Orie House
HOPR 1105
Wal-Mart and China: An Economic Success Story of Two Giants
When talking about Wal-Mart, one inevitably has to talk somewhat about China too. The two have become almost synonymous in recent years, because of all the investing that Wal-Mart has done in China, and the large number of products in Wal-Mart that are manufactured in China. Wal-Mart is a economically savvy corporation that has created a growing niche for itself in China much the way that it has in the United States. However, according to the Los Angeles Times (2006), there is a growing trade deficit, or the difference between what a country imports and exports, between China and the U.S., which has almost reached two hundred billion dollars in China's favor. This has resulted in a social backlash in the United States.
A Los Angeles Times (2006) editorial says:
China is an easy target for our economic grumbling. It is ruled by a Communist Party. Its currency, the yuan, does not float freely. It often looks like a monolithic machine, with factories of assembly-line workers churning out low-cost goods to fund its march toward world domination. It has about $800 billion in foreign reserves stashed away.
That is a very good summary of why many Americans see all this economic activity coming out of China as a bad thing. The Los Angeles Times (2005) draws many parallels between the Japan scare fifteen years ago and the present situation with China. At that time the Japanese economy grew very rapidly due to their manufacturing and exporting industry. This also caused a massive trade deficit with the United States. However, one of the key differences this time is that there are more political pressures added to the already large economic ones. China is a communist country with nuclear weapons, and tensions run high between China and many of their Eastern neighbors including Taiwan, South Korea, and Japan. All are close U.S. allies.
One of the concerns raised about U.S. economic dealings with China is the fact that some believe the Chinese are competing unfairly. The Chinese unit of currency, the yuan, has been kept artificially low in value in order to help the Chinese economy and is preventing the rest of the world from competing. In the opinion of the Los Angeles Times (2006), “there is no reason to believe that a different valuation of the yuan would seriously affect the galloping trade between China and the U.S.” However, according to Wonacott and Phillips (2003), many U.S. companies claim that it is hard to compete against China when the currency is “artificially weak.” The National Association of Manufacturers estimates that Chinese trade goods are forty percent cheaper than they should be, and says that China is to blame for many lost American jobs (Wonacott and Phillips, 2003). There seems no clear cut answer on just what help raising the value of the yuan would be, but it is certain that there are significantly more goods coming into the U.S. from China than there are going out.
So it seems that the effects of the current Chinese economic trade practices are bad for the United States. However, when the United States Congress mandated that the U.S. Treasury Department review the Chinese economic practices, China was found innocent of manipulating the yuan (Wonacott and Phillips, 2003). That was good news for China; if they had been found guilty of manipulation the United States would have had to enter into formal negotiations with China over the matter.
Wade, Professor of Political Economy at the London School of Economics (2003, p. 39) says:
I agree with the globalizers that economic growth is essential to raise the living standards of the world's poorer people (as are changes in our measures of economic growth to weigh environmental quality and public services properly). I agree that more open markets in the West for labor-intensive and land-intensive exports from developing countries would help, and that more foreign direct investment from the West, more technology transfer, is generally to be welcomed.
Wade (2003, p. 40) departs from what he calls the “liberal argument” for globalization when it comes to the widening absolute income gap between the West and the rest of the world, including China and India. So while this foreign investment in China is helping the Chinese economy overall, it doesn't exactly help everyone in China. On a global scale the rich are getting richer, and the poor aren't doing much of anything. In 2001, the World Bank said that the total number of people living on less than one dollar a day was 1.2 billion, though this is generally considered to be a low estimate (Wade, 2003, p. 19). The rural regions of China are falling prey to this process, since they are out of the investment loop that the rest of the country is currently in.
Wal-Mart really isn't concerned with all that, though. What Wal-Mart wants from China are the inexpensive goods that China can produce. Wal-Mart bought about $18 billion in goods from China in 2004, the last year for which it has released numbers (Kabel, 2006). This inflow of goods is one of the major reasons that Wal-Mart has been able to sell things at their low prices. However, some of the reasons behind China's economic success are not well known. During his lecture “Wal-Mart, China, and You” delivered at Williams College in Massachusetts, sociologist Gary Hamilton stated, “China’s ability to produce low-cost goods is not simply the result of cheap labor, as many people believe” (Mulvihill, 2006). Low wages are only partly responsible for drawing in China’s increased manufacturing business. Many other countries have cheaper labor than China, and China itself has its own share of outsourcing. What helps China the most is the infrastructure created by China’s large cities, ports, and highways. This “distribution network” seems right in line with the Wal-Mart values, and mirrors their own success at creating efficient distribution in the United States. It allows China to produce what is needed reliably and in large numbers. It also helps that China has a huge sea cost and many ports. China is also almost at the geographical center of the East, causing it to be the ideal place to put goods together from parts brought in from the surrounding countries.
