China's Two-Headed Labor Problem

China’s Premier Wen Jiabao  says that workers should be treated better. Jiabao’s comments come in light of a series of strikes at Honda Motor (NYSE: HMC) plants and supplier facilities.

He should be careful that his wish may come true.

The central government is faced with two conflicting problems which means that it is not likely to solve either one of them. It has to show its support for its huge manufacturing labor force which numbers in the tens of millions. These workers also need to be docile to keep the big Chinese export machine humming.

China depends to some extent on foreign companies to keep employment high. Firms such as Honda cannot afford disruption caused by unruly unions.

The People’s Republic also knows all to well that a high-paid workforce means that it will be more challenging to export goods at attractive prices. China displaced Japan three decades ago as wages rose in that country.  China also already faces pressure from the US and EU to revalue the yuan to level the global trade playing field. Higher cost goods coupled with currency related trouble could undermine the Chinese manufacturing economy very quickly.

The premier and his colleagues are certain to treat Chinese workers with a certain duplicity. They can tell them that they deserve higher wages. They can point to foreign companies  including Honda as forces bent on keeping labor costs down. In an odd way, Honda is an ally of the central government. It is the tip of a sword that the Chinese government needs to keep labor costs low or give up the significant advantages it has in the global trade market place. Honda other foreign manufacturers can fight for lower wages. The central government cannot.

Douglas A. McIntyre

Sponsor: 5 best investments for 2010 – The next nine months represent a bold new era for investors.