If you’ve been following the news of late, you’ve most likely heard rumblings about factory workers in China striking for better pay (most notably, at Foxconn). Someone asked me what these labor strikes mean for China, both domestically and globally. In terms of the effect on the rest of the world it will mean higher prices for cheap goods, prompting me to tell them: “You ought to get your yearly Walmart shopping out of the way now.” Domestically, however, it marks a long overdue shift in economic policy and means that China is now entering the middle stages of economic development.

For years, China’s modus operandi was keep labor costs and comparative wages exceptionally low, so as to make it lucrative and attractive for foreign companies, and their foreign direct investment, to enter the mainland and set up shop. This was also contingent upon keeping the renminbi artificially deflated in value, so European and US purchasing power could by more Chinese goods. However, anyone with a background in economics will tell you that comparative advantage, i.e. the cheapness of creating/producing goods from one country to another, changes over time as costs of living, labor, capital and investment rise with quality of living. Odds are much of the cheap, low-end production goods that China has dominated over the last decade (textiles, plastics, toys), will move to a country like Vietnam, where labor costs are still exceptionally low. That being said, the rise in labor wages (which is expected to nearly double from 1,000 to 2,000 renminbi) following these strikes, is very telling about where China is economically–and more importantly–developmentally.

Already facing the woes of inflation and a real estate bubble that may make the U.S. collapse look like child’s play, Chinese citizens and migrant workers are faced with the very real issue of “livable poverty” as government led GDP growth has faltered among the lower classes. The once abundant migratory workforce is diminishing in availability as population restrictions have led to a decrease in the young workforce.

But the real issue here is that of development, and what direction the Chinese economy will shift towards. In a previous post I discussed the income disparity between the coastal and inland provinces, discussing how economic growth has been lopsided. Development has occurred so rapidly in Coastal areas, that you could now argue that these areas are moving toward “middle-end-production”, while seeking to move lower cost, “low-end-production” to the inland where costs of living are much lower. As a result, we are starting to see development move east to west, instead of just north-south along the coast line.

Underlying all this is a simple fact: China’s economy is beginning to shift toward middle-end products such as automobiles, electronics and other tech industries (just like Japan did throughout the 80’s). This is no surprise, because naturally a country that experiences such rampant growth in such a short time is a sure-fire indicator that citizens within the nation are earning more, spending more, and improving their purchasing power. So if people are getting paid more, but exports are dropping, what does this mean for China? Simply put, it means a focus on domestic and regional markets (such as Indonesia, Japan, Korea and Malaysia). By improving wages within China, workers now have a reason to save less, and spend more. Instead of relying upon the back and forth nature of FDI and exports, China is looking to close the economic loop within its borders and stimulate consumerism within its borders.

These labor strikes are a premonition of things to come, and have many foreign companies worried about a “domino effect” as laborers begin to protest and form pseudo-unions. Don’t be surprised if this call for an increase in wages spreads throughout the coast and even into the inland. Maybe this will help assuage the huge gap between rich and poor. Stay tuned.