Despite the huge investments made by Wal-Mart and other U.S. companies, China still has mostly Asian investments. In 2004, three-quarters of their $60 billion in Foreign Direct Investment (FDI) came from Hong Kong, Japan, Taiwan, Korea, and Southeast Asia (Barshefsky and Gresser, 2005).
In addition to importing Chinese goods for American consumption, Wal-Mart also now has a strong retail presence in the growing Chinese economy. Wal-Mart spokeswoman Amy Wyatt has stated that Wal-Mart could hire as many as 150,000 new employees in China over the next five years, and twenty new stores are being opened this very year, adding on to the existing 56 stores with 30,000 employees (Kabel, 2006). In fact, Wal-Mart's Chinese business is now growing faster than their U.S. counterpart. The 2005 increase in operating income for Wal-Mart's international division was 11.4 percent compared to the U.S. division's 8.2 percent (Kabel, 2006). Because Wal-Mart doesn't supply a breakdown of international financial results by country, the only number available is the total for international sales, which was $312.4 billion last year or 20 percent of Wal-Mart's overall net sales (Kabel, 2006). The company is also very optimistic about the future of the chain in China. Joe Hatfield, chief executive of Wal-Mart Asia, has stated that his company's Chinese operation could be as big as its 3,700 store United States business in the next twenty years (Watts, 2006). With a Chinese population of 1.6 billion, this isn’t at all surprising.
That's not to say Wal-Mart hasn't had a bit of a rocky road setting up their Chinese operations. Retailers, like Wal-Mart, that want to get into business in China need to adapt to get their products to sell. The idea that it won't sell if it's not fresh, is one of the ideas that they have had to adapt to in China. Turtles, bass, perch, carp, and shrimp are all sold live in the store, and customers enjoy netting them by themselves (Watts, 2006). This type of business doesn't seem like what Americans typically know as a store, but it is built on the Chinese tradition of markets. Because there was no way to keep the food from spoiling, it always had to be purchased as fresh and often as possible. The Chinese are simply into the habit of doing business this way.
Retailers in general, though, are growing in popularity for a number of reasons; one of the chief ones being the safety of their grocery departments. There is a growing consciousness of safety in China, particularly in the realm of food. Large grocery retailers like Wal-Mart offer a security that the traditional Chinese markets can't deliver (Watts, 2006). In addition, the tradition of freshness shows up again in the frequency of Wal-Mart visits. Chinese shoppers come more frequently than in the United States (though spending less), some more than twice a day. It is a good thing, then, that staffing levels are higher and labor costs lower to deal with the massive amount of traffic a Chinese Wal-Mart experiences (Watts, 2006).
Wal-Mart isn't the only American company interested in China, either. The sheer number of people in the country is enough to attract almost any business. Companies like Starbucks are setting up shop in the most unlikely of places, such as the Imperial Palace or the Gugong as The Forbidden City is commonly known in China (Watts, 2006). As their economy grows, and more Chinese people have the ability to spend their money, this pattern is sure to continue.
Wal-Mart is not the only influence on the Chinese economy, or the U.S. economy for that matter, but the influence can be seen. The trend towards getting goods manufactured in China is closely tied to their ability to do the job cheaply and well, though some claim it's at an advantage over other countries due to various methods of economic “cheating.” However, China as well as the rest of East Asia can help themselves and the U.S. improve economically. Wal-Mart appears to be both part of many problems in China and the U.S. and at the same time is bringing economic success. Whatever the case, it's hard to blame China for this economic boom. The Los Angeles Times (2006) says, “the real cause of grumbling about China is probably the remarkable phenomenon that the world's most populous nation has been booming steadily for 15 years...China shouldn't be blamed for engaging the global economy in a way that benefits us all.”
