The People’s Republic of China was formed in 1949 under the leadership of Mao Zedung. Chairman Mao is credited with modernizing the country and helping to elevate it to a world power in part by improving education, promoting women’s rights, developing a better health care system, and laying the groundwork for a more industrialized economy.
However, in the later years of his rule in the 1970s, China was still primarily an impoverished nation, partially as a result of political turmoil and the government’s mismanagement of the economy. Yet today, only 40 years later, China is the world’s second biggest economy, the top manufacturing and trading nation, and one of the most influential investors in countries throughout the world.
China has replaced America as the world’s top factory producer, and they are on pace to potentially surpass the economy of the United States to take the top economic position in the world. China is truly the factory of the world with over 47 percent of its exports going to Asian countries, 22 percent being sent to America, 19 percent to Europe, and about 4 percent to both Africa and Latin America.
The Chinese economy thrives as a manufacturing powerhouse and the nation’s products seem to be everywhere. The majority of tags, labels, and stickers on a variety of goods proclaim they are “Made in China.” Because of this, it’s understandable Western consumers might wonder, “Why is everything made in China?”
Some may think the ubiquity of Chinese products is due to the abundance of cheap Chinese labor that brings down the production costs, but there is much more to it than that. In addition to its low labor costs, China has become known as “the world’s factory” because of its strong business ecosystem, lack of regulatory compliance, low taxes and duties, and competitive currency practices. Here we review each of these key factors.
Low wages
China has the largest workforce in the world with about 775 million of the total population of 1.4 billion actively working. The abundance of workers competing for factory jobs has historically enabled Chinese manufacturers to keep wages low.
However, as China’s factory workers age, it is getting more challenging to attract skilled factory laborers since the younger generation of Chinese are drawn to other more advanced occupations that don’t involve long hours of labor on a hot production floor. This has helped encourage a steady increase of wages.
Those who are willing to do the work and do it well realize their value, and employers are forced to pay them competitive rates or risk them leaving and decreasing production. The highest wages are found in Beijing and Shanghai, but even there workers are making less than three dollars and fifty cents per hour in US dollars.
The wages in other Chinese cities are as low as 22 yuan or $3.16 in US dollars per hour. Obviously these lower wages help contribute to higher profits, which is a primary reason why so many companies look to China for their manufacturing needs. But there is another reason why production costs have been historically low in China.
Less regulation
The manufacturing boom in China was amplified by the lack of restrictions and regulations that were common in the West. These included lax standards in regards to child labor, health and safety, environmental protections, and wage and hour laws.
Not putting an emphasis on these types of regulations helps lower costs and boosts the bottom line. However, it meant that for many years, factory workers, including children, were working 16 hours or more a day, 28 days a month in unsafe circumstances. Some employers even withheld paychecks until the end of the year to ensure their workers didn’t quit.
There were environmental consequences as well. As of 2018, 22 of the world’s top 50 polluted cities are located in China. It’s true that in recent years, China has taken major steps in increasing necessary regulations such as banning child labor for those under the age of 15.
However, the inconsistent enforcement of these new regulations means many companies are still able to get around them. This is just one of several challenges China faces in the coming years
Currency
China has been accused of artificially depressing the value of the yuan to provide an edge for its exports against similar goods produced by U.S. competitors. China keeps a check on the appreciation of yuan by buying dollars and selling yuan. The yuan was estimated to be undervalued by 30% against the dollar in late 2005. In 2017, the yuan appreciated 8% against the dollar, a move that experts say came about after President Trump threatened to label China a currency manipulator.
However, this trend reversed and the yuan weakened against the dollar beginning in June 2018 when the U.S. imposed tariffs on Chinese goods. On Aug. 8, 2019, China’s central bank lowered the yuan to 7.0205 per dollar, the weakest level since April 2008. The weaker yuan makes Chinese exports more attractive and is seen as China’s response to its trade war with the U.S.
Taxes and Duties
The export tax rebate policy was initiated in 1985 by China as a way to boost the competitiveness of its exports by abolishing double taxation on exported goods. Exported goods were subject to zero percent value-added to (VAT), meaning they enjoyed a VAT exemption or rebate policy. Additionally, consumer products from China were exempted from any import taxes. These lower tax rates helped to keep the cost of production low, enabling the country to attract investors and companies looking to produce low-cost goods.
China and U.S. Tariffs
In July 2018, the U.S. announced China-specific tariffs, targeting 818 imported Chinese products valued at $34 billion. This was the first of many rounds of tariffs imposed by both countries, resulting in $550 billion of U.S. tariffs applied to Chinese goods and $185 billion of Chinese tariffs applied to U.S. goods, as of Feb. 2020. Over time its expected Americans will feel the impact of these tariffs in the form of an increased cost of goods, while the Chinese economy is expected to experience a slowdown.
Lower Compliance
Manufacturers in the West are expected to comply with certain basic guidelines with regards to child labor, involuntary labor, health and safety norms, wage laws, and protection of the environment. Chinese factories are known for not following most of these laws and guidelines
Historically, Chinese factories have employed child labor, have had long shift hours, and have not provided the workers with compensation insurance.
Some factories even have policies where the workers are paid once a year, a strategy to keep them from quitting before the year is out.
Faced with mounting criticism, the Chinese government has claimed to institute reforms that protect workers’ rights and provide for fairer compensation. However, compliance with the rules in many industries is low and change has been slow. Additionally, environmental protection laws are routinely ignored, enabling Chinese factories to cut down on waste management costs.
conclusion
China has achieved unprecedented growth over the past forty years to become the undisputed factory of the world thanks to economic reforms, limited regulations, low wages, a massive workforce, and strategic trade relationships.
In 2010, China became the world’s second largest economy behind the United States. The U.S. has held the top spot since 1871; however, China’s economy is consistently expanding at about three times the pace of that of the United States.
In 2018, China was the world’s largest exporter by value with about 2.3 trillion dollars’ worth of products being sent around the globe, but there are signs that this trend may not continue so strongly in the years to come as emerging economies are able to offer cheaper labor and increased profits. Yet China appears ready to face the challenges of the future head on and adjust as necessary to maintain their status as an economic powerhouse.
0 Comments