Membership required

RATHER than deal with trade unions, Walmart, the world's biggest retailer, has reconfigured its operations around the world, even pulling out of some markets altogether. But, in a reflection of just how different operating conditions are in China, Walmart signed collective-bargaining agreements with workers in two provinces in July. Further agreements covering all 50,000 of its local employees in China are a foregone conclusion.

The financial terms of the contract are of only minor importance. Far more important are the other implications of Walmart's new ties to the All-China Federation of Trade Unions (ACFTU), a monopoly that claims 193m members and is deeply intertwined with China's government and Communist Party. Like it or not, Walmart now has a business partner, and if it wants to close stores, lay off employees, or change other aspects of its business such as operating hours and work quotas (what employees are expected to accomplish), that partner must be consulted.

The history of the ACFTU is, in many ways, the recent history of China. Founded in 1925, it was crushed by the nationalist government in 1927, rose with the Communist Party's ascension in 1949, and was crushed again in the Cultural Revolution before being revived in the general opening following Mao's death in 1976. Competing unions are not allowed and by discouraging any sign of dissent, including strikes, the ACFTU has often been accused of failing to act in its members' best interests. This point was made with particular vehemence in the 1980s and 1990s, as China emphasised growth and business investment at the expense of workers' rights.

With the change of political leadership in 2003 and many highly publicised reports about poor working conditions, there has been a shift in emphasis in China, and a corresponding shift in the union. Walmart, with its prominence, served as an early test case for the union's rise, with accreditation (but no contract) achieved in 2006. Two foreign fast-food chains, Yum! Brands and McDonald's, agreed to worker representation in 2007 after being slammed in the Chinese press for breaking the law in their payment of students (the charges turned out to be false). Agreements were also reached with other companies well known for resisting unions elsewhere, notably FedEx, a logistics firm. The process is now accelerating.

In January, China imposed one of the most far-reaching labour laws in the world. It included provisions requiring firms to consult employees on “material” work-related issues. Some companies responded by forming in-house workers' groups, but the ACFTU objected, claiming that this amounted to the creation of an alternative labour union, and was thus illegal. Instead, it has used the new law as the basis for a huge registration drive by the ACFTU that began in June and is intended to sign up 80% of the largest foreign companies by the end of September. And that, in turn, is a prelude to the stated goal of having trade unions in all of China's non-state-owned companies by 2010.

Unrelenting pressure is applied to convince companies to sign up. Many are visited every two weeks by union representatives. Firms that are willing to co-operate receive two critical benefits: the ability to influence who their union chairman will be, and some negotiating freedom around a 2% payroll “tax” to the national union, much of which is remitted back to the municipal and company branches and, in the best circumstances, may then be used to pay for social functions, medical benefits and bereavement leave.

These two benefits are far more important than they sound. The union chairman is typically tied to the government and the Communist Party, must be consulted on critical issues and, in effect, cannot be fired. The union chairman is therefore critical to a firm's management. And the ability to negotiate on the payroll levy can mean, for example, that expatriate salaries are excluded from the payroll figure, or that a smaller figure from a previous year is used as the basis of the calculation.

By contrast, companies that resist, according to a senior union official quoted in the China Daily, a government newspaper, will be blacklisted. They will not face pickets and strikes, as they might in the West. Instead they will be subject to endless audits, tax examinations and, as in the cases of McDonald's and Yum!, accusations of employment-law violations. It is also possible, given the wording of the new labour law, that resisting unionisation is illegal. So it is difficult to imagine that any company will choose to resist.

With a over a billion people and rising prosperity, China is an irresistible market for the world's largest manufacturers, distributors and retailers. Even so, the impact of higher labour costs and more cumbersome work rules should not be underestimated. For companies aspiring to sell in China, the intervention of what is, essentially, the state into their management is probably unavoidable. For those using China as a production hub, there is yet another reason to search for an alternative.