Why Things in China is Cheap?

There is no doubt that China is one of the most important base for manufacturing. Christmas is coming, and this reminds people that the even higher majority of world Christmas decoration is coming from China. Even the Christmas tree – if it is artificial – may come from China.

Goods in China are cheap. There are arguments of the quality (Well. I will talk about that part in the future). My question to answer today is, why China’s good is cheap?

Labor is the Key

I would say the labor is the key. In Southeast China’s Guangdong province, the average wage for workers in factories are 40 US cents per hour, a fraction of U.S., even 1/6 of New Mexico. Why that?

There is a theory of “Population Dividend” in China. I first heard about it from King. It describes the situation of China – with the huge population, and huge base of “available” labor, China and the world is enjoying the benefits of these population.

Imagine, in the last few years, with the shutdown or reform of state owned enterprises, 45 million people lost their old jobs, and have to find new one. This is just a very small amount comparing to the 800 million peasants in China. Many farmers lose their land in the process urbanization, they don’t have land, and they are ready to pickup any job that pays them salary.

Take Shanghai as an example, the newly born children in villages don’t have land when they are born, while in the past, all peasant’s children must be peasant – there is no way to change it. The up-side-down change in policy forces the new generation to find a job.

Often, 40 cents per hour is way much higher than the money they can earn at home.

Continuous Supply of Labor

The promise for wage increase is not high in the near future. The key is, although the demand is increasing in the country, the employed workers are still far from all of the abundant labors.

For example, if someone ask for 41 cents per hour to their factory, the boss may say, there are millions of people waiting out side the gate, and they are willing to take your job at the same or lower salary…

So when does this situation change? Only after majority of the “abundant labors” find their job, and there is not so many people wandering outside the gates of the factories, and there will be some kind of labor shortage, and the wage would surely increase. At that time, the population dividend is used up.

China after Population Dividend

The world is flat. When all the labors in China is used up, countries like Vietnam is not. Then the world factory will shift to other countries. Hopefully at that time, the domestic consumption of goods, and the hi-tech sector start to boom, and China can be still strong in exporting, and go to another “right path” for development. If not, it is dark cloud on the future sky of China.

Just my few cents about this big topic.

18 Comments

  1. I’m a bit surprised, given the title of your post, that you didn’t mention the complete discounting of environmental consequences in Chinese industrial development. Most inputs- water, fuel, electricity – are heavily subsidized, while outputs- heavy pollution- are, to be frank, completely ignored despite recent official pronouncements to the contrary. I would argue that this freedom to ravage the environment is as much a major element to the Chinese manufacturing miracle as the massive supply of labour, if not more essential. Ultimately, this will be the source of any “dark cloud on the future sky of China”.

  2. @p, yes, environment is another big issue. There are many other big issues for this big topic. If I try to cover even 1% of the problems, this article would be a big book already. I welcome everyone’s addition to the list of answers.

  3. Jianshuo,

    It appears to me China’s low price exports to the west is slowing down a bit lately. I can think of a few reasons as to why:

    1) The labor: you are right China has a large supply of migrant workers. Now the “post 80s” generation is entering the workforce. Compared to their parents or big brothers/sisisters generation, their work ethic is not as good. This is confirmed by the stories “the plants can not find quality workers in Pearl river delta” from time to time.

    2) Environment: Chinese goverment realized current model of economy development, I mean “exchange environment for cheap exports” is not sustainable, and not good development.

    3) Politics: cheap exports and especially the recent “tainted toy products” are causing back lashes in the west. One example is the Chinese shoes were burned in Spain couple years ago, because the Wenzhou people drove the local people out of business. There are lots of touch talk about “China cheaper exports” in the US presidential elections these days, too.

    China is trying to build a harmonious society internally. In my mind, China wants and needs to build a harmonious relations with the world, while continuing the economy development.

  4. There is one thing I always have trouble understanding. A lot of things in China are actually more expensive than in the West, like clothes, cosmetics, cars, electronics, toys, etc. A lot of these stuff are made China, why after all those tax, transportation fee, storage fee, the westerners can still buy them for cheaper than what the Chinese will pay?

    China really is an expensive country.

  5. To add to what I said above

    Service in China is cheap but not goods

  6. Chinese goods may appear cheap, but if you factor in issues like poor workmanship, back-up service, and dubious sources, you may no longer find it as attractive. Come on China ! lets have a bit more pride in what we do. We need results, not hot air. (there seems to be too much of it).

    The sale is not completed just because the goods have left the store.

