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The Shanghai Squeeze

Corporations have been moving jobs and capital out of countries like the United States since the late 1960s. But in the public mind it is only recently that China has become the most likely destination. Almost overnight, it seems, the given wisdom is that if China’s breakneck growth continues, its inexhaustible labor pool, its burgeoning high-tech skills, and its investment opportunities could effortlessly absorb the livelihoods of workers and professionals in every corner of the world. Worries are also mounting about how the world’s resources are being drained to service this growth, but they do not yet compare to the widespread anxiety about the flight of industry and capital: in Mexico, whose NAFTA-based manufacturing sector has been hemhorraging jobs to Asia; in Japan, Taiwan, and Korea, where leading technology industries have come to depend on manufacturing on the mainland; in the United States and Western Europe, where offshore job transfer is sprinting up the value chain into the realm of professional services; in the offshore sites of Eastern Europe and North Africa that are increasingly less profitable than Asian locations; and even

in countries like Cambodia, Thailand, Vietnam, Burma, and India, whose low labor costs are now undercut by the comparative advantages of producing in the heartlands of the jumbo China market.

Workers everywhere tend to perceive the mercurial growth of China’s economy as a threat. Most owners of mobile capital, by contrast, see only an investors’ bonanza. This discrepancy is not surprising, but it is rare to come across a stark divide on such a scale and with so many far-flung consequences. One of the general aims of this book is to explain how these contrasting perceptions came about, whether they are justified, and what conditions are likely to change them. Is China’s growth a timely outcome that will help to stabilize the world economy, or is it a textbook illustration of the lopsided benefits conferred by corporate globalization? How do offshore employees—among the presumed beneficiaries—fit into this equation, and how can their onshore counterparts—among the presumed losers—join with them to help remedy any imbalance? In the plunder-happy world of free trade, what are the responsibilities of governments, either in the West or in key cities like Beijing and Shanghai, to try to equalize the distribution of gains and offset the environmental damage?

My inquiry into these questions took me to the factories and offices of Shanghai’s booming metropolis, neighboring cities in the Yangtze River Delta and other parts of China, and, ultimately, to Taiwan and India, but it begins here with a brief historical account of how the commercial traffic between the United States and China evolved.

How Outsourcing Became a Way of Life

Before the early 1990s, the bulk of job and capital flight to China was obscured by the maze of contracting chains that snaked all over East Asia. When export-processing zones were first established in the 1980s in South China, most of the suppliers to U.S. and European manufacturers and retailers were Taiwan-, Macao-, or Hong Kong–owned factories (registered in the Cayman or Virgin Islands) that operated with a low profile and with equally low operating capital. In most cases the only contact with the onshore firm was through a Hong Kong agent, and the identity of the parent manufacturer was generally not disclosed. Indeed, the system was designed to be nontransparent, making it difficult to trace the connections between the head and the tail of the chain. Because the U.S. apparel industry was the first to see the offshoring of labor-intensive operations, garment unions had the longest record of tracking the flight to Asia, dating back to the 1960s. Labor advocates in the industry also had the longest experience of protesting substandard conditions in the factories—first in Japan, and then in Hong Kong and Taiwan—that supplied the apparel majors. Consequently, the concept of the Asian sweatshop producing for Western consumers was established early in the public imagination. The reality took on a more ominous profile when low-end assembly operations swept onto mainland China itself, all but concealing the factories and shops from international scrutiny.

The initial surge of job traffic to the export zones slowed after the 1989 crackdown in Tiananmen Square. International sanctions took their toll on most trade relations with China. Bill Clinton subsequently campaigned on a promise to take a firm stand against the “butchers of Beijing,” and initially he tied the approval of China’s Most Favored Nation (MFN) trading status to the improvement of Beijing’s human rights record. But his fighting words soon dissolved in the face of pressure from the powerful U.S.-China trade lobby. His first administration approved Beijing’s MFN status in 1994 over and above a barrage of complaints about appeasement.

