Race to the Bottom and Chinese Businesses: Phenomena and Management

EASTERN ACADEMIC FORUM
Race to the Bottom and Chinese Businesses: Phenomena and
Management
TANG Feng
School of Business and Administration, Zhejiang University of Technology, P.R.China, 310023
Abstract: Race to the bottom is a term used a lot in study of international labor standards and
environment standards. This paper shows that it is also common in national situation. Race to the bottom
among businesses especially Chinese businesses is not rare in China. The reason for this problem is lack
of morality and law. Then to manage race to the bottom, internal and external binding should be set up.
That is the key to solve the problem.
Keywords: Race to the bottom, Businesses, Phenomena, Management, Prisoners‟ dilemma
In the discussion of fair trade and free trade, there is a concept used a lot, that is, “race to the bottom”.
Especially in study of international labor standards, environment standards and product safety standards
(consumer protection), race to the bottom is a heat topic. It is believed that in the times of globalization,
there are two main ways to get competitive advantages. One is to put more capital in R&D and
education and raise productivity by enhancing the quality of labor. The other is to challenge the bottom
line of morality and law to abuse the labor, the natural environment and the consumers to cut productive
cost and get price advantage in competition at cost of the welfare of people and damages to the
environment. And the latter is vividly called „Race to the Bottom‟. Though it is still controversial about
the existence of race to the bottom in international situation, the worry about race to the bottom in
national situation seems to be very real to many people.
1 The Concept and Theory of “Race to the Bottom”
Race to the bottom will happen when parties compete for a desired result through making increasingly
larger concessions. It is based on the following assumption. In the context of globalization, capital will
flow to where it can get more profits. Then, reducing productive cost becomes a must. In order to attract
more capital to their businesses, the entrepreneurs will abuse their workers by lowering their wages or
letting them work in an unsafe working environment, or they will show no respect to the natural
environment and pollute the water or the air, or they will provide consumers with fake and shoddy goods
only if they can reduce the productive cost. And on the other hand, the local government may also turn a
blind eye to these illegal phenomena or even lower labor standards, environment standards and product
safety standards on purpose in order to help the local businesses to win in competition with foreign
businesses. We people compete to become better. However, race to the bottom is a weird competition for
becoming worse. That is, it is competing for being worse or worst by ignoring the bottom line of
morality and law in order to make money.
The theory of race to the bottom is based on game theory. Actually, it is a typical prisoners‟ dilemma.
Let‟s take an example to explain the theory of race to the bottom. Suppose there are two manufacturing
enterprises A and B in a market. Both of them provide the same product. The entrepreneurs can choose
to provide a safe or unsafe working environment to their workers. If unsafe working condition will not
be punished by local government, the entrepreneur who provides safe working condition will earn less
money than the other one who provides unsafe working conditions as poor working condition can cut
cost. In some extreme cases, this good entrepreneur may even lose money. Let suppose that when the
two entrepreneurs both provide safe working condition will earn 50 units of profit respectively. When
only one business, for example, A chooses to provide workers with safe working conditions, then A may
lose its market share because of high productive cost and A‟s loss will be 100 (or its profit will be -100).
When both businesses choose unsafe working condition, they share the market and get 50 units of
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profits. However, unsafe working condition will also bring potential danger and unsatisfied workers that
will reduce their profits. So we suppose in this case they both get 0.
Then we get the following table.
Enterprise B
safe
unsafe
Table 1 Game theory analysis of race to the bottom
Enterprise A
Safe working condition
unsafe working condition
50, 50
100, -100
-100, 100
0, 0
We know that the Pareto Efficiency appear at the (safe, safe) or (50, 50) situation. However, the Nash
equilibrium will be (unsafe, unsafe) or (0, 0) situation. This Nash equilibrium is stable that both sides
will not have the desire to break the balance. Then race to the bottom happens though we hope that both
businesses will compete to be better, that is, be more friendly to their workers or the environment, yet
the result is totally opposed to our hope.
2 The Phenomena of Race to the Bottom in China
Though there still exists argument about the existence of race to the bottom among countries, there are
phenomena of race to the bottom in China, especially among small and medium sized businesses.
