Does The New Labor Law Lead To Difficulties In Shoemaking Industry?

At the recent two sessions, some entrepreneurs criticized the newly implemented "labor contract law" and thought that the cost of employment increased, which led to business difficulties.

This argument has also been supported by some economists and jurists.

Indeed, in recent years, the operation cost of enterprises has increased dramatically. Some labor-intensive export processing enterprises, especially those in the Pearl River Delta region, have been in a predicament, and even there has been a phenomenon of enterprise failure and foreign capital divestment.

But what we need to carefully distinguish is the extent to which the current difficulties faced by export processing enterprises are related to the labor contract law.

On this basis, let's answer a more fundamental question: is China's "labor contract law" really beyond international practice?

What is the impact of the implementation of the labor contract law?

What is the relationship between the difficulties in operation of enterprises and the labor contract law?

Objective analysis of the main factors leading to the operation difficulties of export processing enterprises are as follows: first, the prices of raw materials and upstream products have risen sharply.

Comprehensive calculation, because of the rising prices of raw materials and upstream products, the production cost of domestic enterprises has increased by 20% to 30%, which has become the first factor to drive up the cost of enterprises.

Because the labor-intensive processing industry is originally a small profit, which is far more sensitive to the cost rise than the manufacturing industry.

Therefore, the impact of rising prices of raw materials and upstream products on the labor-intensive processing industry is no less than the impact on manufacturing and resource intensive industries.

Second, changes in domestic and foreign trade policies.

In recent years, due to the continuous enlarging of the international trade surplus and the pressure of RMB appreciation pressure, China has been forced to adjust its foreign trade export policy.

The basic direction of adjustment is to restrict the export of labor-intensive and low processing industries.

This has created a great cost for these enterprises, especially for textile shoes and hats, jewelry, leather, chemical, feed and other traditional industries with the greatest impact, and these enterprises are concentrated in the Pearl River Delta region.

Third, the acceleration of RMB appreciation.

Not to mention the impact of RMB appreciation on market share, we only consider the exchange factors. The appreciation of the renminbi directly means that the export processing industry will eventually be offset by the profits measured by the renminbi.

Take the export oriented textile and garment industry as an example: in 2006, the textile and garment industry in order to offset the impact of RMB appreciation, the export price increased by 7.37%, and the appreciation rate of RMB was 3.35%. In a simple calculation, the profit of textile industry could still increase by 4.02%. In 2007, the export price of textile and garment industry increased by 7.26%, the appreciation rate of RMB reached 6.85%, and the profit growth rate of textile industry dropped to 0.41%.

Fourth, raising the cost of financing.

First, while asset prices such as stocks and real estate are skyrocketing, investment profits of export processing enterprises are very low.

Under such circumstances, the capital with the rate of return is the only standard, which flows faster from the export processing enterprises with low profit margins and flows into the stock and real estate industry.

The two is the tightening monetary policy of the central bank, which further exacerbates the financial difficulties of export processing enterprises.

Commercial banks had expected that small and medium-sized export processing enterprises would not be optimistic about the reasons for the rising costs, the appreciation of the renminbi and the impact of the US subprime mortgage crisis, and thus raised the credit risks of these enterprises. The central bank strictly restricted the scale of loans, and in order to maintain profits, commercial banks were more active in shrinking loans to these enterprises.

Fifth, the impact of the US subprime mortgage crisis.

The subprime mortgage crisis has hit the US economy, and has also hit the US's demand for Chinese goods.

Since the second half of last year, orders for textile and garment industry in the Pearl River Delta region have been greatly reduced. Some enterprises that export more than 80%-90% of the total products in the US have been cut down or halt.

In January 2008, China's exports to the United States increased by only 5.4% over the same period last year, down 22.7% from the same period last year.

In addition to the above factors, there is another factor in the difficulty of export processing enterprises: the rise in labor costs.

However, it must be clearly pointed out that this rise was not brought about by the labor contract law, which came into force only on the 1 January of 2008, but brought about by the price shortage of labor shortage caused by the widespread shortage of migrant workers, including the Pearl River Delta and the Yangtze River Delta, which began in 2002.

Taking the PRD as an example, the shortage of migrant workers actually appeared in 2002: the first time there was zero growth in the migrant workers who entered the Pearl River Delta.

In 2004, the shortage of migrant workers concentrated in the Pearl River Delta.

In Dongguan alone, the number of migrant workers is 300 thousand, especially in industries such as electronics, toys, clothing, computers and shoes.

Since 2005, the shortage of migrant workers has been further deepened. Among them, the gap of migrant workers in the Pearl River Delta reached more than 2 million in 2006.

In order to retain or recruit migrant workers, the export processing enterprises in the Pearl River Delta region have been raising wages.

In the past three years, the wages of migrant workers in coastal areas showed a "three jump", with an average annual growth rate of 100 yuan, and some provinces rose by nearly 20%.

That is to say, the supply and demand situation of the labor market determines the rise of wages and treatment of labor force in export processing enterprises since 2004, which has nothing to do with the labor contract law, which was passed in May 2007 and was implemented in January 2008.

Because of the above factors, export processing enterprises have shown signs of failure since the middle of 2006.

