The xenophobic populist slogan that “China stole our jobs (and factories)” is a lie. And those spouting that lie are liars. There was no thief in the night.
If you lived though the early 1990s when Chinese consumer products started flooding the U.S., with Walmart being one of the leaders, and you were involved with business at the time, you know what happened.
What happened
Whenever a company went to Wall Street for financing, or startups pitched their business models to venture capitalists, the constant question asked was: “What is the China price?”
Here’s how it worked. When a company wants to go public or get financing, it puts together a detailed document called a business plan. This plan contains all the financial details, plans and expectations, such as costs of raw materials, labor costs, marketing costs, expected sales prices of products, etc.
Banks and venture capitalists who lend money scrutinize a company’s business plan, wanting to see low costs and high returns. Since they expect companies to look for costs as low as possible, any company that did not include the lowest costs for labor and materials was asked “What is the China price?”
That question became the scariest words in American industry. See, for example, this Bloomberg article.
This “ask” was like a command. If you did not include outsourced (in this case, Chinese) resources, then you were not considered to be efficient, and likely would not get the financing you wanted or needed. And worse, your competitor who was using outsourcing would likely get the financing they wanted.
Then there were the factory owners who, not necessarily needing additional financing from Wall Street, saw the writing on the wall. They often act in a herd mentality, so some moved factories out of the country because others did. Some moved factories because they felt costs would be lower. Some moved factories because of the fear that competitors will be producing goods cheaper and the fear of being undercut by low prices. Some moved factories just because they could.
For these many reasons, companies moved their factories to China. Lower costs, even when factoring in transportation and questionable quality, meant that products would be manufactured cheaper than in the U.S. Lower costs meant more profits.
So, no, China did not steal our factories and jobs. Company executives moved their factories to China by choice, or were essentially forced to move their factories to China by Wall Street.
What China did was make itself a desirable place to relocate factories to.
Favorable terms, a compliant workforce with low wages, moderated costs, political and “social stability” and other incentives. And China’s terms have been and certainly are tilted in China’s favor.
China is certainly not a benign player. They have certainly taken advantage of their position. (What China’s motives were and are is the subject of a future post.)
Of course, the moving of factories overseas is short-term thinking (“Let’s lower costs and that will make us more profits”). And what would be left if all manufacturing was outsourced? While Finance is one of many industries, it is not enough alone to sustain a country. For an economy to grow and enhance its citizenry and its GDP, it must engage in some kinds of producing or manufacturing (“adding value”), the more the better. Without the ability to manufacture things, an economy cannot sustain itself for long. As we have seen in the past twenty or thirty years or more, without broad-based manufacturing capabilities, gains in the economy get concentrated in fewer and fewer hands.
Once the America factories gained a functional presence in China, China started to create their own factories to manufacture and export goods into the U.S. It is no longer only American companies benefiting from the manufacturing environment in China. In the end, we can see that American companies painted themselves into a corner: they enabled Chinese manufacturers to out-compete them.
If you look at China, you see a country that in many ways is getting stronger financially and militarily, and with seemingly enough money to do many things. Why is this so? This is so because it has a large manufacturing base. As a result of its ability to manufacture and export products, it has the money to grow. It has been posited that China will overtake the U.S. economy by about 2032, although there is much debate about that. It is a complex situation, and China is not without many of its own problems. But overall, it is has been growing for years at a pace the U.S. cannot match.
There is a problem in economics call The Tragedy of the Commons. This refers to the situation where people acting in their own self-interest end up depleting a common or public resource. While the analogy is not exact, what has happened is that each factory owner or Wall Street bank that promoted outsourcing to China acted in their own self-interest (as mentioned: “Let’s lower costs and that will make us more profits”), the effect was an entire hollowing out of the manufacturing capability of the U.S., and with it the economy as a whole.
There have been many debates about tragedy of the commons as a theory. Whether it is applicable only to shepherds and herdsmen (as described in the original theory), part of it seems applicable to the current economic condition we are in. We see many corporations attempt to privatize the gain and socialize the losses in a heads I win, tails you lose state of affairs.
While in aggregate we are not in a collapsed economy, some segments of the population are not benefiting from whatever growth exists. And the long-term effects of not having a strong manufacturing sector does not bode well for the country’s future.
What is Free about Free Trade?
The overall description thus far does not take into account changes in U.S. tax policy that allowed this outsourcing to occur. The concept of “free trade” really means the free flow of capital as well as goods. In reality, free trade policies are geared to allow those with capital (ie, those with the money) to move capital and goods freely from one country to the next.
It is the free flow of capital that allowed outsourcing to occur. It would not have been able to happen if moving capital and trade was burdensome or restricted, as it had been in the past. Free trade was championed by those attempting to benefit by lower barriers to trade.
Who’s Got the Barrier?
Free trade aims to reduce and eliminate barriers to trade. Barriers include taxes, tariffs, restrictions on the movement of capital. But some barriers to trade are what a nation needs to maintain itself, for example environmental protection laws, labor laws, legal process, etc. Otherwise everything can be outsourced, bypassed, and thereby be economically destroyed.
However, overzealous barriers are counter-productive. Look at Smoot-Hawley Tariff Act. During the Depression, in an attempt to protect itself, the U.S. passed the Smoot-Hawley tariff law. It put high tariffs on many goods. The result was many other countries passed reciprocal tariff laws on American goods. And Smoot-Hawley is widely believed to have made the Depression worse.
On the other hand, industrialization, as exemplified by the industrial revolution in the U.S. was nurtured and protected at least in part by tariffs. In fact, tariffs, which discourage imports, were one of the main reasons why American industry grew so quickly during the latter part of the nineteenth century.
The recent upheaval in international trade caused by the U.S.’s imposition of some tariffs, seems more a political stunt than a reasoned policy initiative. Scoring points domestically while at the same time injuring numerous other domestic industries isĀ counter-productive. What should be considered is a comprehensive plan that balances the need for international trade with the need for national financial security.
It would seem that some balance on trade would be necessary. Since the purpose of free trade is to eliminate barriers to trade, then the underlying expectation is that free trade should encounter no hindrances in the movement of good and capital.
Completely free movement of goods and capital means the success of only those in control of the goods and capital. With that, everyone else loses.
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