1. Contemporary Issues in Economics
(ECON1019) Term Paper:
Why Can’t Canadians Compete With Lower Labour Cost
Countries Such as India and China?
Why Can't Canadians Compete with Lower Labour Cost Countries Such as India and China? Page 1

2. Why Can’t Canadians Compete With Lower Labour Cost Countries Such as India and China? The quick
answer is because the low cost of labour is not a competition Canada wants to win. In fact this isn’t even a
sustainable advantage that countries like India or China want to maintain. Recently, the Chinese
government had deliberately discouraged the development of the textile and apparel production sector as
well as its further expansion in exports because they are regarded as low-profit margin, resource-intensive,
and without a promising future. As a result of rising production costs and slower overseas demand growth,
over one-third of Chinese textile and apparel manufacturers in southern China shut down in 2008, causing
hundreds of thousands of workers to lose their jobs. These unemployed workers demonstrated on the streets
asking for their unpaid wages and posed great challenges to local social stability. This has made the Chinese
government realize that as a country with 1.3 billion people, it cannot afford to give up a labor-intensive
industry that still plays important roles in maintaining the steady growth of the national economy and social
stability. It may take China a much longer time than any other economies to upgrade and transform its
textile and apparel industry from being labor intensive to one that concentrates on capital and technology
intensive subsectors. (Lu, 2009) Canada has been in the capital and markets business for longer but
China and India will catch up if they want to create a sustainable economy. Low wages are a product of
social and economic infrastructure not a goal.
Using Wal-Mart as an example, we can see that low prices are an enormous benefit to customers, especially
those earning low wages who spend a higher percentage of their incomes on the type of goods that are
available at Wal-Mart. These low prices can be thought of as equivalent to a wage increase or an income
subsidy.
Wal-Mart' s effects on other stakeholders in society are equally powerful. Because Wal-Mart is by far the
largest retailer in the world, it has the power to dictate terms to most of its suppliers. It squeezes them on
prices and costs, often forcing them to operate in different ways. (Capellli, 2006)
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3. Charles Fishman' s book , The Wal-Mart Effect, shows the powerful influence of this pressure on suppliers,
many of whom believe they have no choice but to shift production operations out of the United States to
cheaper locations like China in order to meet Wal-Mart's demands for lower prices.
Literature for example by Kamin et al. (2006), indicates that there is little evidence that trade with China and
other poor but rapidly industrializing nations has had a large impact on prices in the rest of the world. Such
studies cannot disentangle demand shocks from supply shocks abroad and, therefore, cannot identify the
effect of import competition on inflationary pressure. (Auer, 2010)
Facts and studies such as these indicate that low wages which equate to low prices do not have long term,
sustainable benefits to society. China is trying to raise their quality of living while Canada risks lowering
their quality of living by regressing into a model of business practiced with great success by companies such
as Wal-Mart.
New academic research shows that when Wal-Mart moves into a community, it actually lowers wages in
those communities. More important, and perhaps more surprising, is that it lowers overall employment
levels as well. Despite the fact the new store brings lots of new jobs to the community, the smaller, less
efficient competitors employed more people. The lowering of wages, however, is the more controversial
part of the findings. Its size in the labor market in addition to its low-cost operations policies, Wal-Mart
places enormous pressure on higher wage competitors to cut their labor costs, as well.
Wal-Mart' s well-known and aggressive opposition to unionization -- going so far as to close facilities that
successfully unionize -- has received attention over the years, and more recently, stories in the press have
highlighted various violations of employment laws.
But the company’s policies toward health care -- offering employees relatively little access to these benefits
-- have created the most recent controversy. Many states that offer health-care subsidies to low-income
individuals and families have discovered a disproportionate number of participants employed at Wal-Mart.
Employees show up on the rolls of other low-income assistance programs as well.
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4. Some say the programs are working as devised; others say that a huge and profitable company should not
have its employees on public assistance -- which such assistance actually profits the company.
One tough question directed especially at human resources is whether Wal-Mart -- which has relatively
small labor costs of about 8 percent to 10 percent of operating expenses -- should be as relentless in
squeezing costs out of its labor force as it is in squeezing its suppliers.
The bigger question is how to think about Wal-Mart’s responsibility to stakeholders in society other than its
customers and, ultimately, its shareholders. The business strategy it pursues in many ways seems like classic
market capitalism: Lower costs, lower prices, reap the benefits. (Capellli, 2006)
Globalization really could work for everyone's benefit. Developing nations would continue to attract
investment and jobs and develop their own innovative industries but working Canadians would be able to
compete for good jobs and pay as well. Shared Economic Growth is about enabling working Canadians to
compete, not about protecting working Canadians from competition abroad. Working Canadians can
compete and prosper if we just cut through the corporate and personal income tax chains that hold them
down. (n.d., 2011) Tax savings are a tactic that the 2011 federal budget is implementing within its plans.
