Pirates and Sanctions

The people in Dalang, the Sweater Capital, used to be farmers, until a Hong Kong investor opened a sweater factory at the dawn of the 1980’s. After a few years, the workers began to quit and open their own factories, and both the bosses and the staff work dizzyingly hard. One factory worker here in Guangdong Province told me that she works 12-hour shifts, seven days a week, 365 days a year, not even taking time off for Chinese New Year. She chooses to work these hours to gain a better life for her son. If protectionists want somebody to criticize for China’s trade success, blame that woman and millions like her.

Remember that China isn’t like 1980s Japan, which had a sustained huge surplus with nearly everybody. China’s global surplus has surged in the last five years, but traditionally its global trade position has been close to a balance, and it still has a trade deficit with many countries.

China imports components, does the low-wage assembly, and then exports the finished products to the U.S. — so the whole value appears in the Chinese trade surplus with the U.S., even though on average 65 percent of the value was imported into China. When a Chinese-made Barbie doll sells in the U.S. for $9.99, only 35 cents goes to China.

Sure, China pirates movies and software — but the U.S. was even worse at this stage of development (when we used to infuriate England by stealing its literary properties without paying royalties). Pirated DVDs are sold openly on the streets of Manhattan, while sellers in China can be far more creative. A couple of days ago, I dropped into a small DVD shop in Beijing to check its wares. Everything seemed legal.

Then the two saleswomen asked if I wanted to see American movies — and tugged at a bookshelf, which rolled forward on wheels. Behind was a door; one of the saleswomen whisked me into a secret room full of pirated DVDs. That’s piracy — but also capitalism at its harshest and hungriest. There are plenty of reasons to put pressure on China, including its imprisonment of journalists and its disgraceful role in supplying the weaponry used to commit genocide in Darfur. But whining about the efficiency of Chinese capitalism is beneath us.

All that said, the Chinese development model is running out of steam.

Labor shortages are growing and pushing up wage costs. Factories are having to spend more money to improve worker safety and curb pollution. The environment is such a disaster that 16 of the world’s most polluted cities are now in China.

China will also be forced to appreciate its undervalued currency, further pushing up costs. The “China price” will no longer be the world’s lowest, and millions of jobs making T-shirts and stuffed toys will move to lower-wage countries like Vietnam and Bangladesh.

So if China is going to continue its historic rise, it will have to move up the technology ladder and shift to domestic consumption as its economic engine. Yet the share of consumption in China’s economy has fallen significantly since 2000.

So as one who has been profoundly optimistic about China for the last 25 years, I think it’s time to sober up. President Hu Jintao is China’s least visionary leader since Hua Guofeng 30 years ago, and China has the burden of unusually weak leadership as it navigates a transition to a new economic model as well as a political transition to a more open society.

I’m betting China will pull it off, but I don’t think the world appreciates the risks and challenges ahead.