  7. The concept of the “population dividend” sounds very much like the concept of “reserve army of labor” which was advocated by a famous economist whose name begins with “M”. :) In his view, the dynamics of capitalist production would produce more and more output, with less and less labor, thus guaranteeing that this “reserve army of labor” would always remain. In the very short-term, this might be right. But in the long-term, innovation and technology will create consumer demand for new things (e.g. “green jobs” and “green technology”) that will soak up this “reserve” and raise living standards. The issue is if education, mobility, and other public goods will be provided so this reserve army can take advantage of these new opportunities.

    My bigger concern is that this “reserve army” is coming into competition with people globally. Globalization is making this labor much more fungible. This suggests that workers in the US with jobs that can be offshored, will face lower and lower wages as the global market becomes much more fluid. So a consumer electronics manufacturing worker in the US will increasingly get paid what his Guangdong counterpart is getting paid. On the other hand, the specialized software or ASIC designer in Shanghai will also get paid a comparable salary to her Silicon Valley counterpart. Globalization will result in massive rich-poor disparities, much like what you see in China today. This will be hard for people in the West to accept.

    This may be an oversimplified view, just as the most strict interpreters of economist “M” has found over the last century. But we will face some turmoil as this “reserve army” comes into play. Manufacturing jobs will keep moving to Dongguan. But I will continue to pay over 10X what Shanghai families pay for an Ayi because immigration policies prevent that “reserve army” from competing to local service jobs. This will, for better and for worse, be interesting times for China and US in the coming decades.

  8. @elliottng, I do agree about the impact of globalization. That is also the reason that fighting against poverty is a world wide problem. Getting rich is not any country’s problem, and everyone need to participate. Because of the world is flat, problem of any part of the world may impact the other part.

  9. Manufacturing is always chasing after the lower cost of labor.so factories move from one to another for lower production cost. wherever we develop our economy, we must take full use of our advantage.

  10. Almost 18 years ago I saw Korea starting to export good to the world. I remember I bought then a small TV set made in Korea. The quality was very good.

    Then came ships, cars, flat screen TV set, etc. all made in Korea. I thought then “If Korea, a small country, can export so many products what will happen when China starts to do the same”.

    And now it is happening!!

    The problem is that China is too big. The world has now a HUGE production overcapacity.

    The strains are been felt now all over the world. The results are: fierce competition, copycat of every thinkable product, huge pressure to low price and profits for foreign companies, workers losing its jobs in Europe and USA, etc.

    The recent problem with tainted products may be just an indication that the societies in other countries are becoming highly sensitive to the competition coming from China. Not good for China exports, of which most of is economic growth depends.

    One of the problems for the future of China is how to fit this excess of production in the world economy. New opportunities could be open through this new production capacity, but also many dangers…. and mainly for China development.

  11. the manufacture cost is not depend only on labor.i surprised that western country are not use more worker in their production.they are using machinery more than men.so how they largely affected by labour cost.

    there may be other reason that why asian country”s production is more cheap.

    cost of production os depend on machinery output,labour cost,estate cost,water bill, taxes,mass production,safety instrument is used,industrial waste management,row material.

    i think to make unharmful or recycle the waste which is produced during production is very costly process.asian countries through that solid waste directly on the soin,water waste in the river.

    there is no safety equipment are used in asian countries during production.

    thus asian countries’s production is more cheap.

  12. Things sold in China are not cheap at all. However, things that are exported to other countries are often cheap. There is a big difference here.

  13. the reason why one person above the page says that the western products are much cheaper than china products is because of the trade policy that was imposed by president bush, it has something to do with the tariffs given to the exporter going inside u.s.. he imposed such a high amount of tariffs for him to product his local products…

  14. Yeah and the cheap chinese import, labour and competition have pushed global wages down the scale

  15. China must encourage her citizens to become more of entrepreneurs.

  16. I think dharmendra has a point about the cost of industrial waste management, raw materials, labour cost, etc. If all those things are less expensive in China, the products will in turn be less expensive. The sad part about that, as Joe says, is that in order to compete, companies all over the world must lower the cost of their product, leading to lower wages for their workers, cutbacks, etc. That leads to massive economic hardship.

  17. I think dharmendra has a point about the cost of industrial waste management, raw materials, labour cost, etc. If all those things are less expensive in China, the products will in turn be less expensive. The sad part about that, as Joe says, is that in order to compete, companies all over the world must lower the cost of their product, leading to lower wages for their workers, cutbacks, etc. That leads to massive economic hardship.

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