Service-based economy (US and Europe) and Factories in Asia

Hello,

Many people complain that many US companies are leaving for Asia, hence, shutting down the factories in the USA, hence, more unemployment.

I have several questions:

1. If I had a company settled in the US, no matter how big it is, no matter how many employees work there, Am I not free to take my company (it is my company after all, I built it up, I created) wherever I feel like?, I mean, to Asia, to Romania, to Poland, without having to have any explanation to anybody? . Okay, people will get angry, kind of obvious because they work in my factory, but, let´s say that I want simply move to Poland (for whatever reason), Couldn´t I? Do the workers of my factory have the right to protest? why?. Of course, I would pay what I must pay them, but I, as a trade-man, as the owner, could take my company where it suits me more, I don´t have to give any explanation to anybody, I just thought I want to move it, to transfer it to China, for instance. Who is the government to tell me: you have to remain here, in my country?

2. When US companies, so many of them, move to China, Asia, Romania, Poland, and so forth, they do it thinking of making more profits, so, now the factories of the world are in these poor countries, but, the good part is that these countries take benefit from all of this, don´t they? . I mean, even when we say that they work so many hours for so little money, is it that really true?. Let´s take China for instance, the average wages there, is 1€ per day (supposing, I don´t know the figure at all) , then Nike settles in China and gives 2€ per day for their labor. Okay, for us, Western countries is just too little, but for them, that´s simply great, the worker in the Chinese factory would say to their brothers and family: Hey, look how much money I earn here, I am very lucky, we can afford now more things to buy, hence, Nike is allowing China/Poland/Vietnam, to grow , isn´t it?

3. When these factories are taken to China or Vietnam or Poland, ...what happens in the US? more people unemployed is the first thing comes to mind. Okay, but again I go back to my first argument: Any company, private-owned company, even the biggest one (of course!) has the right to relocate wherever they consider better, don´t they?. Honestly , again, if I were the owner of GM, who is the government to impose me where I have to settle my factories?. By doing so, am I destroying American wealth because many people gets fired? .

 

But what about laws designed to protect the environment and reduce pollution? Or worker protections? Or laws guaranteeing a decent wage?
There are also higher tax rates.

The problem is that it is not fully a free market. So free trade is not really "fair" trade.
Allowing free trade, but selectively applying taxation and regulations to just one region, not only circumvents that intent of these laws, but also drives production away to the region with lower taxes, lower wages, and few environmental protections.

Even if you believe that all the taxes and regulations should be reduced, you can still recognise the obvious problem when a country selectively applies these laws within its own borders but allows outsourcing to another country with very different standards.

 

A ridiculous corruption of the difference between free and fair trade, with the latter focused on how- for example- neo-liberalism has hindered the development of dynamic comparative advantage

Lower wages? We've seen how specialisation according to comparative advantage (e.g. labour intensive product in a labour abundant country) increases wage rates. Wage differentials first show the origins of the gains from trade and then, given the impact on labour demand, show how trade is a crucial mechanism to reduce absolute poverty

 

No! Outsourcing provides a means to fine-tune comparative advantage and therefore increase the gains from trade. In economic terms, that means a consumption result further outside the production possibility frontier. In practical terms, it means the pie is even bigger and the greater opportunities creates employment. At worst you can refer to temporary frictional unemployment or structural unemployment solved through re-training.

 

Anders, you are assuming that in the country where the factory is settled, there will be no laws guaranteeing a decent salary, aren´t you? , and the same applies to worker protections. So, you are suggesting , I guess, that the company must take care of these things to settle the factory, but I suppose they don´t do it.

Aren´t those companies from Europe or USA or Canada, audited to check these things?

My point is: From what I read it is good for both sides, the company and the country the factories are settled in. In the destination country (Taiwan, for instance), there will be more jobs, more employment, hence, less poverty, otherwise, before these companies are there, where did the Taiwanese work? in the harvests? as farmers? . Moreover, as Reiver remarks, the owners of the company will earn more money too, and the country (say, USA or Canada) will create more employment (this is what I don´t understand, Canada creating more employment with its companies settled overseas).

Will Taiwanese people earn more money, will Taiwan have more income, will it be good for Taiwan economy? If so, what is the drawback of outsourcing?

