Politics from the Palouse to Puget Sound

Wednesday, December 05, 2007

Wal-Mart and China: The Truth

Is Wal-Mart unfairly exploiting Chinese workers and companies through its "monopsony power" (a market with only one buyer) and offshoring American jobs as critics claim? Of course not, that's an absurd notion.

Emek Basker, from the University of Missouri, and Pham Hoang Van, of Baylor University, released a scientific study in May 2007 titled, "Wal-Mart as Catalyst to U.S.-China Trade."

They concluded:
There is a common perception that Wal-Mart and trade with China are related. But the discussion of the relationship betweenWal-Mart’s growth and import growth tends to focus on Wal-Mart’s monopsony power implied in the often-made claim that Wal-Mart “forces” suppliers to move production overseas in order to cut costs. In a model with increasing marginal cost, a monopsonist who cannot price-discriminate depresses production to extract a lower input price. Such a model counter-intuitively implies that in the absence of Wal-Mart and other large chains, imports would have grown at a rate even faster than the one we have observed over the past two decades.
Basker and Pham found that it was improved technology and liberalization of trade with China that have driven Wal-Mart's growth and created a two-way relationship between the chain’s size and its sourcing choice. If you want to blame anyone for loss of American jobs, blame Bill Gates and Congress, not Wal-Mart. They just took advantage of the system, as any business would do, and in turn have benefitted millions of Americans through lower prices.

But of course, globalization of trade is not bad. It's good for all concerned. In The Wal-Mart Revolution, Richard Vedder and Wendell Cox stated:
World economic and trade meetings usually attract demonstrations, sometimes violent ones, against "globalization." One of the principal claims is that the international factories supplying products to companies such as Wal-Mart and General Motors drive down the wages and standards of living in their low-income host countries. If this were so, then it should be evident in the economic data. Where there is significant manufacture of products for American and Western European markets, gross domestic product growth per capita should be falling. A review of the five low-income Asian nations with strong export growth indicates the opposite. From 1999 to 2005, world real GDP per capita rose by an average of 19 percent. By comarison:

  • China increased the value of its exports 229 percent. At the same time, its per-capita real GDP rose 53 percent.

  • Indonesia increased the value of its exports 49 percent. At the same time, its per-capita real GDP rose 10 percent

  • India increased the value of its exports 79 percent. At the same time, its per-capita real GDP rose 56 percent.

  • Bangladesh increased the value of its exports 57 percent. At the same time, its per-capita real GDP rose 22 percent.

  • Vietnam increased the value of its exports 139 percent. At the same time, its per-capita real GDP rose 29 percent.

  • Each of the export-driven nations has experienced greater economic growth in income - significantly above the world rate. The factories provide jobs and income that would not exist if the big-box stores weren't selling their products. China, India, Indonesia, and their people would be worse off without them. Moreover, the countries that import their products, such as the United States, have been better off as well. Economic growth in the United States has not slowed with rising globalization, and lower prices from imported goods at places like Wal-Mart have brough billions of dollars of consumer surplus and welfare to ordinary Americans - aspillover effect of the internationalization of retail trade.
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