John Donne’s 17th century meditation, “No man is an island,” applies more than ever before to the 21st century global environment. Our present and future circumstances are intertwined with events, decisions and capital movements that occur in far-flung countries. Although chilling to recognize, we are not the sole masters of our own destiny.
China’s huge pool of cheap labor, together with it’s massive trade volumes (China’s imports and exports account for 75% of GDP, while the U.S. accounts for only 25%1), has had the following effects on the global economy, and hence, you and your business:
- Lower prices of labor, goods, assets and capital
- Higher prices of commodities
- Lower inflation
Low Wage Growth
China’s entry into the world economy – together with India and Russia – has nearly doubled the global labor force. With little capital added by these economies, the ratio of labor to capital has fallen dramatically. Because of China and other developing countries, workers in America are earning relatively less money. When was the last time you asked for a salary increase? Many employees are simply happy to have a salary!
Lower Prices, Higher Prices
Because China has a cheap labor supply and is becoming more efficient and competitive, the price of the products it exports is falling. This is probably good for you and your business. On the other hand, because Chinese demand for oil and raw materials is increasing rapidly, prices of these and other commodities are increasing. This is probably bad for you and your business (who hasn’t been shocked at the cost of filling your car’s gas tank?). China’s per capita energy consumption is only 1/15 of America’s. Currently there is only 1 car per 70 Chinese versus 1 car for every 2 Americans. Do you think China’s future energy demands will increase? The same principle will apply to prices of other commodities as the standard of living in China rises. Will Coca-Cola raise prices of Diet Coke due to the increasing cost of aluminum?
Usually when energy costs rise, companies respond by raising prices. Workers respond by demanding higher wages. These have not happened recently in the U.S. There are also less labor unions in the U.S., which typically demand cost of living wage increases. Fortunately for the U.S. and other developed countries, labor unions are not a significant factor in foreign countries.
Over the past 10 years, China’s imports have risen in proportion to its exports, greatly affecting global supply and demand.
Despite China’s huge imports and the resulting spike in commodity prices, their ability to produce cheap mass-market goods has had the effect of maintaining low prices of manufactured products. This capability has also restrained wage growth. The result has been a steady decline in prices of about 10% over the past decade for many finished goods such as textiles. This is probably good for you and your business.
Because of cheap capital sources, people and businesses in the developed world have been able to borrow money at very favorable rates. They have bought cars, houses, and other capital goods, and invested in home re-modeling, stocks and bonds. Have you purchased or re-financed a new home? Businesses have also invested in plant and equipment, Research & Development, employee training programs, and new technology. New entrepreneurial businesses have been started, value has been created, and personal net worth has been increased.
Before we thank China and other developing countries for the good fortunes of the developed economies, there exist potential pitfalls of this cheap money. Excess liquidity has caused an increase in asset prices around the world.
China has also slightly re-valuated its currency, the Yuan, away from a peg to the U.S. Dollar. This shift away from a dollar-pegged Yuan may encourage China to buy more Euro or Yen. This slight shift from a huge economy such as China’s could devalue the dollar significantly. This revaluation could increase the cost of imports – both commodities and finished goods – stimulate inflation, and force the U.S. and other economies into recession. Your house, business and other assets that have been increasing in value for the past several years may decline rapidly. This would surely be bad for you and your business.
What can we do to contribute to our integrated global economy while also protecting our assets and exploiting opportunities in it? First, we can reduce our demand for oil by using public transportation and encouraging the development of alternative fuels. Next, we can increase our savings rate and limit our reliance on credit and borrowing. This savings can be invested personally or in our businesses to create higher value. Finally, we can export our goods and services to other countries to balance our huge trade deficit.
Most importantly, we can stop thinking of America as an island and begin taking advantage of opportunities in our integrated global business environment.
–Peter M. Guyer
Peter M. Guyer is the Founder and President of ATHENA MARKETING INTERNATIONAL (athenaintl.com), an international marketing, consulting and business development firm serving food and beverage manufacturers. Tel. (206) 749-9255.
1 Sources: WTO; Thomson DataStream, The Economist, July 30, 2005.