010. See http://www.zeit.de/2010/51/Billige-T-Shirts.

[x] This estimate is based on various reports of the textile industry in Bangladesh, which has the lowest labour costs in the region. The Bangladeshi textile industry employs around 3 million workers, 90% of whom are women. Almost all of its output is geared to exports.

[xi] Notably, this profit is made on a simple T-shirt. The company does not claim that there has been a great deal of expensive background research to finance, nor that they have to pay licence fees on the use of technology. That kind of monopolistic argument is left to other corporations.

[xii] This fact is acknowledged in the writings of Marx and Engels, and particularly in Lenin’s work on imperialism. Radical and perceptive liberal writers like George Orwell were also clear about what was going on. In Orwell’s essay of July 1939, provocatively entitled ‘Not counting niggers’, he wrote: “What we always forget is that the overwhelming bulk of the British proletariat does not live in Britain, but in Asia and Africa. It is not in Hitler's power, for instance, to make a penny an hour a normal industrial wage; it is perfectly normal in India, and we are at great pains to keep it so. One gets some idea of the real relationship of England and India when one reflects that the per capita annual income in England is something over £80, and in India about £7.” Today there are far fewer formal colonies run by the major powers, but the imperialist world economy keeps many millions of workers in a subordinate position all the same.