Ignorance Will Lead To China Economic Syndrome: Outsourcing To China
A popular topic to talk about is the globalization of business. The terms international corporations, multinational corporations, and export seem to be in every edition of the Wall Street Journal.
A popular complaint among many Americans is that outsourcing to China has a negative effect on the United States. Unfortunately, most of us who live in what used to be the “most powerful and respected country on the planet” are often easily convinced by politicians looking for a vote that China is bad for the US economy.
This is easy to say, but hard to justify when you consider the facts.
China’s economic expansion and its increasing trade and investment with the United States have resulted in a Chinese and American economy that is largely interdependent. My father used to say that figures lie and liars figure. While that may be true, based on my research, I thank God for Chinese trade with us…and for wonton soup.
The goal of this article is to identify significant areas where this interdependence has been beneficial to the US economy and where China’s growth has had a positive impact on all US citizens.
Fact #1 – Cost Savings Resulting from Outsourcing Manufacturing and Services
The phenomenon of outsourcing of manufacturing and service sector activities to markets such as China used to be a consideration for US companies faced with the challenge of reducing costs. Now outsourcing is a necessity. And I can promise you that companies that don’t outsource are putting American jobs at risk.
China’s large pool of low-cost labor ensures that almost any industry can achieve higher rates of return even after factoring in transportation and export fees. China’s cost advantage translates to savings of up to 70% over US wages.
– While China’s low-cost infrastructure leads to foreign direct investment (FDI) in China, the mass-produced products and services are mainly destined to be exported to other markets. China’s artificial exchange rate controls ensure that while its vast labor force offers profitability, its exchange rate creates cost advantages for shipping these goods and services back to the US at prices that US-based manufacturers in the US they just can’t deliver.
American consumers benefit greatly from cheap products that come from China. The many US companies that have outsourced production and manufacturing to China have remained competitive and profitable and are therefore able to repatriate profits to the US and pay corporate taxes on those profits. Hello Mr. and Mrs. Main Street… what would you do without your 4 TVs, 3 DVD players, a fancy stainless steel refrigerator, and a scooter in your garage?
It’s Economics 101: A company that makes more profit, largely due to lower expenses as a result of outsourcing some operations to China, pays more tax due to a higher amount of taxable income. This certainly helps the American economy, right?
Fact #2 – Consumer spending and its effect on the economy
American consumers have benefited from a glut of cheap Chinese-made products and services for many years. These goods form the basis of much of the consumer activity in the US economy. This has kept consumer confidence at a positive level and has mitigated any effects the recession might have had on US consumer spending. Yes George W, we are in a recession.
Consider the following:
– “Cheap goods and easy access to them are critical to consumer confidence, which can help the US economy weather economic contractions related to declining job growth and domestic product contractions gross (GDP)”
Stephen S. Roach – Chief Economist, Morgan Stanley
– According to Catherine Mann of the Institute for International Economics, the globalized production of IT hardware, that is, the offshoring of computer-related manufacturing, has accounted for up to 30 percent of the fall in hardware prices. The resulting increase in productivity fueled the rapid expansion of computer use and thus added some $230 billion in additional cumulative GDP between 1995 and 2002.
– Even when cheap Chinese goods are imported, there are benefits to the US economy. As most American consumers realize, most of the products they buy at Wal-Mart are made in southern China by low-skilled workers who work long hours. In fact, of Wal-Mart’s 6,000 suppliers, 5,000 are Chinese. When they buy these cheap imports, American consumers save billions of dollars every year. A Morgan Stanley report claims that American consumers have saved $600 billion in the past decade through Chinese imports.
– Not only are new opportunities being created for American workers, but also for shareholders. Starbucks CEO Howard Shultz announced that by 2008 the company hopes to have more coffees in China than in the United States. Similar stories can be told for McDonalds, KFC, Coca Cola or Motorola. Now there are 94 KFC in Shanghai city alone, and the number is increasing every month. On a sunny Sunday afternoon, they are usually packed with people, young and old, enjoying sandwiches and ice cream.
