A New Giant Sucking Sound

The "giant sucking sound" Ross Perot used to talk about is back, only this time it is not Mexico sucking away American jobs. It is China sucking away Mexico's jobs. And jobs from Taiwan and South Korea, Singapore and Thailand, Central and South America, and even from Japan. Globalization is entering a fateful new stage, in which the competitive perils intensify for the low-wage developing countries much like the continuing pressures on high-wage manufacturing workers in the United States and other advanced economies. In the "race to the bottom," China is defining the new bottom.

This turn of events is difficult to see against the gathering threat of global recession, but in the long run it will be more meaningful. As one economy after another sinks into contraction, output subsides nearly everywhere--more layoffs and closed factories, more unsold goods. So the migration of production to China will not become fully apparent until after the recovery, when some of the closed factories never reopen. While it is impossible to know the full dimensions at this point, the downdraft on wages and competing economies induced by China's ascendancy may produce a terrible reckoning. For many poor nations that thought they had gained a foothold on the ladder, the reversal will be quite ugly.

This is the "treadmill" that ensnares developing countries--writ large. If they attempt to boost wages or allow workers to organize unions or begin to deal with social concerns like health or the environment, the system punishes them. The factories move to some other country where those costs of production do not exist.

In Mexico, the manufacturing wage level rose a bit in the last couple of years and is now around $1.50 an hour. In China, it is 20-25 cents an hour. After NAFTA, Mexico's manufacturing base expanded robustly year after year--except that most new factories are located in the maquiladora export zones along the US border and in the interior, essentially separate from the Mexican economy and largely producing components for US multinationals. Yet Mexico may already have peaked as an emerging player in global manufacturing. Its manufacturing base is now shrinking, due first to the US recession but also because the factories are leaving. American companies that were cheerleaders for NAFTA back in 1993 are shutting down and moving to greener--that is, cheaper--pastures. An American source in multinational business explained the trend: "When you consider the wage difference, moving the factory, which was usually leased anyway, or moving the more value-added product lines is a veritable no-brainer, if you want to increase profits. I expect this to intensify over the next few years, leaving considerable excess capacity and unemployment, particularly in northern Mexico but also in Central and South America, and the Caribbean."

During the past year, employment in the maquiladora industries fell by 12 percent, more than 170,000 jobs from the peak. The number seems modest by American standards, but those jobs have been the core of positive growth. The maquiladora sector produces about one-third of the nation's hard-currency income from abroad--the dollars that support its foreign borrowing--and so its loss could contribute to yet another currency crisis. The export-zone wages may seem pitiful to Americans (and to many Mexicans), but they are virtually the only bright spot in job development.

Poignant evidence of Mexico's dilemma is the fact that the government has slapped antidumping duties of 189 percent on electronics imports from China. Electronics was supposed to be one of Mexico's bright spots, remember, but Mexico now claims China is exporting its surplus output at a price below what it costs in China. Guadalajara, a production center for dozens of US technology companies,was down 16 percent in exports and lost 15,000 jobs in the first half of the year, according to Business Week. When US steel companies pursue anti-dumping remedies, the free-trade orthodoxy disparages them as backward protectionists, blocking the future for poorer countries. But Mexico is still very poor itself and feeling the same squeeze. Mexico's top three steel producers, incidentally, are all in grave financial trouble, like the American companies, and for the same reason. Worldwide overcapacity drives down steel prices and rewards the lowest-wage producer--China.

In Mexico, other shrinking sectors include shoes, tires, apparel and auto parts. The Big Three are moving auto components to China from both Mexico and the United States. General Electric, which over the years has moved a lot of US jobs to Mexico, is now moving production of mini-bar refrigerators from there to China. An executive of SCI Systems, which employs 10,000 in Guadalajara, told Business Week: "I'm an absolute believer in this country, but anything that is really price-sensitive is considering moving lock, stock and barrel to Asia."

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