China and Walmart

by | September 9, 2011

It’s a shame how democratic governments forget who it is they work for. Open trade with China has created so many problems that it is difficult to enumerate all of them. But here we will try to list two disturbing issues. We will also discuss the effect of Walmart below and how its policy of lower prices at any cost has accelerated and exacerbated the issues.

Let’s first understand the purpose of open trade which is, in and of itself, a very good idea. The idea in its simplest form goes something like this. Let work go to the most efficient country without duties or tariffs or other cross border limitations. Many people think that open trade (or free trade in its most open version) is bad for an advanced country because jobs will simply flow out. That is simply not true. The evidence is that both countries will benefit so long as the trade is fair. And don’t forget the advantage to consumers of the lower prices that result.

But what is fair? Fair means similar regulations on both sides of the deal. If the regulations are vastly different then work will move to the less regulated country. Take an example of a company that performs chrome plating. This is very messy work and is now exorbitantly expensive or impossible in many Western countries because of the poisonous effluent that the process creates. Moving this work to China (where the regulations are lax or where bribes can be paid to avoid them) simply moves pollution to another country. This is the first problem with open trade with China … because it has a very poor regulatory framework, rich Western countries are simply polluting a developing country. This is not fair to anyone.

But China has another problem. Because it is not a democratic country it lacks the openness required to have proper governmental oversight. It therefore does whatever it wants. In the case of open trade agreements with Western countries, this has meant cheating on the agreements. Whereas Western governments allow Chinese goods into their countries at very low (or zero) duty rates and allow Chinese companies to operate within their countries, the Chinese government has managed to make it very difficult for Western countries operating in China. Many need to set up joint ventures with Chinese (often state-owned) companies. Many are worried that their intellectual property is being stolen. And imports can be subjected to onerous duties. When I was last in China I was told that the duty on a Mercedes sedan was 300%. How is this fair and why are our governments not doing something to equalize the agreements?

Now, what role does Walmart play in this problem? Walmart does not operate on the value proposition, that it should provide the best value to its customers. Instead, it is only concerned with price. This means that it has moved its sourcing to China as fast as possible. (In fact, Walmart is the largest purchaser of Chinese goods in the world.) Where other stores have focused more on value and quality, Walmart has not. As a business decision it is brilliant because it can undercut its competitors while ensuring that customers will have to re-buy the same product very soon. But it is bad for its customers, bad for its vendors, bad for its employees and bad for the countries in which it operates.

Walmart has also used its powerful market position to force suppliers to move production offshore, often with a detrimental effect to both quality and employment. We are not suggesting that we need artificial barriers to keeping jobs inside Western countries. We are simply suggesting that companies with significant control over the market not be able to push vendors to do something which is bad for the vendor and bad for the country. A company as big as Walmart needs to be regulated, just like the telephone company and the huge software companies.

So what are the democratic governments doing to solve these problems?

  1. They are not doing anything substantial to stop moving polluting industries to China.
  2. They have not been successful in getting China to allow more foreign competition within its borders.
  3. They have not investigated Walmart for its anti-competitive role in moving goods to China.

Do you have any other stories about open trade or Walmart? Any comments on this topic?

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