How can the unemployed people in Canada or Europe recycle, I mean, what kind of recycle will those workers need? What new areas will be left so that the new unemployed people in the Western countries can work in?

ARE ASIA AND AFRICA AND SOUTH AMERICA THE FACTORIES OF THE WORLD? AND EUROPE, USA, CANADA, ETC, DE CONSUMERS, the service-based economies? Is this the so-called evil globalization?

 

Its hard to find drawbacks, given outsourcing is consistent with more finely tuned comparative advantage opportunity. There is one mentioned here though

 

68% of Australia's GDP is from the service sector. Unemployment is about 5%.

GDP per capita in Australia is $69k.


I sure wish we were a manufacturing economy with higher unemployment and a GDP per capita of $10k.

 

The first companies will move offshore to increase profits, by loweing prices and increasing market share (or, they may have moved because their business model weren't competitive, and needed low labor costs). The rest follow to regain competitiveness.

Even in a country as large a China, the demand for labor increased hourly rates.

You ask about moving a factory off shore, what about adding automation to and an existing factory? Not only to reduce cost, but to radically improve quality, safety, and productivity. Automation caused the significant loss of high paying manufacturing jobs. By the time many companies moved to China, manufacturing wages were maybe 2X minimum wage.

That same move is happening in China:

 

Obviously it is beneficial (at least directly) for both the individual parties involved in the transactions, otherwise they would not be agreeing to the exchange.
But in economics we often find the fallacy of composition- what is true for an individual is not necessarily true of a larger group of individuals. In other words, it could be possible that while outsourcing provides an obvious direct benefit to individual companies, it could nevertheless still be overall disadvantageous to these companies as a whole.

This is only one side of the coin. Comparative advantage does not necessarily mean growth of the economy, and certainly does not always mean higher wages. The one thing comparative advantage does do is lower the direct cost of the goods directly involved. But it has all sorts of other effects.

And what happens when a country's "comparative advantage" is just the equity in its capital, or is just financed by debt? Then the alleged benefits of comparative advantage are much less likely to apply. Indeed, I think this is what we are seeing: the wealth from the Western countries is being drained away into the developing countries.

Even when comparative advantage does provide a net economic benefit to both countries involved, it can still be disadvantageous to the majority of people in both countries. The wealth from free trade seems to have a way of concentrating into the hands of a few, while raising the cost of land and driving down wages. So while the pie may grow, there may also be a larger increase in inequality, such that the poor are poorer than before. While such a situation could theoretically be remedied by taxation and redistribution of wealth, we must also consider the inefficiences of taxation, and the potential economic disincentive of such additional taxation. The people might be better off without added international comparative advantage.

 

So our time and resources being allocated to their most productive use doesn't lead to wealth and prosperity?

No. Way.

Why would we exchange if we weren't both benefiting from it? Further, if it "provides a net economic benefit", that means it's increasing the size of the pie and no matter how small your slice may be, you're better off.

 

Because of the fallacy of composition, comparative advantage between different countries is not necessarily a more efficient allocation of time and resources.
Then there are also the extraneous effects, such as on the environment, or on those dependant on wages.

In any case, increased wealth will not necessarily go into creating higher wages, it might just go into driving the cost of real estate up.

Often the ones suffering a disadvantage are not the ones actually making the exchange. A country is made up of a heterogenous group of individual people, many of whom are reliant on the jobs that trickle down from those who hold most of the wealth.

Not everyone agrees that it provides a net economic benefit overall. Neo-liberal / free-market economists usually like to gloss over this.
While comparative advantage is certainly a very important part of economics, it is not the only factor involved in trade.

Even if the size of the pie has been increased, your slice could still be smaller if you are getting a smaller percentage.

 

A stupid statement. The only complexity is the difference between static and dynamic comparative advantage, with that distinction only informing us of how trade theory can be linked to economic development concerns

 

Uh, that's exactly what comparative advantage is, the ability to produce goods and/or services at lower marginal and opportunity costs. There's no fallacy here.

Externalities as a result of transportation? You'd have to show that those externalities exhaust all of the gains from trade in the face of transportation becoming more efficient and the wage argument is nonsense too since trade tends to lead to higher wagers for both parties.

 

The reference to marginal cost didn't make sense!

