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 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.