Here’s a stunning number: The Census Department reported on Thursday that the U.S. tradedeficit declined to its lowest level in a year, to $56.5 billion. But Calculated Risk observesthat the bilateral trade deficit with China rose to an all-time high of $27.8 billion. Fully halfof the U.S. trade deficit is accounted for by one country — China.The first conclusion to take from this is simple: No wonder China’s government announced a$586 billion economic stimulus plan last weekend. China exported $33.1 billion worth ofgoods to the U.S. in September, but how shaky is that crown? The U.S. economy is in freefall.The second takeaway is a little more subtle. Among all the bad economic news today, I sawone headline that was tinted optimistically: “Wal-Mart Remains Upbeat.” The retailerreported a 9.8 percent rise in profits for the third quarter of 2008, and CEO Lee Scottprofessed himself “optimistic about the upcoming holidays.”Wal-Mart’s recipe for success is no secret:Wal-Mart, which is often viewed as a barometer for the retail industry, has benefited from itslow-price position as shoppers curtail discretionary purchases and seek bargains. In contrast,sales at department stores and specialty retailers have been lagging, in part because of theirbigger exposure to discretionary merchandise.But how does Wal-Mart get the lowest price? In significant measure, by sourcing productionof its goods in China. A rough estimate holds that fully 10 percent of the annual trade deficitbetween the U.S. and China is accounted for by one company — Wal-Mart.The Wal-Mart effect may partially explain the seeming disjunction between the U.S.’s failingeconomy, shrinking overall trade deficit, and yet growing trade gap with China. The worsethings get in the U.S., the more Americans are relying on goods “made in China” just to getby.The Census Department reported on Thursday that the U.S. trade deficit declined to its lowest level ina year, to $56.5 billion. But Calculated Risk observes that the bilateral trade deficit with China rose
to an all-time high of $27.8 billion. Fully half of the U.S. trade deficit is accounted for by one country -- China.Wal-Mart used to sell us only goods made in America. Now they sell us goods primarily made inChina. "Always Low Prices" they said. But now Wal-Mart has quantified their generosity, claiming tosave each of us $2,500 per year. Those savings are really handy when youve lost your job, or if youactually draw a "generous" Wal-Mart wage. Lets look at a few other statistics. FIRST, a salarycomparison.* The average annual salary of a Wal-Mart employee = $10,000. ($8.23 per hour times 24 hoursactually worked, on average, per week). (These are 2005 numbers, but you can be generous andindex them for theoretical, but probably non-existent wage gains for the last 2 years). * The averageper capita income for Americans = $42,000 * The Wal-Mart vs. U.S. wage differential is $32,000.BUT, you can buy more from Wal-Mart/China and save $2,500. And then you have a net LOSS of$29,500.SECOND, a trade deficit examination, courtesy of the Economic Policy Institute.* Our 2006 trade deficit with China was $235 billion. Wal-Mart, a single company, caused anastounding 11% of that deficit with $27 billion in imports.THIRD, a job loss examination, again courtesy of EPI.* If we produce for export, jobs are created. But if we import goods previously produced here, jobs arelost. In 2006, * Our U.S. trade deficit caused a net loss of 2.7 million jobs in 2006. This is because526,000 jobs were created because of exports, BUT nearly 3.3 million jobs were lost due to imports. *The Wal-Mart deficit caused 196,000 net job loss in 2006. Wal-Mart is responsible for 11.2 percent ofAmericas net trade-related job loss from 2001-2006. But those lucky unemployed folks saved $2,500per year if they shopped at Wal-Mart.The US is pushing India to allow foreign direct investment (FDI) in retail at the highestlevel. Last month, President Barack Obama told PTI: “In too many sectors, such as retail,India limits or prohibits the foreign investment that is necessary to create jobs in bothour countries.” And some weeks before this, US Secretary of State Hillary Clinton flewdown to Kolkata to persuadeMamata Banerjee to drop her opposition to FDI in retail.Such lobbying by the top American leadership can only be for a company that carriesunprecedented clout: Wal-Mart, the world’ largest company and retail chain with annualsales of $405 billion, and employing 1.3 million people in the US and 2.1 millionworldwide.The pressure on the Indian government is such that the Congress party has forgotten itsown struggle against British Raj, the ideas that still motivate the political class in thecountry. It is at its wits end trying to justify a policy that no one really believes in butfeels compelled to push through.
