China’s New “Foreign (Direct Investment) Humiliation”

Companies are attracted to doing business in the People’s Republic of China because of its low-tax development zones, cut-price abundant workforce, and totalitarianism. Independent trade unions are banned by the Communist Party. Assembly-line personnel in free-trade zones in south China operate machinery without safety guards and spray paint with inadequate face masks. They often die in industrial accidents or from gulaosi, the Chinese term for death from overwork. Workplace death rates in China are at least 12 times those of Britain and 13 factory workers a day lose a finger or an arm in the boom city of Shenzhen. In a sign of official disquiet, the state-owned China Daily reported in November that a 30-year-old woman, He Chunmei, died from exhaustion after working 24-hours non-stop at a handicraft factory.... Such miserable conditions allow China to undercut developing countries by up to 60 per cent.

—London Independent

The foreign direct investment (FDI) now flooding into China—close to $100 billion annually—is a critical component of the China Price advantage. Massive FDI is providing Chinese companies with two incredibly powerful catalysts for honing their competitive edge:

First, China’s FDI is being spent on the most sophisticated and technically advanced manufacturing processes available. Such technology transfer means that China is getting much better equipment and machinery much sooner than other developing countries. This allows Chinese manufacturers to always produce more efficiently on the cutting edge and allows Chinese workers to experience rapid productivity gains that help offset any wage pressures.

Second, China’s catalytic FDI has brought with it some of the best managerial talent and managerial “best practices” from around the world. The result has been a winning trifecta: cheap Chinese labor toiling on the production lines, local Chinese “scouts” who use their “guanxi” connections to grease the bureaucratic wheels, and the crème de la crème of foreign managerial talent in the middle and upper ranks.

One might argue that this aspect of the China Price is a perfectly legitimate competitive advantage untainted by China’s other unfair trading practices. This argument is, however, dead wrong.

For starters, China’s currency manipulation and its resultant grossly undervalued currency provide a huge and powerful magnet for FDI. This is because the undervalued yuan allows foreign multinationals to buy Chinese factories on the cheap.

Ultimately, however, one of the biggest FDI lures is China’s extremely lax health, safety, and environmental standards. In what some critics rightly describe as China’s second “foreign humiliation,” these lax standards effectively allow corporations from Europe, Japan, South Korea, Taiwan, and the United States to export their pollution and worker safety risks to a country that has surprisingly few defenses against the vices of foreign capital. This passage from Business Beijing, which focuses solely on the role of China as a “pollution haven” for FDI, helps illustrate the broader problem of lax standards as an FDI magnet:

Foreign investors have set up enterprises to decompose, renovate, and process waste metals, electronic appliances, tires, and harmful chemical pollutants. Most of them have a serious impact on the environment. Some of these investors even import foreign garbage into China, ostensibly for the purpose of recycling. Taiwan used to be an important location for recycling hazardous materials from the United States.... A number of Taiwanese investors have relocated their production facilities to the eastern mainland coastal areas of China, such as Shenzhen, Zhuhai, and Changzhou. They continue importing tons of waste materials such as used cells, vehicle plates, computers, adapters, and other electrical and electronic components for recycling in China. The effect on the surrounding environment is enormous.