U.S. Firms In China Pay More As Wages Rise

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STEVE INSKEEP, host:

Factory managers in China are paying the price for success. As everybody knows, countless American businesses have relocated to China in search of cheaper labor, and now the cost of that labor is rising.

David Wessel, economics editor for The Wall Street Journal, and a regular guest here on MORNING EDITION is just back from China.

David, welcome back.

Mr. DAVID WESSEL (Economics Editor, The Wall Street Journal): Thank you.

INSKEEP: So what's changing for American companies?

Mr. WESSEL: Well, I think one big thing that's changing is that China is no longer a nirvana of ample low wage labor. I was in an industrial park about an hour from Shanghai...

INSKEEP: Mm-hmm.

Mr. WESSEL: ...where one factory has opened every day for the past 12 years.

INSKEEP: We're talking about thousands factories in this one industrial park.

Mr. WESSEL: Correct.

INSKEEP: This must go from miles and miles.

Mr. WESSEL: Correct - 400,000 workers. And imagine what it's like to be a boss there. When you treat somebody badly or they want a raise and you say no, you can't have a raise. And they say okay, I'll go next door. So it's really become a workers' paradise of sorts for people who have the skills to work in these factories.

INSKEEP: So the equation has completely changed from having a massive pool of labor that you could always get somebody to replace a worker that wants too much money to the opposite situation, and wages are going up.

Mr. WESSEL: Yes. So one thing that companies are doing is moving plants more into the interior of China...

INSKEEP: Okay.

Mr. WESSEL: ...where there's still a lot of farm workers who are looking to come to the factory. And the Chinese government is encouraging that. So I think it's making a big difference in the calculation that American companies will be making now and in the future. The production that requires really, really cheap labor will leave China. It will go somewhere else. It'll go to Vietnam. I was in a Gap store in Shanghai and I looked at the T-shirts and they said made in Malaysia.

INSKEEP: Well, let me ask about another implication of that. Because, of course, American jobs have been moving to China forever. Would American factory managers, American executives, at some point begin to think about moving jobs back to the United States where wages have stagnated?

Mr. WESSEL: That's a great question, Steve. And my initial instinct was - no way. But I was surprised by an initial report by the Boston Consulting Group, which says that some jobs may actually come back to United States if they are things that require not much of labor, so they are in very highly efficient plants...

INSKEEP: Mm-hmm.

Mr. WESSEL: ...and they involve things that are heavy to move. So for instance appliances are very expensive to ship. So some of the Chinese labor cost advantage is going away. That means other disadvantages like transport or supply base or nearness to customers they come into the fore.

INSKEEP: One other possible benefit or effect for the United States: if Chinese wages are rising does that mean that more Chinese workers will have more money to buy products, some of which might be American products?

Mr. WESSEL: Yes, but. A lot of the money that they have will be spent on made in China products. And there's also a huge problem that a lot of the things they buy may have some American input but they're ripping them off. So we have to make sure - and this is a big issue for American companies - that American intellectual property, if that's what we are really selling to China, is protected and not ripped off.

INSKEEP: As he traveled around China, did you get a sense of an economy and a system that's felt sustainable right now?

Mr. WESSEL: I was struck by two things. One, the incredible momentum and how fast theyve grown and how widespread the evidence of that growth is. But as you talk to people and examined the economic foundations, I was struck by the fissures in the foundation - that they're having a hard time coping with inflation.

INSKEEP: Mm-hmm.

Mr. WESSEL: There's a tension between free markets and people acting as they want to act and the political repression. The income inequality in China astounding. Within 50 yards you can see a mansion that looks like it was in Potomac, Maryland and a hovel that looks like it was in pre-Great Society Appalachia.

INSKEEP: David Wessel, economics editor of The Wall Street Journal, just back from China.

Thanks very much.

Mr. WESSEL: Youre welcome.

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