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Higher minimum wage to change China's trade policy

In recent months, more than 10 provincial governments in China have announced a new policy on raising minimum wage levels by 10 percent. With China's economic recovery on track, higher wages may help to stimulate domestic consumption.

Theoretically, the economics of an increasing minimum wage should result in an improvement in consumer price index and cost-of-living accommodation. Beyond that, there are also some absolute trade policy implications. Labor standards have been a trade policy issue between developed and developing countries during the past few decades. During China's WTO accession negotiations in the 1990s, the U.S. and EU raised deep concerns over China's "unfair" labor practices and made it one of the major arguments in defining China as a non-market economy (NME). As an NME, China is subject to anti-dumping duties. However, most of China's anti-dumping cases end in failure because any WTO member can use prices in a surrogate market as normal value to compare with that of China's.

The labor standards issue didn't pose a formidable challenge to government management until the turn of the new century. In the early 1990s, China's east coast regions stepped onto the fast track of export-oriented growth. The manufacturing workforce experienced accelerated booming. In fact, China has experienced the largest growth of farmer immigration from villages to bigger cities in modern history. For unskilled job seekers coming from China's countryside, how much they were paid in a manufacturing job was far more important than how fairly they were paid, because at that time any payment they got from being a manufacturing worker would be much higher than they used to get from farming. The over-supply of farm labor continued flowing into job markets in the 1990s, but working conditions for migrant workers improved very slowly. Migrant worker wages have been stagnant at the lows from $100 to $200 per month for decades. This partially explained why Western nations put the labor standards issue on their trade negotiation agenda with China very often, but no desired outcome occurred in the 1990s.

After 30 years of open-door policy, China is now one of the largest economies in the world. In the Chinese labor sector market, labor related issues have begun to capture the spotlight of government and media.

China's domestic consumption has been limited largely due to low domestic income. It seems reasonable that if workers are paid more, then they are going to spend more. Although China is culturally and historically a saving nation, raising wage levels will help to stimulate domestic consumption and contribute to China's sustainable economic growth.

Labor disputes and complaints have added tremendous political pressure on China's labor policy practice in recent years. The most recent Foxconn suicides have been taken as warnings to those using unfair labor practices. A rise in worker demonstrations has shown that Chinese labor is gaining more bargaining power to raise wages and improve working conditions. As China is building a harmonious society and making efforts on narrowing the widening income gap between rich and poor, labor's voices must be heard. Most importantly, Chinese workers desire to have equal access to children's education and social welfare. Chinese manufacturers, both domestic and foreign-owned joint ventures, should take social responsibility for treating workers well based on fair labor standards to help China become a powerful trading nation in the world.

World trade is moving towards fair trade, or as initiated by the U.S., free but fair trade. Fair trade deserves fair standards with fair trading partners. China has a crucial role to play on the world fair trade agenda. Both labor standards and environmental protection will be important to Chinese trade policy in the 21st century. Labor issues cannot be separated from trade. Research on US trade policy shows that American labor unions have played an important role in US trade policymaking. Some labor unions in Western nations have argued that Chinese exports are competitive only at the cost of unfair Chinese labor standards and abusive working conditions. These unions want strong enforcement of labor standards through trade policy to improve wages and working conditions in China.

Chinese policy makers have recognized the need to raise labor standards as part of trade policy initiatives. Chinese manufacturers have begun to acknowledge the shortage of skilled workers and take certain steps to raise minimum wages in hopes of reversing the shortage. Manufacturers will have to bear higher labor costs and survive other effects of raising minimum wages.

Raising minimum wage means not only fair labor standards for workers, but also a better trade policy situation for China. Even though minimum wage may help to encourage consumption and relieve employment shortages, manufacturers labeled "Made in China" will have to rethink their business strategy. A strategic transition from low-labor cost competitive advantages to quality and innovative competitiveness is inevitable. China's trade strategy should focus on being a fair labor practice trading partner, and its economic growth pattern should change from a GDP-driven economy to a social-welfare driven society. This is not just an improvement of labor standards, but it will help China develop into an economic world leader.