December 2007

Talk about big. Wal-Mart Stores Inc., headquartered in rural Bentonville, Arkansas (population 29,000), is the world’s largest corporation, with annual revenues approaching the $350 billion range. Wal-Mart’s revenues are larger than the combined GDPs of Hong Kong and Malaysia. Wal-Mart imported about $27 billion in merchandise from China last year—about the same as did Singapore. What began 45 years ago when hillbilly entrepreneur Sam Walton launched a no-frills mom-and-pop discount store in a remote corner of the American South, now is a corporate empire that spans the globe. In the United States, Wal-Mart directly employs a workforce of about 1.4 million so-called "associates" who work in 4,000-plus Spartan big-box stores.

Another 550,000-plus workers are found in 3,010 Wal-Mart-owned international outlets that serve some 49 million customers from São Paulo to Shenzhen, the site of one of 192 retail outlets in 34 Chinese cities. Wal-Mart also controls 394 Seiyu discount stores throughout Japan and is planning to move into India in 2008. The world has never seen a corporation quite like the hardscrabble beast from Bentonville—which has a passion for secrecy that is almost cult-like, and is so famously pennywise that it boasts that its executives fly economy and share hotel rooms when traveling.

As any casual reader of newspapers would know, opinions differ greatly as to whether that beast has economic beauty. There’s a sort of yin and yang as one begins to sort out the criticisms. The contradictions begin with those decidedly downscale big-box stores, which are to beauty what Josef Stalin was to architecture. Wal-Mart is the economic and cultural opposite of ritzy retail outlets such as Japan’s Mitsukoshi, where wealthier shoppers along the Ginza don’t mind paying extra for frills like those unnecessary-if-charming female employees who bow courteously to shoppers as they step into elevators. To some on the conservative end of the economic spectrum, Wal-Mart is an inspiring entrepreneurial success story, its ruthless price-cutting a model of Adam Smith’s beneficent invisible hand. To liberal champions of the poor, Wal-Mart personifies the wonders of a global marketplace that delivers low-priced goods to grateful consumers who will never see the insides of a Shanghai Tang or Mitsukoshi. But to others who consider themselves liberals, Wal-Mart is an arrogant, union-busting employer that refuses to pay its own employees, many of whom don’t even have health insurance, decent wages.

Still other critics accuse Wal-Mart of exploiting hundreds of thousands of anonymous poor workers who work in the sweatshops in some of the poorer parts of the world—especially Asian countries like China, Bangladesh and the Philippines—that churn out all those cheap toys, clothing and so forth. To some of the corporation’s more energetic cyber critics who inhabit the blogosphere, Wal-Mart is a hated capitalistic "Satan." Beyond the fringes, the growing chorus of Wal-Mart sentiments have now reached the mainstream of American politics, where anti-globalism sentiments are on the rise: all seven Democratic aspirants to the U.S. presidency are currently busy wooing union audiences by running against Wal-Mart and the globalization it stands for.

So how to sort out the "truth"?

The Truth About Wal-Mart

Perhaps it is a loose combination of "all of the above." While Wal-Mart is certainly not satanic, neither is it—or any "soulless" corporate behemoth that is designed to keep its greedy eyes on the bottom line, for that matter—always saintly. For instance, after years of foot-dragging and denials, Wal-Mart has recently been praised by critics like Andrew Stern, the president of the Service Employees International Union, for taking steps to provide health insurance to more of its employees—yet less than half of the corporation’s U.S. work force is covered. Is this glass half full, or half empty?

Wal-Mart is often accused of exercising what antitrust theorists call call "monopsony" purchasing power, squeezing its suppliers for ever-lower prices until they go out of business. The blogosphere is full of accusations, for example, that Wal-Mart’s relentless cost-cutting pressures in the late 1990s eventually drove Vlasic Pickles into bankruptcy. Yet that story doesn’t check out. As recounted in author Charles Fishman’s The Wal-Mart Effect, an often-critical history that detailed Wal-Mart’s rise from mom and pop to an economic superpower, Vlasic was indeed pressured mercilessly to cut its prices for gallon jars of pickles, to the extent that profits were barely a penny a jar. But Mr. Fishman added that when Vlasic went into Chapter 11 bankruptcy proceedings in 2001, it’s dealings with Wal-Mart were not "by any reason, the cause." Today, Vlasic, out of bankruptcy, is part of a food conglomerate that is owned by the Blackstone private-equity group—and Vlasic pickles are still on Wal-Mart’s shelves, where they compete with other brands, some of which are priced even lower.

Indeed, Wal-Mart’s aisles are filled with products made by corporate giants, including famous brands like Pfizer’s Listerine, Kellogg’s Special K cereal, Procter & Gamble Co.’s Crest toothpaste, Johnson’s Baby Lotion, Gillette Razors and Bayer vitamins. Consumers should be delighted that Wal-Mart is on their side, squeezing the big players in a competitive marketplace, turning profits by offering lower prices to consumers. If it is true that hard-nosed capitalistic competition, viewed up close, is never pretty, it is also true that the end result can serve an economic public good.

