Beware the unintended consequences of short-term thinking
The release of China’s export trade numbers for May have released a torrent of unease from US policymakers and politicians related to the ongoing debate over the valuation of China’s currency.
Across both parties in Congress, calls are increasing to promote legislation that would explicitly limit Chinese imports to the American market. US Treasury Secretary Timothy Geithner noted, ““I think the strength of the sentiment in Congress is overwhelmingly strong , it’s bipartisan and it reflects how important this is to the United States.”
And no one can dispute how important Sino-American trade is to both countries.
China has relied on it for over 30 years to bring millions out of poverty. And despite the rising share of Chinese exports headed to other markets (especially the developing world), the US is still China’s largest export destination, accounting for nearly 20 per cent of exports in 2009. Barriers to trade with the US would thus pose a great threat to China’s continuing economic growth.
And while the US may complain about the policies China has utilized to ensure its competitive advantage, lest the Americans forget Read the rest of this entry »
Thoughts on the next hundred years.
While Canada might avoid the worst of the austerity and sacrifice that is sweeping through Europe on the heels of Greece’s near bankruptcy, the effects on the global economy, including ours, cannot be ignored.
Stimulus spending may have mitigated the worst of the past 24 months of global financial crisis, but the accumulated deficits and mounting debts they added to may lead to a prolonged period of muted growth if not recession. And so in order to meet the financial obligations set by a divergent set of interests related to labour on one hand and service provision on the other, something has to give.
In theory, governments have three choices when mired in what most would call near-default positions:
1. Raise taxes.
2. Cut services.
3. Cut the cost of service.
The most straightforward approach would be to simply raise taxes in order to increase government revenue. However given already strained constituent pocketbooks, there’s a limit to how much even the most progressive taxes could be raised.
Moreover, raising taxes is usually tantamount to political suicide and thus ranks quite low on a politicians radar. This despite the fact that at some point citizens may need to re-examine how much universal services cost and what share we’re willing to pick up in order to keep them going.
The next alternative is to cut back on services. Yet as I’ve written previously, despite our complaints on service provision and social spending, Canada on a whole ranks in the middle of the pack when it comes to spending on what most would think are the most important elements of a sound economy (education, health and social services). Most would tell you that there are no extraneous services left.
So far then, we’re neither ready to pay more in taxes, nor cut back in the current level of service provision we receive.
What’s left to be done?
Well, perhaps we’re due for a pay cut.
Heresy, you say?
Over the past several weeks there’s been a lot of press focused on working conditions at several of China’s big-name factories, notably, Foxconn and Honda.
A rash of suicides at Foxconn, maker of products for big names such as Apple, Sony, Nokia and Hewlett-Packard, has focused media attention on the company’s huge profits and, by our standards, grossly low wages. The Taiwanese company employs over 800,000 people across China with an average wage of under $200 month, just a touch over standard Chinese minimum wage rates.
(And while that may sound horrific, keep in mind that China’s poverty line, measured in purchasing power parity by the World Bank, is approximately $1.25 per day. To be more realistic given inflation and a more realistic basket of urban goods and services, that figure is likely closer to $5/day in urban centres, and some would argue even more.)
Over at Honda Motors, a strike by 1,900 workers at a Chinese transmission plant over low wages shut the plant down for two weeks. Wages at the plant ranged from $131 to $219 per month.
In both cases, management has responded with wage hikes – 30 per cent of basic wages at Foxconn, and a 24 per cent increase at Honda. Other companies are likely feeling the pressure to follow.
Great, right? Well, maybe not. Read the rest of this entry »