2.1 Case of labor standards
For Chinese businesses, they lack of advanced technology and they don‟t have enough capital. And in
China, non-skilled labor supply is relatively rich. As a result, most of Chinese businesses engage in
labor-intensive industry and to them the easiest and quickest way to make more money is to cut labor
cost. The bosses have several ways to keep the labor cost low, for example, cutting the workers‟ wage or
welfare, failing to pay them on time, lasting the working hours, providing a bad and unsafe working
condition or employing child labor each of which is illegal or immoral.
According to the Labor Law of China, the legal working hours are eight hours per day, five days per
week. The overtime working hours are at most three hours per day and 36 hours per month. However, in
fact, overtime working is quite often. According to a report made by a labor union, workers in textile
industry of Zhejiang, Jiangsu and Hebei provinces will work for 12 hours per day, 306 hours per month,
that is, their overtime working hours will be 139 hours one month. It is 3.86 times of the legal overtime
working hours.
What is even worse is that many workers can‟t get their pay from the bosses after they finish their work.
According to the National Statistic Bureau, in 2008, 132 million peasant workers were employed and
4.1% of them, that is, 5.41 million failed to get their pay on time. Most of these peasant workers are
employed by construction and manufacturing businesses.
Moreover, workers‟ safety can‟t be guaranteed. It is reported in some firms in textile industry in
Chongqing, the workshops are so noisy that the workers can only communicate by gesture. Dust is
blowing in the work site. However, nearly 80% of the firms don‟t provide the workers with earplugs or
respirators. Because of the bad working condition, diseases like benzene poisoning, lead poisoning, dust
con are very common for workers in many export and machining industries.
2.2 Case of environment standards
Being friendly to natural environment is beneficial to businesses. By taking responsibility of the nature,
a business can help to reduce waste of natural resource, cut down waster and air pollution, and finally
achieve sustainable development.
However it is evident that environment protection is costly at least in a short run and it is also with
positive externality, which means a business that is friendly to environment and pays a lot of money to
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cut pollution will not benefit from his behavior in a short term and many other businesses will be
hitch-hikers. Accordingly, businesses especially those Chinese businesses that lack of enough capital
will choose to lower environment standards and pollute the water and air as long as they will not be
punished badly by the local government. Actually, according to National Bureau of Statistics and
Ministry of Environmental Protection of China, Chinese businesses have become main sources of
pollution. 80% of Chinese businesses have problems of environment pollution and 60% of the pollution
can be traced to Chinese businesses.
2.3 Case of product safety standards
In Today‟s China, one big problem is the bad and unsatisfying quality of many products, especially the
living goods. Some of the living goods are even dangerous or lethal to consumers. Milk powder with
melamine, preserved eggs made of Sudan, food cooked in swill-cooked dirty oil are only a few food
safety incidents happened in the past few years. And they are not coincidence. Actually, today‟s market
is flooded with cheap-jack goods. Both big businesses and Chinese businesses should be responsible for
producing trash goods. And it seems that Chinese businesses should be more shameful. According to
General Administration of Quality Supervision, in 2011 the average product qualification ratios of
Chinese businesses and big businesses were 84.7% and 95.4% respectively. The number seemed to be
not so bad. However, the following statistical numbers published by the authorities can not be the same
comforting. According to Quality Supervision Bureau of Guangdong Province, the quality issue of DVD
produced by Chinese businesses in Guangdong was so serious that the qualification ratio was 39.2% in
2008. Inner Mongolia is famous for its cashmere products. But according to a report made by Quality
Supervision Bureau of Inner Mongolia in 2012, the qualification ratio of cashmere products is as low as
2.5%. The report points out that there exist more than 500 enterprises producing cashmere products in
Inner Mongolia, and more than 480 firms are Chinese businesses. Quality of products made by big
businesses such as Ordos and Deer King is very stable and the qualification ratio is about 95-98%
(www.Info.gongchang.com).