Another sign of a highly competitive marketplace working as it should is in the flat-panel, state-of-the-art televisions that Wal-Mart offers at extremely low prices. On Nov. 23, the famous annual "Black Friday" day of incredible sales after America’s Thanksgiving holiday—so named because of the profits generated by sales—Wal-Mart offered a Polaroid 32-inch liquid crystal display flat-panel television for $448 (at least a $100 discount), and a 42-inch Polaroid for $798 (a whopping $400 discount). Both televisions were made in China. Eager shoppers were standing in lines at 5:00 a.m. to snap up the bargains.

The story of those Wal-Mart televisions has some politics. In 2003, a small U.S. company based in Greeneville, Tennessee named Five Rivers Electronic Innovations LLC brought an antidumping case that targeted television sets that were being imported from China and Malaysia by Wal-Mart. It wasn’t difficult to see the economic flaws in the case. Five Rivers actually made cabinets, and was buying its color picture tubes, printed circuit boards and other electronic components from places like China and putting them together in television sets for companies like Samsung. Nevertheless, the Tennessee assembler persuaded compliant U.S. antidumping officials to slap tariffs on the Chinese picture tubes. As cathode tubes were quickly being supplanted by modern flat-panel lcds, the tariffs didn’t have much practical effect. Five Rivers has exited the business. And on Black Friday last month, one of the hottest items on sale at the Greenville, Tennessee Wal-Mart was ... flat-panel televisions from China.

In the course of researching this article, I spent time in various Wal-Mart outlets in poor towns in the U.S. South, observing shoppers who looked like they didn’t have a dime to spare. I also visited an ASDA supermarket in London’s gritty East End (Wal-Mart owns that British retail chain), and saw the looks in the eyes of obviously struggling Muslim immigrants and poor Britons looking for bargains. There is a moral lesson here that the critics seem to gloss over. Saintly or not, the beast from Bentonville does give needy consumers a (much-deserved) break.

Alas, the story—and legitimate concerns—don’t quite end here. Wal-Mart’s critics quickly retort that these consumer savings come with a price tag that is taken off the hides of poor, often exploited, Asian workers who make the cheap blue jeans. Indeed, the criticisms don’t just come from the antitrade crowd. There is widespread, if understandably muted, agreement inside the rag trade that the criticisms are reasonable. While everyone in the clothing industry has to worry about sweatshops, Wal-Mart’s extreme cost-cutting business model appears to give the company’s contract suppliers incentives to cut costs by the usual sweatshop methods: refusing to pay statutory minimum wages, demanding excessive overtime hours and then cheating their workers out of overtime pay, secretly subcontracting parts work out to children, and otherwise skirting internationally accepted labor practices. Wal-Mart claims to be on top of the problems, but there is ample room for doubt.

One doesn’t even have to visit a factory to understand the suspicions. On last month’s Black Friday sales, the Wal-Mart supercenter that I visited in rural Virginia had advertised some Asian-made denim jeans for only $7.50. These were quickly snapped up by the 5:00 a.m. crowd. Strolling through the aisles later that morning, I saw $9 women’s Chinese-made blue jeans, along with $7.84 children’s blue jeans, which were made in Swaziland. There were also $10 shirts from Bangladesh, and some Chinese-made sweaters that were going from $7.92 to $9.00. Even some ardent advocates of free trade in the clothing industry who were interviewed for this article said such prices made them uneasy. Said one insider, who asked not to be identified by name: "Wal-Mart claims that these are not loss leaders. Well, if that’s true, imagine the costs of the denim, the zippers, the buttons, the shipping costs, the store overhead, and there certainly isn’t much room left over to pay for the costs of labor. I love free trade, but this makes even me uncomfortable."

Here’s where the corporate passion for secrecy enters the story. Wal-Mart’s Website boasts that the company is the biggest corporate philanthropist in America. Indeed, the company and its foundation report that they gave more than $300 million in charity to some 6,700 world-wide communities. The company is eager to publicize its giving, particularly that aimed at showing its more saintly side to its liberal critics—a $1 million grant to the Congressional Black Caucus Foundation, an equal amount to a medical college center to support research into "minority women’s health issues," assistance to small-scale farmers and indigenous peoples in Brazil’s rain forests, etc. But when asked about whether Wal-Mart’s global-sourcing model encourages sweatshops, the spinmeisters say the company has "zero tolerance" for abuses—and then clam up when asked for details.

