Pang Qing Xiang climbs furtively up the narrow staircase leading to the private dining rooms of a noodle shop in Liaoyang, a city in northeastern China. He speaks quietly as he takes a seat, and flinches whenever there is a sound or when someone enters the room. That’s the price Pang, 60, is still paying for having tried to organize unpaid employees at the ferro-alloy factory where he worked three years ago. Independent trade unions are banned in China, and Pang’s incipient unionism got him nine months in prison, where he was often beaten and abused. “To them we were nothing,” says Pang, who is still tailed by plainclothes police officers. “Certainly not people who had a right to demand anything, not even pay. When I told them work without pay is slavery, they just laughed.”

Global consumers buying $25 Chinese-made DVD players usually assume Chinese labor is cheap because the country has a limitless supply of poor workers. But the morally cumbersome truth is that the Chinese government systematically prevents workers from being paid the full value of their labor. Chinese workers can join several state-controlled unions, but since the state and politically connected clans, or families, own most of the Chinese economy, official union representatives who work too zealously first get a warning smack on the wrist–then worse. Ask Kong Youping. After Kong, a trade union official in Liaoyang, raised the ire of local officials by fighting doggedly for the rights of recently laid-off workers, he was sentenced to fifteen years in prison.

This power imbalance between owners and workers in China means that almost 200 million Chinese workers go to bed every night in overcrowded dormitory rooms after having worked eighteen-hour days in Dickensian factories where some employees are literally worked to death. The phenomenon has even added a new word to the Mandarin vocabulary: guolaosi, or overwork death, where fatigued workers fall off their stools bleeding from the ears, nose and anus.

Pang says conditions for Chinese workers could get worse before they get better. China’s economic “miracle” has long hinged on five elements: cheap labor, market reforms, disregard for intellectual property rights, loose environmental standards and cheap capital from state-controlled banks. Together, they’ve offered global investors a unique combination of nineteenth-century business practices and twenty-first-century infrastructure that have allowed China to attract almost $900 billion in direct foreign investment since 1979, mostly in the labor-intensive manufacturing sector.

But China’s economic ground realities are changing. Ecological devastation is forcing better environmental standards. Beijing is under pressure from the West to enforce intellectual property rights. And the public listing of major state-owned banks is reducing the banks’ ability to make political loans to China’s gargantuan state-owned companies. That’s left China’s cheap and disempowered labor force as the country’s only unchanged manufacturing “competitive advantage.” The government recognizes it cannot constrain workers and wages forever and is trying to move the Chinese economy up the value chain. But that could take decades. In the meantime, “the exploitation here is getting harsher,” according to Han Dongfang, a unionist with the China Labor Bulletin, a journal in Hong Kong, who was expelled from China for trying to organize workers in 1993. “On the one hand, we have better laws than ever. But in reality there is no enforcement, and actions always tell you better than words what people really want.”

Sun Yi Lin, 38, a construction worker in Beijing who has been living in makeshift housing on work sites for the past twenty years, says conditions for workers and peasants have improved since Chinese President Hu Jintao came to power in 2003. New agriculture policies have helped farmers, reducing the incentive for them to migrate to cities and work as laborers. This, coupled with rising economic standards, raised wages in boom towns like Shanghai by about 15 percent last year. Yet the government is dragging its feet on the creation of a national minimum wage, and the average monthly income for workers remains about $50-$100, depending on location and industry. Also, international organizations trying to address labor rights are being intimidated by authorities, and at least twenty-four labor activists are languishing in Chinese prisons, says the Dui Hua Foundation in San Francisco, which tracks political prisoners in China.

Part of the Communist Party’s aversion to independent unions can be explained by an old Chinese proverb: “There cannot be two suns in the sky”–i.e., there can be only one source of power in the land. “No one knows where a union ends and a political party begins,” says Zhang Bijian, head of the Beijing-based think tank China Reform Forum and a close associate of President Hu. “A gradual approach is always more successful, and it’s good for everyone. All the other ways will be not good to our people in the end.”

Zhang’s words betray a common fear here that a Solidarity-type movement led by a charismatic leader like Lech Walesa could sink China into the same turmoil that engulfed the Eastern bloc in 1989. But Han says the argument that independent trade unions will automatically drive China toward democracy is a red herring. He says the specter of chaos and political instability is fearmongering put out by powerful people with a vested interest in denying Chinese workers their rights. “In the US in the 1920s, it was argued that trade unions would turn the country into a Communist state, but it didn’t happen,” says Han. “Now ironically in China they are saying trade unions will turn the country into a democracy. Isn’t that strange?”

