T’aint no big thing….
Bryan Ferry, Roxy Music

I remember a time (Reagan era, I believe), when there was considerable talk about greatly reducing public television (PBS) funding here in the United States. In response to this, PBS reacted like any good bureaucracy does. It threatened to terminate that which the people found most precious. PBS told everyone who would listen that it would need to cancel Sesame Street, a hugely popular educational show for children. Of course, this left reasonable people wondering why PBS would cut off one of its highest regarded and most watched shows, rather than one of the interminably dull shows that made up the bulk of its offerings. Local governments threatened with reduced funding have been known to threaten to halve their firefighting force. Again, reasonable people can only wonder why such a vital service would be the first to go.

Of course, neither PBS nor the local governments that threaten to halve their firefighting were really serious. They just were going after that which the public holds most dear in an effort to scare them into raising (or not lowering) funding. I believe this argument was at one time actually known as the Sesame Street defense.

There has been a bit of that in China of late with respect to China’s new labor contract law. Story after story is coming out of China of 3,000 factories here and 5,000 factories there and 60,000, no make that 120,000 factories having closed or moved to Vietnam because of the new law. Hogwash.

Employers in China are painting the new labor law as far worse than it really is because they believe doing so now might either influence the law’s yet-to-be-released regulations or perhaps even lead to a revocation of the law. I do not fault them for this, but, at the same time, I do think its impact needs to be kept in perspective.

China’s new labor contract law is a big deal (as we have noted on countless occasions ), but it is not earth shattering or paradigm shifting. It is a big deal because it shows China’s continuing evolution to rule of law and it is a big deal because the employees (pretty much for the first time in a long time) have won one. But, in terms of factories closing or moving to Vietnam because of it….we are just not seeing it.

I was asked about the impact of China’s new labor law by a Newsweek reporter the other day. She wanted to know about the impact this new law is having on my law firm’s clients in China. I told her how they have had to pay anywhere from $5,000 to $25,000 to clean up their employment contracts and policy manuals, including getting them into Chinese. I also told her how we are concerned about how to handle matters for those of our clients who typically hire employees seasonally. And that was it.

She wanted to know what our clients were saying about the new law and I told her they were just asking us whether and how we could help make sure they were complying. What about the impact on their business, she asked. Are they talking about that? Yes, a few of them have complained about the new law the same way people always complain about taxes. Have any of them left China because of the new law? No. Are any of them threatening to leave China because of the new law? No.

I then flipped the questioning and asked her if she was aware of a single well-run Western company that is claiming to have left China because of the new law and she was not aware of one either. She quoted me an AmCham survey saying that 20% of American companies are thinking of leaving China because of rising costs. I said that sounded about right to me and that there will probably always be around that number looking to move to a cheaper locale and that of these 20%, I would guess the overwhelming majority of them will stay in China when they discover the grass is no greener on any other side.

Which brings us to Vietnam. The talk was that all these companies would go to Vietnam. My thought is that if they have, Vietnam should be bulging at the seams about now, but it is not. Yes it is booming, but does anyone seriously believe it has seen 15,000 new factories since the first of the year?

My sense is that China has seen a number of factory closings of late, but most of these are domestic factories that produced low end goods, not Western companies doing business in China. I also have no doubt that many Taiwanese and Hong Kong and Korean factories producing the same sorts of goods have closed as well. But, it is not fair to blame even these factories’ problems solely on China’s new labor law as Beijing has instituted a number of policies explicitly aimed at marginalizing such factories so as to push China up the value chain.

The labor law is a huge deal, but it is not everything.