HOPR 1105
Wal-Mart and China: An Economic Success Story of Two Giants
When talking about Wal-Mart, one inevitably has to talk somewhat about China too. The two have become almost synonymous in recent years, because of all the investing that Wal-Mart has done in China, and the large number of products in Wal-Mart that are manufactured in China. Wal-Mart is a economically savvy corporation that has created a growing niche for itself in China much the way that it has in the United States. However, according to the Los Angeles Times (2006), there is a growing trade deficit, or the difference between what a country imports and exports, between China and the U.S., which has almost reached two hundred billion dollars in China's favor. This has resulted in a social backlash in the United States.
A Los Angeles Times (2006) editorial says:
China is an easy target for our economic grumbling. It is ruled by a Communist Party. Its currency, the yuan, does not float freely. It often looks like a monolithic machine, with factories of assembly-line workers churning out low-cost goods to fund its march toward world domination. It has about $800 billion in foreign reserves stashed away.
That is a very good summary of why many Americans see all this economic activity coming out of China as a bad thing. The Los Angeles Times (2005) draws many parallels between the Japan scare fifteen years ago and the present situation with China. At that time the Japanese economy grew very rapidly due to their manufacturing and exporting industry. This also caused a massive trade deficit with the United States. However, one of the key differences this time is that there are more political pressures added to the already large economic ones. China is a communist country with nuclear weapons, and tensions run high between China and many of their Eastern neighbors including Taiwan, South Korea, and Japan. All are close U.S. allies.
One of the concerns raised about U.S. economic dealings with China is the fact that some believe the Chinese are competing unfairly. The Chinese unit of currency, the yuan, has been kept artificially low in value in order to help the Chinese economy and is preventing the rest of the world from competing. In the opinion of the Los Angeles Times (2006), “there is no reason to believe that a different valuation of the yuan would seriously affect the galloping trade between China and the U.S.” However, according to Wonacott and Phillips (2003), many U.S. companies claim that it is hard to compete against China when the currency is “artificially weak.” The National Association of Manufacturers estimates that Chinese trade goods are forty percent cheaper than they should be, and says that China is to blame for many lost American jobs (Wonacott and Phillips, 2003). There seems no clear cut answer on just what help raising the value of the yuan would be, but it is certain that there are significantly more goods coming into the U.S. from China than there are going out.
So it seems that the effects of the current Chinese economic trade practices are bad for the United States. However, when the United States Congress mandated that the U.S. Treasury Department review the Chinese economic practices, China was found innocent of manipulating the yuan (Wonacott and Phillips, 2003). That was good news for China; if they had been found guilty of manipulation the United States would have had to enter into formal negotiations with China over the matter.
Wade, Professor of Political Economy at the London School of Economics (2003, p. 39) says:
I agree with the globalizers that economic growth is essential to raise the living standards of the world's poorer people (as are changes in our measures of economic growth to weigh environmental quality and public services properly). I agree that more open markets in the West for labor-intensive and land-intensive exports from developing countries would help, and that more foreign direct investment from the West, more technology transfer, is generally to be welcomed.
Wade (2003, p. 40) departs from what he calls the “liberal argument” for globalization when it comes to the widening absolute income gap between the West and the rest of the world, including China and India. So while this foreign investment in China is helping the Chinese economy overall, it doesn't exactly help everyone in China. On a global scale the rich are getting richer, and the poor aren't doing much of anything. In 2001, the World Bank said that the total number of people living on less than one dollar a day was 1.2 billion, though this is generally considered to be a low estimate (Wade, 2003, p. 19). The rural regions of China are falling prey to this process, since they are out of the investment loop that the rest of the country is currently in.
Wal-Mart really isn't concerned with all that, though. What Wal-Mart wants from China are the inexpensive goods that China can produce. Wal-Mart bought about $18 billion in goods from China in 2004, the last year for which it has released numbers (Kabel, 2006). This inflow of goods is one of the major reasons that Wal-Mart has been able to sell things at their low prices. However, some of the reasons behind China's economic success are not well known. During his lecture “Wal-Mart, China, and You” delivered at Williams College in Massachusetts, sociologist Gary Hamilton stated, “China’s ability to produce low-cost goods is not simply the result of cheap labor, as many people believe” (Mulvihill, 2006). Low wages are only partly responsible for drawing in China’s increased manufacturing business. Many other countries have cheaper labor than China, and China itself has its own share of outsourcing. What helps China the most is the infrastructure created by China’s large cities, ports, and highways. This “distribution network” seems right in line with the Wal-Mart values, and mirrors their own success at creating efficient distribution in the United States. It allows China to produce what is needed reliably and in large numbers. It also helps that China has a huge sea cost and many ports. China is also almost at the geographical center of the East, causing it to be the ideal place to put goods together from parts brought in from the surrounding countries.