Canada has always been a trading nation. The prospect of selling our goods to 1.3 billion consumers is
intoxicating. So, too, is the prospect of cheap imports. But China's economic revival poses obvious problems
for both countries. How do you compete against a giant that pays its workers a fraction of what they earn in
Canada? The challenge for both countries is to figure out how to manage the economic and social
dislocations. (CBC, 2006) It would appear that we both need and can benefit from each other. A method of
addressing these dislocations would be to collaborate and appreciate how each country complements the
other and focus on some of our comparative advantages. Sprott told CTV's Power Play, the federal and
provincial governments must address productivity-killing protectionism, which has created a
"competitiveness problem" in Canada. (Wyld, 2011)
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5. “Historically, protection has caused economic slowdowns and freer trade has lead to economic growth, so
that’s the most important reason in the global economic context for resisting protectionism,” Mr. Van Loan
said. “For Canada, which is two-thirds trade dependent, our economic recovery depends on being able to
trade freely and to seek further trading opportunities.” (Comte, 2010)
Economic output has also returned to pre-slump levels thanks in large part to continued consumer spending.
However, in light of consumer debt levels now reported to be at all-time highs, and the recent tightening of
mortgage rules, the bank expects spending to slow this year. In its place, Carney says businesses will need to
both invest more and export more in order to bolster the economy going forward.
The country needs to continue to develop new creative economic policies to assure that workers fare well
during this transition and that the next several decades do not repeat the experience of the past twenty or
thirty years in which nearly all of our productivity advances ended up in the pockets of so few. For less
skilled and lower paid Canadians, there is need to restructure the labor market for their services so they do
not fall further behind the rest of the country. Some of the policies that can help them through this period are
.tried and true.: a strengthening of rights at work that would allow them to gain a share of the profits of firms
in nontraded goods markets through trade unions; higher minimum wages; expansion of earned income tax
credit; and provision of social services such as health insurance that makes them less costly to hire. Given
the doubling of the global labor force, these workers will need greater social support in advancing in the
economy than in years past.
Collaboration at the global level adopting best practices and education starting with individual financial
literacy will be fundamental moving forward. An ethical social conscience based on mutual benefits for all
stake holders can move the world out of the second Great Depression with potential for improving the
quality of life for all possibly eliminating poverty. Canada is in a good position to play a significant role in
this new future. We don’t have room for the Wal-Marts, Enrons or MCI-World Coms of the past.
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6. Perhaps Richard Freeman has stated the best case scenario most clearly. In the good transition, India,
China, and other low wage countries close the gap with the US and other advanced countries in the wages
paid their workers rapidly as well as in their technological competence. Their scientists, engineers,
entrepreneurs develop and produce new and better products for the global economy. This reduces costs of
production and dominates the declining terms of trade in the advanced countries, so that living standards get
better. The US and other advanced countries retain comparative advantage in enough leading sectors or
niches of sectors to remain hubs in the global development of technology. The world savings rate rises so
that the global capital labor ratio increases rapidly. As US GDP grows, the country distributes some of the
growth in the form of increased social services and social infrastructure. national health insurance, for
instance -- or through earned income tax credits so that living standards rise even for workers whose wages
are constrained by low wage competitors during the transition. (Freeman, 2006)
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7. Bibliography
Auer, R. a. (2010). The effect of low-wage import competition on U.S.inflationary pressure. Journal of
Monetary Economics , 491, 503.
Capellli, P. (2006, March). Wal-Mart and the obligations of business. Retrieved June 2011, from Human
Resource Executive Online: http://www.hreonline.com/HRE/story.jsp?storyId=4615496
CBC. (20??, Month? Day?). china-canada-relations.html. Retrieved June 9, 2011, from
www.cbc.ca/news/background/china: www.cbc.ca/news/background/china/china-canada-relations.html
CBC. (2006, November 16). Milestones in chinese-canadian relations. Retrieved from
http://www.cbc.ca/news/background/china/china-canada-relations.html
Comte, M. (2010, June 22). Canada warns G20 against protectionism. Toronto, Ontario, Canada.
Dube, R. (2009, April 3). 'Made in canada' - via china. Retrieved 2011, from The Globe and Mail:
http://www.theglobeandmail.com/life/article769114.ece
Freeman, R. (2006). The great doubling: the challenge of the new global labor market. University of
Berkeley.
Isgut, A. (2006). The Effect of Imports from china on canada’slabour markets: your wages are not set in
beijing . Toronto: University of Toronto.
Lu, S. D. (2009). The outlook for U.S. – China textile and apparel trade in 2009: from the trade policy
perspective. University of Deleware.
n.d. (2011). How shared economic growth builds middle class market power. Retrieved June 2011, from A
proposal for tax reform: http://www.sharedeconomicgrowth.org/middleclassmarketpower.html
Schneider, R. (2005). A message to north american manufacturers: save your factory. Hoffman Estates:
FANUC Robotics America, Inc.
Sexton, R. &. (2007). Exploring economics (first canadian edition ed.). Toronto: Nelson Thompson Canada
Ltd.
Wyld, A. (2011). Strong loonie, low productivity restraining recovery. Strong loonie, low productivity
restraining recovery. Ottawa: The Canadian Press.
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