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M.Vivek asked: What was the impact of China's labour unrest on trade relations with countries who's firms had to shut shop?

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  • Smita Purushottam replies: While it is not always possible to establish a direct relationship or causality between domestic labour unrest/ firm bankruptcy - and bilateral trade relations, hugely competitive Chinese exports can and have hurt importing countries’ economies by contributing to medium/long term redundancy among the latter’s firms. Paul Krugman, a Noble prize winning economist, has called for revaluing the Chinese currency in order to redress some of the imbalance.

    Recent waves of labour unrest in China, including strikes in foreign invested enterprises such as the Japanese Honda company and the Taiwanese Hon Hai enterprise (which also witnessed multiple suicides due to poor labour conditions), have contributed to a revision in wages in many parts of China, particularly in the coastal, more developed regions.

    However it may be premature to jump to conclusions regarding the impact of rising wages on China’s export juggernaut. In fact China’s exports and trade surplus have continued to rise at a very fast clip in July this year. The trade surplus dipped in August as imports rose by 35.2% over the year before, indicating improvement in domestic demand (domestic demand being generally expected to strengthen when the currency appreciates and domestic wages rise, and there has been marginal appreciation in both in China), but exports also rose, though at 34.4% - at a marginally lower rate than imports.

    Also, Michael Porter’s theory of competitive advantage should be kept in mind. He says that higher wages may simply reflect higher productivity, which translates into rising exports. This explains Germany’s success as an exporting country, despite its labour force being paid some of the highest wages on the planet. German products, which embody high technology, and which require an educated and well paid workforce to produce them, continue to command a high premium in export markets. If China is following a high-technology path leading to rising Chinese exports in this segment - trade frictions resulting from bankruptcies in importing countries need not be a phenomenon of the past. Today’s headlines in the Wall Street Journal - - clearly indicate that China is competing with western firms in the high tech sector.

    Economist Intelligence Unit annual trade figures for China:

                                               2009 (Actual)      2010 (EIU estimate)
    Exports of goods fob (US$ bn)      1,203.8     1,506.1

    Imports of goods fob (US$ bn)       954.3     1,306.6

    Current-account balance (US$ bn)       297.1     272.5

    TOTAL                                    2158.1     2812.7