Despite the huge investments made by Wal-Mart and other U.S. companies, China still has mostly Asian investments. In 2004, three-quarters of their $60 billion in Foreign Direct Investment (FDI) came from Hong Kong, Japan, Taiwan, Korea, and Southeast Asia (Barshefsky and Gresser, 2005).
In addition to importing Chinese goods for American consumption, Wal-Mart also now has a strong retail presence in the growing Chinese economy. Wal-Mart spokeswoman Amy Wyatt has stated that Wal-Mart could hire as many as 150,000 new employees in China over the next five years, and twenty new stores are being opened this very year, adding on to the existing 56 stores with 30,000 employees (Kabel, 2006). In fact, Wal-Mart's Chinese business is now growing faster than their U.S. counterpart. The 2005 increase in operating income for Wal-Mart's international division was 11.4 percent compared to the U.S. division's 8.2 percent (Kabel, 2006). Because Wal-Mart doesn't supply a breakdown of international financial results by country, the only number available is the total for international sales, which was $312.4 billion last year or 20 percent of Wal-Mart's overall net sales (Kabel, 2006). The company is also very optimistic about the future of the chain in China. Joe Hatfield, chief executive of Wal-Mart Asia, has stated that his company's Chinese operation could be as big as its 3,700 store United States business in the next twenty years (Watts, 2006). With a Chinese population of 1.6 billion, this isn’t at all surprising.
That's not to say Wal-Mart hasn't had a bit of a rocky road setting up their Chinese operations. Retailers, like Wal-Mart, that want to get into business in China need to adapt to get their products to sell. The idea that it won't sell if it's not fresh, is one of the ideas that they have had to adapt to in China. Turtles, bass, perch, carp, and shrimp are all sold live in the store, and customers enjoy netting them by themselves (Watts, 2006). This type of business doesn't seem like what Americans typically know as a store, but it is built on the Chinese tradition of markets. Because there was no way to keep the food from spoiling, it always had to be purchased as fresh and often as possible. The Chinese are simply into the habit of doing business this way.
Retailers in general, though, are growing in popularity for a number of reasons; one of the chief ones being the safety of their grocery departments. There is a growing consciousness of safety in China, particularly in the realm of food. Large grocery retailers like Wal-Mart offer a security that the traditional Chinese markets can't deliver (Watts, 2006). In addition, the tradition of freshness shows up again in the frequency of Wal-Mart visits. Chinese shoppers come more frequently than in the United States (though spending less), some more than twice a day. It is a good thing, then, that staffing levels are higher and labor costs lower to deal with the massive amount of traffic a Chinese Wal-Mart experiences (Watts, 2006).
Wal-Mart isn't the only American company interested in China, either. The sheer number of people in the country is enough to attract almost any business. Companies like Starbucks are setting up shop in the most unlikely of places, such as the Imperial Palace or the Gugong as The Forbidden City is commonly known in China (Watts, 2006). As their economy grows, and more Chinese people have the ability to spend their money, this pattern is sure to continue.
Wal-Mart is not the only influence on the Chinese economy, or the U.S. economy for that matter, but the influence can be seen. The trend towards getting goods manufactured in China is closely tied to their ability to do the job cheaply and well, though some claim it's at an advantage over other countries due to various methods of economic “cheating.” However, China as well as the rest of East Asia can help themselves and the U.S. improve economically. Wal-Mart appears to be both part of many problems in China and the U.S. and at the same time is bringing economic success. Whatever the case, it's hard to blame China for this economic boom. The Los Angeles Times (2006) says, “the real cause of grumbling about China is probably the remarkable phenomenon that the world's most populous nation has been booming steadily for 15 years...China shouldn't be blamed for engaging the global economy in a way that benefits us all.”
posted by Louise Mengelkoch at
12:45 PM