Offshoring corporations developed a tight understanding with the governing class that each would press for the global liberalization of trade and investment. This entente among financial and political elites was part of the Washington Consensus, and its advocates promoted the doctrine that free-trade policies would bring wealth to all participants. Benefits flowed to those who profited from trade deregulation and privatization, but the more numerous “losers of globalization” were hard-pressed to see the silver lining. Rising inequality appeared in every poor country that lifted trade and investment barriers. Domestic protests surfaced wherever corporate-led free trade left its uneven footprint. Toward the end of the 1990s, a far-flung protest network—the global justice movement—was advocating a bottom-up vision of globalization, geared to human needs and sustainable development, rather than to short-term corporate profits. With its scant domestic freedoms, and limited international exchange (though not for businesspeople), China emerged as the weakest link in the network, and the largest single obstacle to global cooperation on labor and environmental standards.

Partly as a result of this stepped-up global opposition to free-trade policies, a much fiercer fight over worker and human rights preceded congressional approval of China’s Permanent Normal Trading Relations (PNTR) status in 2000. The granting of PNTR, which was the prelude to China’s accession to the WTO in 2001, opened the door wide for production shifts from the United States to the mainland. The exodus began in earnest. In the years that followed, the majority of China’s ballooning exports were produced with foreign investment, and most of the goods were destined for the American market. Consequently the U.S. trade deficit with China soared (by 30 percent in 2004 alone, to top $162 billion), along with anxiety about the loss of livelihoods in the United States.

After PNTR was approved in 2000, Congress established a bipartisan commission (the U.S.-China Economic and Security Review Commission) to assess the economic and security implications of the worsening trade deficit with China. The first study to be commissioned on domestic employment impact reported a sharp escalation in production transfers out of the United States in the six months after the granting of PNTR. In this short period, more than eighty corporations announced plans to shift production to China. According to the survey, these were large, well-known, and highly profitable companies, and the majority of them were not producing for the China market. Moreover, the pattern of their investment in China showed a clear move away from low-skill light manufacturing toward more complex, value-adding industries like electronics, chemicals, machinery, metals, and financial services. The lost onshore jobs in these industries were more likely to have been unionized with higher wage and benefit packages than in labor-intensive sectors.

Each sizable plant closure, the commission’s report continued, had a “ripple effect on the wages of every worker in that industry and that community, through lowering wage demands, restraining union organizing and bargaining power, reducing the tax base, and reducing or eliminating hundreds of jobs in the related contracting, transportation, wholesale trade, professional and service sector employment in companies and business.”

The authors of study estimated that in the eight years since 1992, 760,000 jobs had been lost due to U.S.-China trade, and predicted a rapid increase in the current rate (between 70,000 and 100,000 jobs each year) after China joined the WTO. There was also evidence of a direct link between corporate investment in China in selected industries and domestic job loss in those same industries at home. The conclusion to the study was a sharp indictment of free-trade policies pursued by Republican and Democratic administrations at the behest of the business wings of their parties and U.S. multinational investors in China: “Our research concludes that the U.S. and other countries have moved ahead with trade policies and global economic integration based on faulty arguments and incomplete information.”

A follow-up study, covering the period from January through March 2004, did indeed show a sharp increase in the number of production shifts, as well as the number of industries involved, and reported that corporations had established a pattern of simultaneous transfers to multiple low-wage destinations, both near shore (i.e., Mexico) and offshore (China). No government body had collected this kind of data on the domestic impact of overseas trade policies, and the studies flatly refuted what many economists had argued about the benefits brought to the United States by the “virtuous circle” of free trade. A subsequent study, undertaken for the commission by the Economic Policy Institute, found that the U.S.-China trade deficit was responsible for the loss of 1.5 million American jobs from 1989 to 2003. According to this survey, published in 2005, job displacement had doubled since China joined the WTO, and the fastest growth was occurring in highly skilled and technologically advanced areas, such as electronics, computers, and telecommunications. Indeed, China now accounted for the entire U.S. trade deficit ($32 billion) in “advanced technology products.”

