Enjoy the cheap goods, they will not last

China has enjoyed great economic growth by becoming the manufacturing shop for the global economy thanks to its large population and vast supply of cheap labor. Company executives in China however are starting to complain about labor shortages and wages have been rising rapidly. This could be an indication that China’s surplus labor has been used up. This should not come as a surprise given that the country’s one-child policy introduced in 1979 has caused population growth to slow sharply. As a matter of fact the growth in the working-age population is expected to drop from an annual rate of 1.3% in 2005 to 0.1% by 2015. At the same time, the migration of workers from agriculture to industry will slow. In addition, the population is ageing, and there will be fewer young, single workers who are usually preferred by many industries. For those who fear the rise of China this slowing trend may be good news but for the rest of us who enjoy good deals it means that the seemingly never ending supply of cheap goods made in China is something that should be treasured until it last.

How free trade helps America

According to a Gallup survey eight out of ten Americans today think their country is heading in the wrong direction. This concern is not mainly about Bush but about a struggling nation. One source of concern is the sorry state of the American economy at a time when house prices are falling faster than during the Depression, oil is more expensive than in the 1970s, banks are collapsing, the dollar is weak and inflation is rising. Many Americans also feel as if they missed the boom because between 2002 and 2006 the incomes of 99% rose by an average of 1% a year in real terms, while those of the top 1% rose by 11% a year.

With the perception of jobs shipped overseas and the rise of China, free trade is less popular in the United States than in any other developed country, and a nation built on immigrants is building a fence to keep them out. America has faced crisis before confronting Soviet power, Watergate, Vietnam, oil shocks, the fear over the rise of Japan but each time, the United States rebounded because it is good at fixing itself and embracing change. Lax monetary policy that enabled Americans to build up huge debts and fueled a housing bubble, not to mention, the poor state of the education and health care systems have made clear that there is a urgent need for reform. Politicians seeking a scapegoat for America’s self-made problems too often point the finger at the growing power of developing countries accusing them of stealing American jobs but if America reacts by raising trade barriers and rejecting foreign investors it will only make its economic troubles worse.

As a matter of fact new reserch from Chicago economists found that because the price of services rose by more than the price of goods during this period, the inflation rate for the rich was far higher than that for the poor. These differences matter when considering inequality in America. The richer household earned 10.6 times more than the poorer one in 1994; that multiple rose to 11.2 in 2005 (see left-hand chart). But according to the economists, this ratio exaggerates how far the poor have been left behind because it does not account for different inflation rates. A fuller picture would consider shifts in relative prices as well as in relative incomes: around two-thirds of the increase in the standard inequality gauge since 1994 is offset by the poor’s lower inflation rate.

In additon their data on shopping habits show that the range of goods consumed by poor households increased by far more than for rich households. The researched matched their figures on non-durable spending with equally detailed import data, and discovered that increased trade with China (see right-hand chart) helped lower prices and widen variety. The poor tend to shop in the aisles of the supermarket where the presence of Chinese goods has increased most, and these are also the aisles where prices have fallen fastest. The authors reckon that low-cost imports from China alone offset more than a quarter of the measured rise in income inequality since 1994. We know that Walmart and China are not popular with the union and snooty types but the research shows that income inequality needs to be thought through carefully; and that the increase in Chinese imports offers some clear benefits especially to low-wage Americans.

The Waves of Global Wealth

In the midst of economic crisis it is always fashionable to blast foreigners and global trade as the root of most of evils. Unfortunately, while trade can hurt and displace workers in poorly competitive industries, history shows that it benefits economies and consumers on a grand scale. A recent report published by the World Trade Organization (WTO) compared 3 periods of expanding globalization, which is certainly not a modern phenomena. Industrialisation and technological changes (such as the invention of the steam ship, which produced cheaper means of migrating and trading between continents) led to a period of globalisation in the 19th century. More recently  new inventions (such as the jet aircraft, the internet, etc) have helped to encourage new waves of it. The WTO report compares the 3 broad periods and shows how global growth in GDP, in population (including migration) and wealth were affected by a increase in the trade of goods. Whenever governments preach limiting trade in the name of fair trade or protecting national industries be prepared to suffer unwelcome consequences.