The End of the Production Line

Earlier this year, there were various newspaper accounts of labor strife at the Korean-owned Chong Won Fashion, Inc., a Wal-Mart supplier of T-shirts, pants and baby blouses in Rosario, Cavite, a gritty Philippine town a bumpy two-hour drive outside of Manila. When I asked Wal-Mart officials for their side of the story, spokesman Kevin Gardner referred me Verité Inc., a respected Amherst, Massachusetts-based nonprofit firm that specializes in fact-finding "social-compliance" audits of overseas clothing factories, and had investigated the situation for Wal-Mart. But when I called Verité officials, I learned that Wal-Mart had instructed not to discuss what they had found. When I asked why he would do that, Mr. Gardner said in an e-mail that Wal-Mart would not be "participating" in "this story opportunity."

Little wonder. When I visited Rosario in July, I heard a sad story. Chong Won had folded, after a long struggle with workers, who said they had earned two or three dollars a day and had been pressing for a better deal since the mid-1990s. I was told how the company would offer a one peso-per-day raise for each year they worked. As one peso—depending upon varying exchange rates—is worth pennies, it could take perhaps 40 to 50 years to get a raise of $1 dollar a day. And to avoid even that prospect, Chong Won hired many of the factory’s workers, which at one time numbered about 1,000, as five-month contract employees. This is a familiar Philippine story, as contract workers are fired the day before their sixth month, thus allowing the employers to avoid paying legally required benefits such as health care. Often, contract workers are shifted to another factory for another five-month stint, or are even rehired immediately for another five months in the same place. The one word for this is: exploitation.

Since 1994, Chong Won workers had been trying to form a union, hoping to negotiate a collective bargaining agreement. But the organizing efforts had been vigorously suppressed by the factory management, which paid scant heed to the Philippine freedom of association laws.

Persisting, Nagkakaisang Manggagawa ng Chong Won, as the union calls itself, managed to win a certification election in 2004. That’s when the management got really tough. The union’s president, a determined 46-year-old woman named Ressurecion Ravelo, told me how she had been transferred from the sewing lines and forced to be a trimmer, where she had to stand all day. When the intrepid Ms. Ravelo, who might reach 5 feet if she stood on her tiptoes, further complained, she was made to work in a room that lacked ventilation. The upshot was that Ms. Ravelo and her colleagues went on strike in September 2006. All 119 members of her union were promptly fired, and the factory, which by then was down to a few hundred other contract workers, ceased operations. Ms. Ravelo said she had written to Wal-Mart officials, but that her letters had not been answered. After reports of the labor unrest hit the newspapers, Wal-Mart retained Verité to try to figure out how the situation might be salvaged.

A leaked copy of Verité’s report to Wal-Mart, which was completed on March 26, 2007, essentially confirms the workers’ allegations. Verité recommended that Wal-Mart guarantee to keep buying clothes from Chong Won, provided the Korean owner would refrain from further illegal union-busting activities, and rehire the fired workers, with back pay (as provided by Philippine law). Wal-Mart apparently accepted the recommendations, but by then Chong Won had gone out of business, changing its name to C. Woo Trading (which presumably could reopen in another location, another familiar sweatshop tactic in poor Asian countries). By whatever corporate name, the Korean executives declined to respond to requests to be interviewed for this article.

The now-unemployed former Chong Won workers I interviewed said they weren’t really angry with Wal-Mart, just disappointed that the company hadn’t been more aggressive earlier to keep their factory in operation. "Wal-Mart did too little, too late, to save our jobs," Ms. Ravelo told me.

Meanwhile, back in the U.S., Wal-Mart is being criticized on the 2008 presidential campaign trail for providing too many jobs to Asians. Current Democratic frontrunner Sen. Hillary Clinton has called Wal-Mart’s existence "a mixed blessing." Ms. Clinton has returned Wal-Mart campaign contributions and said the company’s business practices raise "serious questions about the responsibility of corporations." She has vowed that, if elected, to name a "trade prosecutor" to take "tougher standards" on imports, particularly imports from China. Candidate Barack Obama, a senator from Illinois, has sought union votes by asserting that "people don’t want a cheaper T-shirt if they’re losing a job in the process." Mr. Obama recently was quoted as telling a New York City audience that some American workers "now compete with their teenagers for minimum-wage jobs at Wal-Mart because their factory moved overseas." Former Sen. John Edwards has not only campaigned against Wal-Mart and the globalization it stands for, but has staffed his campaign with anti-Wal-Mart activists.

Problem is, the political critics often have their own contradictions. Ms. Clinton is a former director of Wal-Mart. Mr. Edwards owned Wal-Mart stock before he ran for national office. And Mr. Obama’s wife, Michelle Obama, was associated with a company that supplies Wal-Mart with pickles, until she resigned earlier this year when the association raised questions.

Perhaps, whatever one thinks about Wal-Mart, the greater cause for concern is with the double standard associated with politicians who want to become president of the world’s economic superpower by pandering for antiglobalist votes against America’s No. 1 employer.

Mr. Rushford is editor and publisher of the Rushford Report, a Washington-based newsletter that specializes in the politics of international trade