3 The Reasons for Businesses’ Race to the Bottom
As mentioned above, race to the bottom is in nature an issue of prisoners‟ dilemma. And the hypothesis
of prisoners‟ dilemma is that the prisoners are egoists, and there is not an authority to bind the prisoners‟
behavior. In another word, there are two main factors to explain why Chinese businesses choose to race
to the bottom instead of race to the top. One is morality, the other is law. Morality provides an internal
binding for people to do good things. And law provides an external binding for people not to behavior
bad.
3.1 Analysis about Chinese businesses
On the side of the Chinese businesses themselves, they don‟t have many ways to raise profitability.
Unlike big businesses, they usually cannot offer good pay or welfare to attract skilled labor and
technical staff. Without warranty and good business reputation, it is very hard for Chinese businesses to
get loan from banks. It is also not easy for them to get financial support from the local government. And
in China, business tax is also a very heavy burden for Chinese businesses. In a word, they lack of
technology, skilled labor and capital. As a result, many Chinese businesses regard cutting productive
cost as the only possible way to increase profit. Low price become their only comparative advantage in
competition at home and abroad. In this situation, Chinese businesses will definitely choose to show no
respect to their workers, environment and consumers because morality is very weak and fragile before
cruel reality of survival. Race to the bottom seems to be the only choice left to Chinese businesses to
survive in competition. On the other hand, China has not tradition of religion and our traditional
morality which can be traced to Confucius and other ancient wise philosophers were damaged badly
during the Cultural Revolution during 1966-1976. Lack of obligation from religion and morality, owners
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of businesses become egoists, which is perfect hypothesis of prisoners‟ dilemma.
However, the consequence of race to the bottom will be very dangerous even deadly for the whole
nation. Prosperity of businesses and nation lie on prosperity of we people and our offspring. Money
earned by abusing people and polluting environment is bloody. Prosperity achieved by doing harm to
people and environment is meaningless.
3.2 Analysis about government
On the side of the central authorities and the local governments, for these years, enough laws and
regulations have been legitimated and implemented. For example, the Labor Law (1997) and the Labor
Contract Law (2007) can provide workers with good protection. Some of the regulations are stricter than
the SA8000 which is regard as a code strict grass-root labor standard.
In the field of environment protection, China has legitimated a series of laws and regulations, for
example, Water Pollution Law, Air Pollution Law, Noise Pollution Law, Clean Production Law and
Environment Effects Evaluation Law. Maybe these laws and regulations have their flaws and should be
amended in the future. They are still good enough to protect environment only if they are implemented
strictly.
The product safety issue is the same case. Consequently, when businesses do something illegal, they will
not get punishment or the punishment is so ignorable that the businesses won‟t take it serious. For
example, according to the Product Quality Law of China, if dangerous products cause consumers to
death or injury, producers or sellers have to pay money to the victims. However, the damages are
compensatory not punitive. And compensation for physical instead of mental injury will be the bigger
part of damages. Consequently, in reality, compensatory damages can not be a big number. The vice
chief of the China‟s Consumers Association, Mr. Wu Gaohan states that till 2007 the Association helped
consumers to deal with over 10 million complaint cases in China, and averagely every consumer got the
damages of 700 RMB (about $100). Comparatively, in 2006, 50 thousand consumer cases decided in
American court brought about 35 thousand dollars to the plaintiff averagely.
Then why the local government will not implement the laws and regulations strictly? Regional
Protectionism may be one of the answers. Many Chinese scholars hold the view that the success of
China‟s economic development at least partially attributed to power separation from central government
to local governments and competition among these local governments. Power separation gives local
governments opportunities to take actions which are good and fit for the local area. Competition among
local governments brings energy to market. However, power separation and competition are not perfect,
and one side-effect exists that is the possibility of regional protectionism. On the other hand, the present
system to assess performance of local officials also leads to regional protectionism. Performance of local
officials is assessed by economic indexes of their regions. It is known that the root of economic
prosperity is human resource and technology innovation, but accumulation of human resource and
achievement of technology innovation are time-consuming. So it is possible that an official can not be
patient enough to pay time and money to cultivate human resource and technology innovation in his
tenure. Local officials are not inspired to pursue sustainable development. Instead, to get better
economic indexes in a short term become their aim.
