China labor gets less cheap

New labor regulations designed to protect China's workers are already having an impact, according to an American-based watchdog.

By Jonathan Adams
Newsweek Web Exclusive, Feb 14, 2008

Its Communist ideals aside, China hasn't exactly been known as a bastion of workers' rights. But the country's new labor regulations—which took effect Jan.1—are designed to better protect workers' rights, including signed, written contracts for all employees. The new mandates have also hiked labor costs. Taiwan, for example, is rife with anecdotes of smaller Taiwanese manufacturers who have seen margins squeezed to the limit because production costs on the mainland are now higher.

Auret van Heerden, president and CEO of the Washington, D.C.-based Fair Labor Association, recently visited China for a first-hand look at the law's impact. NEWSWEEK's Jonathan Adams spoke with him about how the rules are already empowering Chinese workers and why he says China is not the world's worst labor rights offender. Excerpts:

NEWSWEEK: How big an impact did foreign labor rights groups such as yours have in pressuring China to pass this labor law?

Auret van Heerden: Frankly, very little. I think obviously the Chinese government does pay attention to what the world thinks and says about labor conditions in China. But personally I feel that the motivation for this was almost entirely internal. [The government] saw very obvious signs of discontent and unrest. For example, mines and construction sites have been getting a lot of attention for several years now. They realized the sources of the discontent: the cleavage between urban and rural, employed and unemployed, the domestic versus the export sector. Also the problems where workers were clearly being abused. All of this represented a source of social instability, and I think they just decided they couldn't afford it. So they decided to get at one root cause: the lack of contracts.

Firms are complaining that their labor costs have risen as much as 40 percent.

I don't think it's that dramatic. That's quite an exaggerated number that lumps together several things. Wage rates are also going up because labor markets are tight; that's been happening for the last couple of years. Sure, you're going to have to register a lot of workers now, pay the minimum wage, give benefits. But this will lead to a much more stable and productive workplace. Before, in some places we've seen 100 percent labor turnover per year. We've never captured the costs that entails in training. Firms have been bleeding ridiculous amounts of money because they've had such an unstable workforce.

What's the reaction from firms you've talked to there?

I'm definitely hearing a lot of complaints about the way in which costs are going up. The government is placing a high burden of social costs on [firms], and they would like the government to bear more of the social security costs. The cost pressures are tremendous. There's no doubt about it. I just don't think the law alone is leading to a 40 percent jump. It's a series of pressures. For the low-cost assembly business, some of them will have to move [out of China], definitely. But I don't think the Chinese government is that concerned. They want to promote high value-added production, and they don't think China's economic future lies in low-cost assembly. They want to see businesses move up the value chain.

China has numerous laws on the books that aren't enforced. How much of a real improvement in labor standards do you expect?

Right. Implementation and enforcement are traditionally the weakest points of labor law in China. But I've never seen a law attract so much public attention. At the factory level people are talking about it everywhere. One of the things about the law is it doesn't rely on outside labor enforcement. Once you've got a written contract, there are all sorts of avenues open to a worker: the labor department, labor tribunals, or through other grievance mechanisms. So what you're seeing here is a change of approach where the government is saying, "We'll create a proper contract between workers and employers and give workers the means of enforcing their own contracts."

The effect has been immediate. There have already been strikes about it; there have been employers who have panicked about the commitment the law would require, so they've tried to lay off or outsource workers. The workers struck, saying, "No, we're not going to accept that." There have been a couple of high-profile cases of strikes against dismissal involving Hong Kong-listed companies.

Take the richest woman in China [Zhang Yin, CEO of Nine Dragons Paper], who owns a huge paper company. She tried to outsource guards and security cleaning services, and didn't want to give contracts. The workers struck. It's been an emblematic case: if one of the richest and most powerful businesswomen in China couldn't sidestep the law, it's a good indication of the signal the government wants to send.

Given the changes in China, are you now turning more attention to labor standards elsewhere, like in Vietnam?

We've always looked at all countries equally. If you analyze our audit results, we find a worldwide average of 17 or 18 violations per factory. These are from unannounced independent audits, which give a good picture of what's going on in a factory. In South Asia there's an average of 37 violations per factory. The most problematic countries are India, Bangladesh, Pakistan and Sri Lanka. China is actually slightly below the international average—about 15 or 16 [violations per factory].

How optimistic are you that those numbers will go down in China?

I am optimistic in the sense that I think that there's much more consciousness of this law than others. My concern, at a very practical level, is that factories need to procure management systems to allow them to operate in accordance with this law. There aren't a lot of places to get those systems. It will take some time for companies to adapt.

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