 

If I'm able to make a good at a lower marginal cost than you, do I not have a comparative advantage?

 

Directly, at least. But it still does not absolutely imply net lower costs.
For example, maybe all the outsourcing leads to lower demand because the consumer base is earning lower wages and has higher unemployment. Or maybe higher corporate profits mean all that money is driven into residential mortgages (through more bank lending) so housing becomes less affordable because of higher prices.

Outsourcing almost always benefits the individual company involved, but what about everyone else?

Well, it does take more oil to transport everything from China than to produce it locally. That means higher fuel prices for everyone else.

 

You are free to take your business anywhere you want. You don't owe any loyalty to the people who spent many years producing your products and making you the person you are today. It was all you. And who is the government to tell you that you have to stay in this country? You don't have to listen to them at all. Tell the government to stay our of your business. Tell the government they can take their patents and shove them.

Is this what you are talking about or do you expect your company to have all the benefits of our country without living up to any of the obligations? If you think you don't owe any loyalty to the people of the United States then why should the people of the United States owe any loyalty to you? You have your interests and we have ours. If your ability to make as much money as you want involve your moving then good luck to you. If our ability to make as much money as we want involves tariffs, extreme taxes on those who outsource, removing United States patent protection from foreign made products, and otherwise disassociating ourselves from the likes of you then that is what we will do. You have your interests and we have ours. And none of us owe each other any loyalty, right?

 

Not necessarily. You'd have something closer to absolute advantage. Comparative advantage is purely about comparing opportunity costs.

 

That is absolutely the implication, it's about opportunity costs and me doing whatever the thing is that is the most productive.

Simple example, I'm a professor and I have a secretary. I'm much taller than her and can walk much faster, but I'd be foolish to do my own deliveries because my time can be better allocated towards something else, like giving a lecture or writing a paper. No different for nations, even if the US can manufacture cars more cheeply than China, it wouldn't be smart to do so because there are better uses for our time and resources.

You'd have to show that offshoring (which is what I assume you're talking about) actually leads to reductions in wages and employment. I'll wait.

Trade benefits everyone.

The division of labor is limited by the extent of the market - Smith

We don't and can't get wealthy trading with ourselves. Do you make your own shoes?

 

Ok, I was thinking that say for instance my marginal costs are lower because for each unit produced I generate fewer negative externalities that that would mean I have a comparative advantage.

Samuelson at one time said that comparative advantage is the one thing in economics that is both universally true and not obvious. It may not be the only one, but he's certainly right that it isn't all that obvious to most.

 

I agree that if we had ideal laws, a business should be allowed to take its business wherever it wants (assuming coerced labor is not being used). But as it is, the structure of our laws is not very logical, and there are no tariffs to compensate for extraneous environmental degredation/pollution. In light of this current situation, I think it counterproductive and perhaps even disasterous to be allowing free trade in its current form.

Obviously there is a huge problem if operations in other countries are being subject to a much lower rate of taxation; it is just driving all the production away.
And most American workers will not be able to compete with Chinese workers that are able and willing to work for less than a dollar per hour.

 

Its because people naturally gravitate, due to a misunderstanding of the economic agent (using simple, and bogus, views on the firm), to neo-mercantilism (i.e. they see it as an exercise in competition such that, if- say- marginal costs are higher, the less efficient party cannot compete).

 

It's almost like the United States is being punished because we were the first ones to build a large, modern economy.

Well ... if not punished then at least put at a disadvantage.

 

20 years ago Ross Perot warned Americans about the unemployment that would result from NAFTA. I guess Americans never made the connection because the growing problem was obscurred by the dot-com and later housing bubbles.

[video=youtube;xQ7kn2-GEmM]http://www.youtube.com/watch?v=xQ7kn2-GEmM[/video]


Contrary to what many modern economists believe, mercantilism was not just some illogical economic ideology from the past. Accumulating wealth is beneficial to a country because it reaps the interest and dividends of that capital. And we should remember that the types of capital with the highest value today are limited resources - land near centers of economic activity, and oil for example. If you read most modern economic textbooks in universities, or even read the wikipedia article, it seems main stream economists try to go to extraordinary measures to villify the concept of mercantilism.

 

Someone living in a country that does what you describe in response to the demands of the envious and the ignorant would do well to get out of it and take his wealth with him.