Belgium strikers on Friday

Why wages matter less – the WTO column

(later also at Chinabiz and the Wage Indicator)
Brussels - For lazy analysts the competitiveness between China and the developed world is often reduced to wages and labor costs. Last Friday trade unions in Belgium called for a strike against the new pension reforms in their country, like there would be actions against other cuts in Europe’s social security system. Those cuts are defended by pointing at cheaper countries like China.

I agreed with the opposition against this reform, since I fail to see how Belgium or Europe can become more competitive when tram conductors in Brussels do not retire on the 58^th but on their 60^th birthday.

Similarly, when Chinese companies would decide to double the salaries of their factory workers that would not have a big influence on China’s global competitiveness. The percentage of wages on total costs in China is much to low to make a real difference.

The gap between wages is so huge between the two parts of the world at this stage that changes one way or the other would not make a huge difference in global competitiveness. That might be very different on the level of individual workers or companies, but I will look at that later.

Why then can Chinese companies be so much cheaper than their European or American competitors? They are much better in reducing costs, not only labor costs, but any costs. Their energy bill is lower, because companies often do not pay world market prices. They get their resources cheaper. Compulsory investments for environmental protection are often not enforced. Taxes and social security fees are often not collected. They do not invest in R&D or only very little. And most important: domestic competition is gruesome. Especially in manufacturing overcapacity triggers off prices wars and also reduces profits to very low margins.

Last week it was the turn of the producers of air conditioners. The production capacity exceeded this year 80 million unites, while the market only absorbs 50 million. Have you ever imaged a pile of 30 million air conditioners?

So, while on a global scale any increase in labor costs might not hurt China’s compositeness, it could kill larger numbers of its producers. Competitiveness in China is defined by the ability to strike deals with the local governments, reduce costs and in the end go for volume rather than a high margin.

Local governments in turn are both players and victims in this game. When they would really turn the screws on the companies in their jurisdictions, those companies would move or go bankrupt.

Trying to compete with China, Chinese companies against Chinese conditions does not seem a good idea for European companies. European should not even want to try. The asset of European companies is that they can still make a profit, after they pay tax, pay their workers, invest in the environment and R&D. Before throwing away those assets, European countries and companies should think again.

More than reducing costs, investing in those assets seems needed. Companies should then not make a profit only for a profit, but use it to contribute in Europe’s competitiveness in a smart way. Like Shell spending her profits on buying back its shares, seems not the best way to improve Europe’s competitiveness. Investing in education, R&D and the environment, where Chinese companies can only dream from, could improve Europe’s position in the world, more than only cuts in labor costs.

Fons Tuinstra