Magazine article The American Prospect

Trading with a Low-Wage Tiger: What Happens to Everyone Else When China Sucks Up So Much of the World's Economic Growth? (Gazette)

Magazine article The American Prospect

Trading with a Low-Wage Tiger: What Happens to Everyone Else When China Sucks Up So Much of the World's Economic Growth? (Gazette)

Article excerpt

WHEN ROBERT MAO describes the fantastic manufacturing opportunities his company sees in China, he speaks with mixed feelings. "For the first time in the modern era," he marvels, "we have an inexhaustible reservoir of good, trainable labor." But Mao, who as president and CEO of Nortel Networks China has worked in the region for 20 years, also worries about what that means for China's neighbors. For the foreseeable future, he says, almost all new investment by Nortel suppliers will go to China and not to other Asian countries. So, too, he expects, will most major investments by other global manufacturers. "What can Taiwan, Malaysia and the Philippines do?" he asks. "They offer pretty much the same degree of technological sophistication as China but they are more expensive and lack the scale. What will they do?"

His concern is well-founded. In 2001, China absorbed 75 percent of all foreign direct investment into Asia's developing economies, a complete reversal of the ratio of 10 years ago. Indeed, almost all economies--from Cambodia to the United States--have by now lost some industrial activity to China. And with China's workers earning less than one-third as much as their counterparts in, say, Brazil or Thailand, with tens of millions of underemployed Chinese industrial workers waiting in the wings and With hundreds of millions of farm-workers lined up behind them, such losses are very likely to continue.

Press attention has mostly focused on the plight of the richest Asian nations--particularly Japan, where think tanks and government agencies, recycling a phrase that Americans once used to use to describe their loss of manufacturing to Tokyo, report a "hollowing out" of the economy as manufacturing moves to China. Taiwan has also been in the news: Fear of China as an economic competitor recently edged toward panic following government approval of the first mainland investments by the country's gaudiest industrial success, the giant Taiwan Semiconductor Manufacturing Company.

But the economic stakes for developing nations are, relatively speaking, much higher. Mexico, Malaysia and Thailand--and, to a lesser extent, South Africa, Poland and Brazil--now find themselves competing with China for shares of the U.S. and European markets, and even for a place in their home markets, as well as for direct investment and capital. The effects can add up quickly. Mexican government figures show that in 2001, that country lost 5 percent of its manufacturing jobs, more than 580,000 positions, largely to China. More than 350 maquiladoras, many of which supplied parts to foreign companies, shut their doors as orders went to Chinese vendors instead; and the job loss was even worse among factories in Mexico that were directly owned and operated by multinationals. Among those that moved production from Mexico to China were Philips, Sanyo and Sony.

The same thing is happening in Southeast Asia. Singapore frets as Hitachi, Sanyo and Philips transfer high-tech work to China; Malaysia wrings its hands as Dell moves personal-computer production from Penang to Xiamen; and the Philippines watches helplessly as new foreign direct investment falls by half in a year while sec, a longtime resident manufacturer, relocates a hard-drive plant to Shanghai and Toshiba moves PC production to Hangzhou. So strong and persistent is the investment slowdown in Southeast Asia that some academics are starting to connect the Asian financial crisis of 1997-1998 to the ascension of China.

The allure of China to the big manufacturers is not just its low wages, lack of unions and shocking absence of citizens' rights (Mexico looks downright Scandinavian by comparison). A recent survey of managers at Japanese multinationals showed that most believe China's workers are better-educated and harder-working than their counterparts in Southeast Asia. In addition, water and power are highly subsidized in China, and because Beijing will take from its people to give to industry, supplies are virtually guaranteed. …

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