Fact #3 – Effect of Chinese investments in the US
China’s total investments in US companies rose to $9.8 billion in 2007, from $36 million in 2006, according to Thomson Financial. By comparison, US investment in China was $2.6 billion in 2007, up from $3 billion in 2006, China’s Ministry of Commerce said.
Chinese manufacturers, particularly those that import parts or raw materials from the US, are also looking into setting up assembly operations in the US. It would save on shipping costs, said Karen Shen, business development representative for the state of Washington in Shanghai since 2000. US states are now trying to capitalize on the growth in China:
– More than 30 US states have staff or representatives in China, according to the Council of American States in China. With the US economy slumping and unemployment rising, even some harsh critics of China and outsourcing are courting Chinese money. In March, a Missouri delegation included the governor, two US senators, the mayor of St. Louis and two dozen other officials and businessmen, with the goal of getting Air China and Chinese officials to back Missouri’s attempt to create a air cargo hub in St. Louis.
– Few states have been as aggressive in reaching out to China as South Carolina. In recent years, 10 Chinese companies, including home appliance maker Haier, have expanded into South Carolina, creating about 2,000 jobs, said John Ling, general manager of the South Carolina office in China.
Fact #4 – Impact on US interest rates
China realizes that in order to maintain its own economic growth and stability it needs to continue to support US economic policy through continuous purchases of US securities that allow it to artificially control the value of its currency against the US dollar. China’s monetary policy seems to be indicative of a pervasive foreign policy that is increasingly aligned with the demands of the US market itself.
China’s use of the yuan’s partial peg to the dollar may act to support its export market. However, to secure this artificial valuation, it bought a large number of US securities, which helped keep interest rates low, again greatly benefiting the US consumer, especially in its recently ended housing boom.
Thus, it can be said that after American consumers pay for Chinese imports, much of the capital is recycled in the form of investments in government Treasury bonds. This foreign capital, in turn, helps keep interest rates low so American consumers can continue to enjoy cheap financing for cars, homes, and college. As long as the Chinese are confident in their US investments, this positive cycle will continue for the foreseeable future.
I wonder how many daily critics of outsourcing to China consider this point… a point of great magnitude for all Americans.
If the US economy collapses and Americans stop buying Chinese goods, it will deepen the US downturn as China first stops buying US bonds that have inflated the US bubble and then turns to selling them. This would be an “uh oh” moment.
Fact #5 – Benefits of rising living standards in developing countries
People in developing countries like China and India, who are now outsourcing jobs to the United States, are seeing a rapid increase in their wages and standard of living. In the process, they are becoming more Americanized, which translates into demand for American goods and lifestyles. Thus, according to the McKinsey Global Institute, for every $1 outsourced, the economic gain for the United States as a whole is $1.12 to $1.14; while the country to which a job is outsourced earns only 33 cents.
I’m not a mathematician, but it seems like this is a 3.45X advantage.
Okay, so-called truth-speakers, without digging into the basic facts… to me, a 345% lead over China and other developing countries sounds like a good thing and not something to be afraid of.
Do you want something to fear? Fear of the fact that American students are not only falling behind, but have fallen so far behind other countries in Math and Science. Maybe Mr. and Mrs. Main Street should stop watching their imported 56-inch TV for a few hours a week so they can help their kids with their homework.
Most likely we will never (note I didn’t say never…can’t come back to myself in 2025 and point out my mistake) be internationally competitive in manufacturing. Therefore, we must continue to lead the world in innovation. We must also realize that a key product in 2008 is information. Imagine life today without Google.
Please, American citizens, understand that this great planet is actually a small trading village. We are interdependent and we depend on each other. Many people who claim that China and specifically outsourcing to China is a bad thing would take offense if they were called racists.
I think we can all agree that a base ingredient of racism is naivety and false assumptions. Just as we welcome people as one, let’s welcome savings as one, based solely on the investigation of the facts. My fear? Those false assumptions by uneducated politicians (not an exaggeration, eh?) will negatively affect our positive relationship with China. Talk about a real china syndrome.
This article is the first in a two-part series. The following article will address the responsibility of corporate America to outsource labor to produce quality products and ensure the ethical treatment of workers.