Take footwear industry as an example, in the early September 2007, the China footwear trade development report pointed out that due to a series of problems such as RMB appreciation, labor costs rising, raw material prices rising, tax rebate rate reduction, processing trade policy adjustment and so on, China's footwear industry is facing severe domestic and international situations, and some shoe enterprises are even forced to stop production and collapse.

Some foreign capital divestment also started in early 2007. In March 28, 2007, Hongkong Ta Kung Pao reported the massive withdrawal of Hong Kong capital to the Yangtze River Delta or the mainland in the Pearl River Delta region. Korean capital divestment was earlier. In the first half of 2006, some Korean capital closed the small and medium-sized processing factories in the Pearl River Delta region or withdrew more than 200 million US dollars.

Therefore, the failure of enterprises and the withdrawal of foreign capital are not the only ones after the implementation of the labor contract law.

China must pass the "labor contract law". In the long run, China must pass the "labor contract law".

It is almost the only way to dissolve the internal and external imbalance of China's economy at present.

From the perspective of solving the internal imbalance, the promotion of laborers' treatment is conducive to expanding domestic demand in China.

Almost all economists admit that the lack of domestic demand in China's economic growth is becoming more and more serious.

The reason is that the majority of the wage earners earn very little because of the slow increase in their incomes.

If we raise the wages of labourers, and at the same time implement various laborers' Safeguards under the requirements of the labor contract law, there will of course be a great improvement in the total social demand. China's economic growth does not need to rely too much on investment and foreign trade.

From the perspective of solving the external imbalance, China's foreign trade surplus has been expanding and the pressure of RMB appreciation has been accumulating. The reason is also that China's economic growth is insufficient in consumption demand, and the products it produces are too dependent on the digestion of the international market.

And the insufficient consumption demand is due to the lower relative income of labourers.

That is to say, the root of the external imbalance lies in the internal imbalance. The reason for the internal imbalance lies in the relative low income of the workers.

Moreover, at present, there is a vicious circle between the relative low income of workers, the external imbalance and the internal imbalance: low relative income of workers leads to low social purchasing power, low social purchasing power, and insufficient internal demand, which leads to products dependent on exports. Products depend on exports will inevitably lead to the expansion of foreign trade surplus and increase of foreign exchange reserves. At the same time, in order to lower prices and gain competitiveness in the international market, the labor cost can be further reduced in the domestic market, and the relative income of workers will be further lowered, and the internal imbalance will be more serious.

To break this vicious cycle, we can only rely on raising the relative income of laborers, so that China's economic growth will enter another benign cycle, that is, "raise wage income" - "workers' affluence" - "rising purchasing power" - "total social demand rising" - "internal balance" - "products no longer rely on external market digestion" - "external balance".

Once this benign cycle is formed, it is also very beneficial for enterprises at the micro level, because once the economic prosperity depends on the internal demand and the total demand of the society is flourishing, corporate profits will be guaranteed.

What is worth mentioning is that China's promulgation and implementation of the labor contract law is of worldwide significance.

Internationally, there is a general view that China's competitiveness in the international market, which has been constantly reducing the relative cost of labor, has not only reduced the labor treatment in most developing countries, but also reduced the treatment of workers in the relatively low level industries in developed countries.

Many sweatshops in the Pearl River Delta region have reduced the welfare and security level of the world's labors, and reduced the labor rights worldwide.

This is obviously contrary to the "people-oriented" and the wave of progress in the world.

If China's development model really wants to achieve its contribution to human progress, it is the only way to give workers more freedom and higher welfare through the labor contract law and pursue a "human economic growth".

The key lies in a balanced interest expression platform. During the two sessions this year, some entrepreneurs' representatives questioned the voice of the labor contract law.

I agree with the view that these entrepreneurs' representatives are not wrong in expressing their interest demands from the interests of entrepreneurs.

But the question is whether there are commensurate representatives of the working class to fully express the interests of the workers.

Obviously, compared with the remarks made by some entrepreneurs and representatives of economists who oppose the labor contract law, there is little public platform for the labour class to express their views on the labor contract law.

It can be expected that over a long period of time, the operational difficulties of some Chinese enterprises, especially labor-intensive export processing enterprises, will be further deepened.

The reason is that the price increase of raw materials and upstream products will further aggravate; the speed of RMB appreciation is accelerating; the US subprime mortgage crisis is further fermented and spread; the tight monetary policy has just begun.

In the face of internal and external attacks, some business owners and some economists will more vigorously promote the revision or adaptation of the labor contract law.

This is because the above factors that make the operation of enterprises more difficult are those they can not control, even if they want to attack, they have no specific targets to attack. However, in the context of Chinese legislation and law enforcement still being affected by administrative and other aspects, the labor cooperation law becomes the only thing they can do.

Therefore, I believe that any amendment to the labor contract law or the interpretation of the law must both listen to the views of both the representatives of the capital and the labor party, so that the two sides can have a balanced platform for expression of interests.

Otherwise, in the background of strong capital, any change in the labor contract law alone can be a terrible consequence: not only a challenge to the authority of the state and the legislature, but more likely to cause more serious labor and capital antagonism and thus affect social harmony.