PACIFIC REPORT : Asia’s Shifting Search for Labor : Industry: Effects of the increased wages include making American goods more attractive and benefiting less-developed Third World countries.

For decades, Asia has been synonymous with cheap labor. Huge non-union work forces toiling long hours at low wages helped create the economic miracles of several Asian nations, while rendering American industries such as autos and steel less competitive.

Today, that is changing--with some dramatic results and worldwide implications.

Rapidly rising labor costs in parts of Asia--largely the result of rising worker expectations and maturing industries--are a factor in a resurgence of U.S. steel and capital goods industries and in America’s recent and unheralded trade gains with Asia.

More and more Asian industrialists are shifting facilities for making toys, apparel, shoes, small-scale consumer electronics products and other goods to emerging low-cost labor havens such as China, Indonesia, Pakistan, Egypt and Mauritius. Such shifts could stimulate more economic development in less-developed parts of the Third World.

These new economic realities are especially troubling for the fast-growth economies of Taiwan and South Korea, which relied and prospered on cheap labor. While wages have climbed gradually in Japan, they have risen much more rapidly during the past five years in South Korea, Taiwan and Hong Kong.

Searching for new ways to sustain economic growth, the Taiwanese and South Koreans have tried--with only modest success--to adopt the Japanese formula of modernizing plants and stimulating development of high-technology industries.

Without fanfare, some U.S. industries and companies are taking advantage of the trends.

“East Asians are no longer dominating markets as they did in the early 1980s,” observed Milan Brahmbhatt, director of Asian services for DRI-McGraw Hill, a Lexington, Mass.-based research firm. “This is a sign of improved competitiveness in the United States.”

This improved competitiveness is partly reflected in a declining U.S. trade deficit with East Asia, to $71.1 billion in 1990 from $97.5 billion in 1987. Much of that decline can be traced to the export explosion in America’s manufacturing sector--up 80% since 1985, according to the U.S. Commerce Department.

To be sure, not all of that decline can be attributed to higher Asian labor costs. Also helping has been the weaker dollar--off roughly 50% since 1985--that makes U.S. goods cheaper in Asian markets, as well as U.S. successes in prompting some Pacific Rim governments to remove some trade barriers. Sales of American-made capital equipment, such as factory equipment and industrial machinery, have also been aided by an increase in Asian and European demand for modernized plants, Brahmbhatt said.

But relatively stable U.S. labor costs have helped too, he said.

The average manufacturing wage in South Korea has nearly tripled to $3.57 per hour in 1989 from $1.35 in 1985, while in Taiwan it more than doubled in the same period, to $3.53 per hour from $1.50. Those wage rates are still far below those of American manufacturing workers, but the gap is narrowing, with U.S. wages rising to an average of $14.31 per hour in 1989 from $12.96 in 1985.

However, many U.S. industries have not yet benefited. American auto makers are unlikely to get a competitive “leg up” on Japan because wages of Japanese and American auto workers are already comparable, said Steve Beckman, senior economist for the United Auto Workers union.

Korean auto wages have risen in recent years, making it harder for Korean auto makers to maintain low prices for price-conscious Americans. Beckman said U.S. auto makers may make some gains against Korean rivals if those wages continue to rise because the Korean auto industry is less mechanized and much more labor intensive.

On the other hand, the once-moribund U.S. steel industry is already one of the biggest beneficiaries of the wage shift, many economists say. Importers’ share of the U.S. market grew from 2.3% in the 1950s to about 9% in the 1960s, about 15% in the 1970s and a record 26.4% by 1984--largely because of shipments from the burgeoning steel industries of Japan, South Korea and Taiwan.

However, the foreigners’ share has now declined to about 17%, and there has been a resurgence in the sale of U.S. steel abroad. U.S. steel exports reached 4.3 million tons in 1990, down from an all-time high of 7.1 million tons in 1970 but up from an all-time low of 1 million tons in 1984.

“Asian steel companies made inroads because they became stronger in the areas of cost and productivity,” observed Sheldon Wesson, a spokesman for the American Iron & Steel Institute, a Washington-based trade group. “Now that the U.S. is stronger in these areas, we’re seeing the other side of the coin.”

Much of the competitive gain by U.S. steel firms is a direct result of sacrifices made by American labor. The average hourly wage for American iron and steelworkers was $19.41 in 1985 and rose to only $20.88 in 1989--a decline when inflation is considered.

Wages of their Taiwanese and South Korean counterparts are still relatively low. But since 1985, Taiwanese iron and steel wages have more than doubled while South Korean pay has nearly tripled. U.S. steelmakers have also gained by modernizing plants with equipment that increases productivity and reduces the need for labor.

Among the companies poised to take further advantage of the shift is Sterling, Ill.-based Northwestern Steel. It produces a structural steel product used to reinforce buildings that meets Japan’s stringent quality standards, enabling the product to be legally used in public works construction in Japan.

Northwestern, the second U.S. firm to ever meet those standards, is more competitive partly because it installed state-of-the-art electric furnaces in the 1980s, said Charles Biermann, the company’s marketing director.

Northwestern recently began to export to Singapore and Malaysia and will soon begin to market its product in Japan, Hong Kong, South Korea and Taiwan, Biermann said.

While Northwestern gears up for the Taiwanese market, Taiwan’s steel producers are losing sales in the American market. Taiwan exported 476,000 tons to the United States in 1986, more than all but six other nations, but that fell to 141,000 tons in 1989.

Steel producers and other industries in Taiwan are trying to modernize production facilities to regain competitiveness, said Michael Ding, a research fellow at the Chung-hua Institute for Economic Research, a private Taipei-based think tank.

Meanwhile, South Korea, Singapore and Malaysia are trying to establish a presence in high-tech fields. Their governments have encouraged industries to spend more on new-product development and have increased funding to technicians, scientists and engineers involved in research and development. But these nations have yet to realize major dividends partly because they were slow to make these investments.

On the other hand, Taiwan moved more quickly to encourage development in high-technology fields such as microelectronics, biotechnology and information and financial services. For example, the Science-Industrial Park in Hsinchu--opened in 1980--is designed to generate scientific research with commercial potential. The Taiwanese government recently decided to proceed with plans to build another high-technology research zone.

But many labor-intensive industries in Taiwan have raised the white flag and are moving production facilities to other Asian nations. The Taiwanese poured a record $1.55 billion into overseas investments last year, an increase of about 65% over the previous year.

Malaysia and the Philippines were the biggest recipients of Taiwan’s direct investment in manufacturing operations in 1989 and 1990, Ding said. Even more Taiwanese manufacturing has been shifted to China, where wages are among the lowest in Asia.

The investment shift disturbs some U.S. labor leaders. Charles D. Gray, executive director of the Asian-American Free Labor Institute, an AFL-CIO organization that assists unions in the Pacific Rim, said workers in less-developed countries are being exploited by Taiwanese and South Korean businessmen with little respect for internationally recognized labor standards.

However, some economists say, the investment shifts reflect a healthy change in economic development toward more Third World nations. For example, they note that wages in Malaysia are rising as a result of the investment surge from Taiwan, Hong Kong and Japan.

Indeed, some Malaysian industrialists are beginning to cast about for cheaper production sites. Malaysians recently established rubber production sites in China. Malaysians also recently launched manufacturing ventures in Africa--palm oil refineries in Egypt and textile plants just off the East African coast on the island of Mauritius, for example.

ASIA’S DECLINING LABOR COST ADVANTAGE Wages in Japan have nearly caught up to American wages. Wages in Korea and Taiwan are still far below those in the United States, but have been increasing sharply in percentage terms.

Source: U.S. Bureau of Labor Statistics