Significantly, China’s labor policies elicit little criticism from Western governments, even though they fly in the face of international law, including the charter of the International Labor Organization, of which China is a member. When US Labor Secretary Elaine Chao was in Beijing in December, she never raised the subject of independent trade unions in public. Perhaps she was loath to rock a system that’s allowing Western corporations and governments to reap huge profits. Low labor costs in China mean big profits for Western companies with factories here. A recent survey of 1,800 US businesses in China by the American Chamber of Commerce in Beijing found that profit margins for 42 percent of them were higher than their average worldwide margins. The export of low-cost goods made in China is also helping to keep global inflation at about 2.5 percent despite recent spurts in oil prices, real estate and stocks, the World Bank says. More significantly, China has invested most of the $1 trillion it has made from its labor-driven exports in US debt, including Treasury bills. This helps the United States fund its deficit and keep its interest rates low, thereby allowing US consumers the cheap credit they need to buy loads of Chinese goods–which begins this cash cycle anew.

Even some US officials and politicians who stir voters by bashing China for taking American jobs usually neglect to mention the country’s lack of independent trade unions, despite the fact that this is one of the key reasons Beijing has been able to take away 1.5 million American jobs between 1989 and 2003, according to a report by the Economic Policy Institute. Instead, Treasury Department officials prefer to dwell on Beijing’s undervalued currency and its poor enforcement of intellectual property rights (IPR). But the bulk of China’s exports to the United States are toys, textiles and cheap electronics, which contain little or no intellectual property. Further, China’s local value-added to exports–the portion of a product actually built in China–has been calculated by the World Bank to be between 10 and 30 percent of the total product. So even a 20 percent increase in the Chinese currency, the renminbi (RMB), would only raise prices of many Chinese exports by 2 to 6 percent, too small to reduce job losses or the trade deficit significantly. What the emphasis on currency rates and IPR reflects are the interests driving global trade policy. Stronger labor rights might help American and Chinese workers, but they would undercut the competitiveness of foreign corporations with factories in China. A stronger RMB and IPR protections would benefit US corporations that own patents and could sell more of their high-value goods in China.

“Everybody benefits from cheap labor–except the workers themselves, of course,” says Han. “Foreign companies have created a race to the bottom, and chase countries for the cheapest labor. In March [2006], when the National People’s Congress [China’s rubber-stamp parliament] tabled a new labor contract law, the US and European chambers of commerce were the first to come out publicly against it.”

The Chinese government recently made good PR use of the fact that it had forced Wal-Mart, a company notorious for preventing its employees from unionizing, to allow a state-run union in its doors. Yet most foreign companies, and particularly local factories manufacturing for foreign companies, still push their employees to work extended shifts without overtime pay, says Han. Last July thousands of workers at the Merton Company in Guangdong, which makes plastic toys for US companies like Disney, Mattel and McDonald’s, rioted because they were forced to work eleven hours a day without overtime compensation, according to China Labor Watch, a New York-based NGO.

Still, Han sees hope in China’s fledgling legal system. On paper, China’s labor laws read like those from any moderately liberal country; it’s just that they have never really been enforced. With the legal system expanding, Han and other activists are using the courts to breathe new life into China’s laws by filing thousands of labor rights cases. Some activists, such as Gao Zhisheng, a dissident lawyer currently under detention by the government, say they’ve had little luck in the courts, as the government has short-circuited their cases with a mixture of heavy-handed and velvet-gloved tactics. But Han says he and other supporters have brought thirty labor rights cases to Chinese courts, and somewhat astonishingly, they have won most of them. One case, in which they were representing jewelry workers who’d been fired after developing silicosis, a lung disease contracted by breathing mineral dust, set a record for worker compensation: RMB 500,000 ($62,500) per worker.

While the cases activists are pursuing in the courts are still a drop in the ocean, Han says the important thing is that they are slowly setting precedents. “Through these legal battles we also provide the idea that workers should get together,” he says. That’s made Han and other labor activists folk heroes with many in China’s underclass. The tales of their exploits are creating a discernible change in workers’ mindset. “The period of relying on leaders is already gone,” says Han. “Today, slowly, people are understanding that they have to fight for their own future.” That’s potentially seditious talk in China, and like many Chinese who realize they’ve gone too far, Han relies on an old trick for backup: He quotes Mao. “As Mao used to say, the evolution of history does not follow the will of individuals,” he says. “Historical developments happen either way. Today, China is living in a time of darkness, but that does not mean there is no hope. Respect for people’s basic rights, limited work hours, decent compensation, better working conditions, laws that are enforced–all these things will happen because it is natural that they do. That’s just the process of civilization.”