Wal-Mart imports $30 billion worth of manufactured goods, mainly electronics, FMCG products and toys, fromChina. Getty ImagesThe clearest argument against opening up retail is that the suffering caused by the loss oflivelihoods in small retail stores would far outweigh any possible gains to the economy.Not only that, Wal-Mart could also benefit the Chinese manufacturing sector more whileforcing our own factories to close down.Retail is the second largest employer in the country after agriculture and some 40million families depend on business from small kirana stores, rediwallas, or hawkerswho sell knickknacks on the roadside. With very few jobs being created inmanufacturing, the small and tiny retailer is a thinly disguised form of unemployment orunderemployment. For many who aren’t able to get a decent job, it is the only option — away out of hunger and despair.The government’s decision to bat for big retail mainly relies on a study-cum-surveyordered by the Prime Minister’s Office (PMO) and conducted by the Indian Council forResearch on International Economic Relations (ICRIER) on the impact of big brandsand retailers. Their report, Impact of Organised Retailing on the UnorganisedSector, submitted in 2008, was the basis on which the government proposed opening upretail for foreign investors. Surprisingly, this survey wasn’t widely disseminated amongeven members of parliament.The ICRIER study says: “The growth of organised retail will enhance the employmentpotential of the Indian economy…. it will drive the growth of a number of activities inthe economy which in turn will open up employment opportunities to several people,”including “food-processing, textiles and apparel, construction, packing, IT, transport,cold chain, and other infrastructure.” The government maintains that 10 million newjobs will be created over the next three years after the retail giants come in.
This is highly contestable. There is already a growing organised retail sector in India withlarge conglomerates such as Reliance, Tatas, Bharti, and the Aditya Birla group runningthousands of stores, apart from Pantaloons, Spencers and Shoppers Stop. According tomanagement consultancy AT Kearney, these Indian retailers account for around 7percent of India’s retail business and are growing much faster than the small sector.While the growth of Indian companies in retail is to be welcomed, bringing with it manyof the changes needed in supply chain management, the giant multinationals are anothermatter.The Indian retail market generates close to $409 billion annually, about the same asWal-Mart’s revenues of $405 billion. But this is the difference: in India 40 million peopleare employed, 20 times the 2.1 million people employed by Wal-Mart, or 10 times thefour million employed by the top five global retail giants. A study on FDI in India’s RetailSector,by the Centre of Policy Initiatives, says that if large FDI retailers like Wal-Mart,Metro, Carrefour and Tesco “were to take 20 percent of the retail trade, as HindustanUnilever anticipates, this would mean employment of just 43,540 persons, displacingnearly eight million.”While adding jobs in related sectors, the supermarket expansion leads to massiveemployment loss in the currently inefficient value chain of mandis, buyers, wholesalers,distributors and transporters. Like the East India Company in the 19th century, Wal-Martcould buy cheap and sell dear to make huge profits by controlling both ends of the valuechain. Also misleading are contentions that its efficiencies would give farmers higherprices at a lower cost to consumers.In a recent article in Mint, Himanshu of the JNU writes: “One of the studiescommissioned by the US Congress in 2008 was on the linkage between farm gate andretail prices. The average value of farm share (the share of total retail price received byfarmers) declined from 41 percent in the 1950s to around 35 percent in the 1970s, andthen declined sharply after the 1980s to only 18.5 percent in 2006…. For the record, anIndian farmer gets anywhere between 60 percent and 70 percent of the retail price forrice and wheat. The percentage varies, but it is upwards of 50 percent for most of fooditems, including eggs and poultry.”Equally damaging would be the effect on manufacturing. The company is notorious fordriving down costs in the manufacturing sector. According to a report by the AmericanFederation of Labor, in 1995 just 6 percent of Wal-Mart goods were imported, but“today 60 percent of its total merchandise is imported from more than 6,000 suppliersin 63 countries, with China at the top of Wal-Mart’s supplier list.”Wal-Mart imports $30 billion worth of manufactured goods, mainly electronics, FMCGproducts and toys, from China. Unless Indian manufacturing is made competitive withthat of China, the advent of the retail giant could mean the closure of many Indianmanufacturing plants as well.
Already India has a huge trade deficit of $28 billion with China. With Wal-Mart’s entryinto the country, there would be a flood of low-priced Chinese imports through itsoutlets, further distorting the trade balance, impacting factories and manufacturing jobs.The US- based Economic Policy Institute estimates that “Wal-Mart’s increased tradedeficit with China eliminated 133,000 manufacturing jobs, 68 percent of all jobs lost. Onaverage, 77 US jobs were eliminated for each one of Wal-Mart’s 4,022 US stores in2006,” as its size gives it power to drive down manufacturing costs. India would not faremuch better.Unless manufacturing is reformed to make it competitive with the best in the world(read: China) the retail giants cannot be expected to play the role of catalysts. In anewspaper article last December, senior BJP leader Arun Jaitley wrote that “the time forallowing FDI in the retail sector in India has still not come… India needs manufacturingsector reforms in the first instance, so as to enable us to develop into a low-costmanufacturing economy … In the absence of these reforms, international retailers will beselling the products of low-cost economies, leading to an adverse setback to our alreadychallenged manufacturing sector.”