Made In Italy At Chinese Prices?

New Economist has a post linking to a recent paper by Francesco Daveri on Italian productivity, and by this somewhat circuitous route (being directed by a comment towards a blog called Business Hackers on my way) I found this article in Spiegel Online about how the arrival of Chinese migrants was changing the face, and economic substructure, of Prato:

Outsiders have long since made their way into Prato....new home to 2,000 Chinese entrepreneurs and an army of low-wage workers, 25,000 strong, which is growing rapidly in front of the walls of this small city of 180,000. One in five of the workers is undocumented and, officially at least, isn't even here. Meanwhile Prato's citizens look on and curse their new neighbors as sewing machines rattle through the night.

Prato's residents call the immigrant neighborhood, which has grown rapidly in the last five or six years in an area once inhabited by local factory workers, "San Pechino," or St. Beijing. When the first Chinese, their suitcases filled with cash, arrived in the early 1990s and leased their factories, the Italians laughed at them. But now that their numbers have quadrupled and they own a quarter of the city's textile businesses, where they make "Made in Italy" fashion at "Made in China" prices -- often illegally -- the newspapers are full of op-ed pieces about the "yellow invasion," low-wage competition and the Chinese mafia. The president of the city's chamber of commerce, who also happens to own a textile business, says: "We underestimated them. What they're doing here is called unfair competition. We need a battalion, an operation like the one in Iraq, to keep them under control."

Prato's residents are now frantically asking themselves questions to which they have no answers. Who are these Chinese? What is their objective?
continue reading Spiegel online

Well placing carefully to one side the paranoia which seems to be revealed by the last sentences, what I find slightly worrying about the situation brought to light in this article is the way some parts of the Italian economy seem to be sliding down the value chain, just as China itself is starting to move up it. Expanding activity in this kind of manufacturing industry is a dubious enough thing to do with global prices as they are in any event, but doing so by allowing the needs of the tax system to support the spending demands of the elderly population to be flouted in just this kind of way is quite another.

There is considerable evidence for the existence of this kind of activity here in Spain too (and I imagine in Greece). But really bringing in undocumented workers to create work which would otherwise be unprofitable (and note that I support inward migration where it has some kind of rationale) seems to be a more or less pointless activity. At best you are renting the land to allow your overseas competitors to get even nearer their market of interest.

In the long run none of this has much future, since as I say, this kind of activity is simply not cost effective in Europe any more, and all it does is create unnecessary resentment among ordinary Italians who cannot understand what the hell is going on.

One example of where all of this can lead is to be found in the Spanish town of Elche (in the Community of Valencia):

The Chinese community in Spain has not yet forgotten the events that took place in Elche, Europe's shoe capital, on September 16, 2004.

That night, a group of Spanish shoemakers set on fire the factories of Chinese entrepreneurs. Local shoe industry workers say the Chinese competitors were playing dirty by offering cheap products distributed in Spain and the rest of Europe but manufactured across the world. Those criticisms, not limited to Spain or the shoe industry, clearly illustrate concerns in Europe with cheap Chinese products.

Now what seems to be happening is that attempts to contain the flow of products by the use of quotas are being got round by renting land and premisses, and importing workers to do the production within the EU. All of this is very difficult to control since, as China Economic Review notes, it is taking place in areas where a blind eye has traditionally been turned to underground economic activity, and it is now virtually impossible to start having an 'eyes wide open' policy overnight, too many other people might be 'found out' at the same time:

Elche, in the east of Spain, is close to Valencia and not far south of Barcelona. It is a city of 200,000 people that has lived for decades on the returns from its shoe industry. For most of this time, it has been known as a place that lives outside labor and tax laws. Employees have often worked illegally without fixed salaries or social security.

Half a century ago, US shoe companies moved their production there, only to transfer it later to markets with even cheaper labor such as India, China and Vietnam.

Invaded by migrants from all over the world (mainly South America, Eastern Europe and Sub-Saharan Africa), European societies are not coping well with change. Europe's economies are struggling to overcome the structural challenges derived from the WTO's Agreement on Textiles and Clothing. In some cases, manufacturers don't even need to move production to China. Chinese workers will work in the heart of Europe for a fraction of the wages European workers demand.

In Elche, Chinese shoemakers have set up warehouses and sell shoes at one tenth the price of locally made products.

Now to be clear, my beef here is not about immigration. My beef is about a degenerate application of public policy and how it always ends up acting against everyone's interests in the long run. We need migrants here to do work with a real economic basis behind it (to meet our man- and woman-power shortages and to help pay our health and pensions system) but, frankly, we don't need this, unless, that is, the respective local councils and governments are willing to pay the retraining costs of these soon to be displaced workers, once the regulations are applied and the no-longer profitable enterprises closed.

Naturally I will post on the somewhat more interesting arguments from Francesco Daveri on Italian productivity (the real variety) under separate cover.