How can Chinese companies ship products to the US cheaper than it costs to ship the same items across town?
In: Economics
US labor is expensive. People need to afford not just groceries, but also housing and healthcare. They probably need a car to get to work. They may have a family and kids. Most US companies’ largest cost is labor, and if they try to lower wages too much people simply *stop working* and look for other jobs because they can’t afford to live anymore.
Chinese labor is not expensive. The workers don’t need to afford the same things, but also China has a reputation for very exploitative labor practices.
So making a bunch of stuff in the US that costs, say, $1,000 might break down as follows:
$600 – Labor
$200 – Profit margin
$ 50 – Materials
$ 50 – Shipping
The company makes $200 of profit on the $1,000 you pay.
Now, keep in mind that shipping across the ocean is more efficient than you think. That $50 in the US might only move a few hundred items at a time. A container ship can move MILLIONS of items across the ocean at a time, then it goes on a train that can move MILLIONS of items, and eventually the things you ordered end up on a truck. So while the voyage itself will cost hundreds of thousands of dollars, this order of a few hundred items takes up less than 1/10,000 of the space on the ship, so they’ll have to pay accordingly. They’re sharing that shipping cost with literally thousands of other people.
The math might work out like this for a Chinese company:
$ 50 – Labor
$200 – Profit margin
$ 50 – Materials
$100 – Shipping
They paid twice as much for shipping, but their labor cost 8% as much. They make the same profit, but they can charge $400 instead of $1,000. If the US workers were making $7.25 minimum wage, to match this Chinese quote they’d have to drop to $0.60/hour. Nobody’s going to work for that in the US, it won’t pay any of our bills. Imagine if working a full 8 hour day couldn’t buy a combo meal at McDonald’s after taxes.
I made these numbers up, but I think they are illustrative. It’s a hard problem to solve without contemplating a lot of government assistance to take away from things that workers have to spend wages on.
Latest Answers