4 Management of Race to the Bottom
How to manage the problem of race to the bottom in China? It is not an easy question. In my view, in
order to solve this problem it will take a really long time. On the side of the Chinese businesses, if
entrepreneurs do care about their social responsibility and want to contribute to the society and our
offspring at the same time of earning money, maybe they will be nicer to their workers, to natural
environment and try to provide satisfying goods to consumers. Though classical economic theory tells
us, every one is economic man, that is, he is always perfectly rational and tries to maximize his
economic welfare. However, many researches argue that most people in the world admire justice and
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equity. They will also take the society and other people into consideration when they make choices. That
is the good part of human‟s nature. Education helps people to find out and apply this good part of their
nature. The internal binding provided by morality will help to break the hypothesis of Prisoners‟
Dilemma. However, it will take a long time, maybe dozens of years, to educate people.
As a result, if we can do something to manage the issue of race to the bottom in a relatively short run, in
my opinion, the central and local governments should take more responsibility.
On the one hand, the governments should take every measure to help Chinese businesses to increase
returns. The most important measure should be cutting business tax payments. According to the Tax
Misery Index published by Forbes, in 2011, China got the second highest tax misery index in the whole
world. Though the index is controversial, it is a mutual agreement in China‟s academic field that tax
burden for Chinese businesses especially Chinese businesses is really too heavy. Ratio of value added
tax is 17%, and ratio of business income tax is 25%. Besides this total 42%, businesses also have to pay
City Construction Tax, Tamping Tax, Education Expenses Tax and so on. It is estimated that a SMB can
only get about 42% of his gross profit. In this serious situation, a business has to abuse his workers and
environment and use bad-quality material in order to cut productive cost. When businesses can get profit
through faithful labor, it is believed that most entrepreneurs won‟t participate in race to the bottom.
On the other hand, laws and regulations should be strictly implemented. Like morality, laws can provide
people with external binding to break the hypothesis of Prisoners‟ Dilemma. The most important
implication in execution of law lies in the condition that any form of law-breaking will be punished
according to laws and regulations. As mentioned above, the most serious problem about China‟s legal
system is not the issue of legislation. In fact, from 1949, we have made really great progress in
legislation. The key problem is law execution system. If law-breaking will not be punished properly, that
is, benefit from law-breaking overweighs loss from law-breaking, disregard of law is inevitable. To
avoid regional protectionism, the local judicial departments must be strictly separated from the
administrative department. Only if work of procuratorial organs and People‟s Courts will not be affected
by local administrative officials, justice can be expected. Otherwise, it may be impossible that the
problem of race to the bottom can be solved.
5 Conclusion
The term of race to the bottom is used a lot in study of international labor standards, environment
standards and product safety standards. Though it is still controversial that whether the phenomenon of
race to the bottom really exists in international situation, it does exist in national situation. When
businesses race to abuse their workers, natural environment and provide consumers with fake and
bad-quality goods to cut productive cost, race to the bottom exists. And the paper tries to show that in
China many businesses especially Chinese businesses are racing to the bottom.
The nature of race to the bottom is prisoners‟ dilemma. When „prisoners‟ are egoists that only take their
own interests into consideration (that is, there is no internal binding), and there is not external authorities
for the prisoners to be afraid of (that is, there is no external binding), race to the bottom happens. It is
shown in this paper, race to bottom is popular among Chinese businesses especially Chinese businesses
and local governments. The root of problem lies in lack of morality and law.
In order to solve the issue of race to the bottom, the re-shape of business morality is necessary, but it
will take a long time. In the short run, governments should take more responsibilities. Firstly, they must
let businesses become profitable. One important measure that can be taken is to cut tax greatly. Secondly,
laws must be strictly implemented, that is, law breaking must be costly. In order to achieve this, local
legal organs must be separated from administrative organs. Thus regional protectionism may possibly be
avoided.
Acknowledgement:
This research work is supported by Department of Education of China (12YJC790172) and Zhejiang
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Provincial Natural Science Foundation of China (Y6110266).
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