August 25, 2004

The Price of Tea in China and Minnesota

By Doug McGill
The McGill Report

ROCHESTER, MN -- It started modestly enough, with just a single line in a radio news report last week. The report said Minnesota soybean farmers are sweating out their second biggest worry after this summer's killing frosts -- namely, how much China is going to pay for the surviving crops.

I decided to look into this. What is the extent of Minnesota's economic dependence on China these days? Every other item we buy at Wal-Mart nowadays is "Made in China" -- including the painted-plaster Minnesota loons in the trinkets section. But what's the China Effect in agriculture? In manufacturing? In professional services? Other areas?

I spent several hours absorbing some truly eye-popping statistics and then had to conclude that even if I listed all of them in this column, they wouldn't tell the whole story. They wouldn't convey the real depth of what we are getting into with China -- not only what we as Minnesotans are facing, but we as Americans.

$15 Sneakers

Because the real story is the unleashing in China of an economic force so vast that the entire world is having to adjust to it, not just in this soybean season or in this decade, but for many decades to come. The world hasn't seen anything like this since America's own industrialization over the past century. The force is the transformation of China's hundreds of millions of rural poor into a powerhouse of urban workers and consumers.

Consider that China's work force of some 400 million is far larger than the entire U.S. population. About 300 million of these are rural workers, mostly farmers; and About 100 million are urban factory workers. The key point is the historic shift that is taking place as 200 million of the rural workers are migrating to China's cities to enlist in the ranks of the urban work force.

Those 200 million workers are streaming from China's remotest regions into its cities in one of the largest human migrations in history.
If you've ever wondered how Wal-Mart can sell $15 sneakers, there is your answer: because 400 million people in China are willing to work for 25 cents an hour.

Piano Lessons

A work force this large is like a force of nature that sends out not just ripples but huge waves of influence over the globe. It pushes businesses in faraway countries into bankruptcy by sheer force of rock-bottom prices created by cheap labor. Yet other businesses open up if they feed China's awakening consumer demand for everything from diet pills and cell phones to piano lessons, soybeans, and iron ore.

China's population of 1.5 billion is so big and so vibrantly growing and changing that the paradoxes abound. Yes, its work force is so big it is forcing companies around the world to compete on their terms, at their price. Yet China also is losing more manufacturing jobs every year than the United States, as the country's Communist government jettisons cradle-to-grave employment and fires factory workers by the millions.

And there is still enough population left over (there are 100 cities in China with a population of more than 1 million) to create a growing middle class of consumers. They've helped power an overall economic growth rate of around 10 percent a year for the past decade, and are one of the reasons why China's soybean imports from the United States -- in which Minnesota has fully participated -- grew fourfold from 1999 to 2002, to about $1 billion.

Booming Eveleth

The paradoxes caused by China's staggering growth create paradoxes in the United States and in Minnesota. A study last year by Minnesota Technology Inc., a nonprofit group, found that competition from China played a significant role in the loss of up to 38,000 manufacturing jobs in the state since 2002. Half of the 150 manufacturers surveyed said that competition from China was hurting their business by an average 20 percent of sales per year.

But what about that $15 pair of sneakers? Doesn't that kind of a price really help a lot of single working Minnesota moms?

Our interdependence with China has helped Minnesota in other ways. In Eveleth, on the Iron Range, a Chinese company saved a local iron mine from bankruptcy and brought the town its first strong economy in years. Last week, Northwest Airlines announced the inauguration of service on a new route to China, as part of a larger package of newly-authorized routes that could lead to a fivefold increase in regular U.S.-China flights.

Remember the old saying that once was a synonym for "that's ridiculous"? You'd say, "What's that got to do with the price of tea (or substitute your favorite agricultural or manufactured commodity) in China?"

Today, the answer is "a heck of a lot."

Copyright @ 2004 The McGill Report