The commission’s own field hearings, conducted in Columbia, South Carolina (September 2003), San Diego, California (February 2004), Akron, Ohio (September 2004), and Seattle, Washington (January 2005), generated a wealth of testimony from politicians, economists, manufacturers, employees, and trade unionists about the debilitating impact on U.S. industries and communities of job and capital flight to China. The industrial sectors under investigation ranged from textiles, apparel, and furniture in South Carolina; to steel, auto, and machine tools in Ohio; high-tech in California; and aerospace and software in Washington. At each hearing the commission’s findings were sharply critical of how policies that were introduced to promote free trade were, in practice, actively encouraging and, in some instances (involving the Export-Import Bank), funding the transfer overseas of manufacturing, services, and R&D. According to one commissioner, “We appear to be mortgaging a broad array of assets, pieces of our country’s economic future, in a historic stampede for short-term gains in corporate profitability and consumer pricing.”

In the years following the onset of the recession, estimates of domestic job loss came thick and fast from many other quarters. By

the end of 2003, the number most commonly cited was 3 million jobs lost since 2000, though all such estimates had to be balanced against how many jobs the economy would have been expected to create in

a normal recovery. According to one such report, over the course of

the actual recovery from the recession (from November 2001 to November 2003), 1.3 million jobs in manufacturing alone were lost, along with 272,000 jobs in information services, and 93,000 jobs in professional/technical services. These were all in sectors that paid above-average wages. Job gains in this period were predominantly

in lower-wage sectors. By 2004, only 65.9 percent of employable adults—a sixteen-year low—had jobs or were looking for work. Though the bulk of the losses were in manufacturing, and were assumed to have mostly migrated to China, as many as 30 percent were estimated to be in white-collar, IT-enabled services, flowing abroad primarily to India. If those displaced found full-time employment, by far the majority were earning less than at their previous positions. On the whole, these earnings losses had been increasing since the mid-1990s. Department of Labor figures that analyzed the job downturn showed a sustained impact on older, more experienced workers, a result that was consistent with patterns of outsourcing.

Much of the headline-grabbing data about job loss, and projections of future flight, came from private consultancies like Forrester Research, the Gartner Group, Technology Partners International, the Boston Consulting Group, and the McKinsey Global Institute. Their research analysts played both sides of the issue. They advised their client firms to move offshore whatever assets they could, as soon as they could, while also issuing publicity-conscious reports that were guaranteed to scare the living daylights out of Americans who still had jobs in vulnerable sectors. The mainstream press followed the same schizophrenic path. Alarmist human-interest stories about jobs lost alternated with reassurances, often directly from the mouths of business economists, about the beneficial impact of outsourcing “in the long run.”

The analysts’ most alarming reports offered estimates of unprecedented losses in white-collar services and skilled IT jobs. A much-cited Forrester Research report in November 2002 projected that by 2015 the United States would lose about 3.3 million such jobs. In July 2003, the Gartner Group estimated that by the end of 2004, one in ten technology jobs at American IT companies and one in twenty at non-IT companies would have moved offshore. In addition, only 40 percent of those who had lost jobs were likely to be retrained and redeployed by the firms surveyed. Some estimates were even higher. Researchers at the Fisher Center for Real Estate and Urban Economics predicted that as many as 14 million white-collar service employees, or 11 percent of the nation’s total jobs, were vulnerable to offshoring.

Even after the U.S. economy began to add jobs in the winter of 2003–4, the estimates continued to rise. The market-research firm Technology Partners International reported that the second quarter of 2004 saw a 35 percent increase in the value of IT outsourcing contracts over the previous year, indicating that companies were increasingly committed to moving their entire IT operations out of house. In March 2004, McKinsey reported that multinationals had moved $35 billion of investment offshore in 2002 alone, and forecast that the rate of offshoring would grow between 30 percent and 40 percent annually at least through 2008. Outsourcing was no longer an option in services: it was considered a requirement of business-process jobs in call centers, loan processing, and back-office accounting; it was becoming an imperative in a whole range of engineering sectors and services like financial analysis; and it was marching steadily into the legal and medical professions. In July 2004, Boston Consulting Group adopted a more apocalyptic tone in warning firms that they faced extinction if they did not move offshore: “Companies that wait will be caught in a vicious cycle of uncompetitive costs, lost business, underutilized capacity, and the irreversible destruction of value.”