Jobs oversees? Another attempt to explain

Ludwig von Mises Institute ^ | Nov 27, 2003 | Llewellyn H. Rockwell, Jr.

[Huber]

The Bush administration has slapped high duties on Chinese TV sets for the alleged problem of "dumping"—which increasingly means selling at prices lower than sets sold by established firms.

Let's leave the issue of dumping for now and examine the claim that jobs are being shipped overseas, which is usually what is said when great foreign products appear in US stores. A number of people have observed that TVs are no longer made in the US. The implication is that at least the Bush administration recognizes a problem. The jobs that used to go into making TVs have effectively been shipped overseas. Why not act?

International economic historian Sudha Shenoy (University of Newcastle) has been at the offices of the Mises Institute, and this topic has come up quite often. She has found herself astounded at the lack of knowledge over trade issues in the US, and alarmed by growing protectionist sentiment. I'll offer a response to the above in a manner that follows a number of points that she has been making about trade.

Let's first watch our language. Jobs are not being shipped, and Americans are not somehow being stopped from making TVs. TVs can still be made in the US. Everyone and anyone is free to invest the money, hire the workers (bidding them away from other pursuits), buy the parts, build the sets, and put them on sale. That the same processes are undertaken in China has no bearing on anyone's freedom to do it here. If you want to make an all-American TV, no one is stopping you.

And yet, as with any other product, the US TV maker must still face the issue of persuading people to buy. The question comes down to the price people are willing to pay for your TV sets versus the prices charged by the competition. To try to sell them at a price that justifies your investment and worker salaries means they would sit on the shelves unsold because the same product or better is available at a cheaper price. You will have to lower your price to sell them, and will end up selling at a loss.

Now, you are free to continue to make losses, or produce TV sets that nobody buys, employing workers and dumping capital into the project, but you must eventually come to terms with the fact that you are not going to make a profit. That you are unique in choosing an economically unviable path would not be surprising. Investors are not so stupid that they continue to pour scarce resources into production (which is always and everywhere directed toward the final end of consumption) that makes no sense.

Now, is it a problem that American consumers (and businesses that import and sell TVs retail) have access to lower priced TVs than can be made in the US? Not at all. It is great for the buyers of TVs and it is great for the economy in general because this frees up capital and labor to be employed in better projects. To force the situation to be otherwise would imply sheer waste: deliberately raising the price of TVs by restricting supply or taxing non-US TVs. This is precisely the Bush administration policy, and it accomplishes nothing but destruction. It is only putting off the inevitable and taxing people in the process.

Then we come to the question of why it is possible to make TVs more cheaply in China than the US. It is a matter of the widening circles of the division of labor. China finds itself in a stage of economic development that allows it to specialize more and more in manufacturing at the expense of agriculture, even as the less developed nations are specializing more and more in agriculture. While this is taking place, more advanced nations are finding it economically advantageous to specialize in the production of goods and services that require more advanced labor skills and more capital expense.

In short, China (as well as South Korea, Indonesia, Malaysia, and many other booming economies) is finding itself in the position that the US was in the early 20th century, while the less developed nations are taking on tasks that used to be performed by the US in the early 19th century. It is globalism of economic processes that account for why the world, and not just the single nation, is the relevant domain to consider in understanding this.

These long-term trends of economic development are part of the blessing given to the world by the free mobility of capital. And so long as markets are free, they are also perfectly capable of adjusting. It is not only good for people around the world that prosperity is rising and the division of labor is expanding; it is good for the US. To wall ourselves off does nothing but subsidize waste.

What about workers who lack the job skills to fit into the higher and higher levels of sophisticated production in which the US is specializing? Because of the existence of scarcity, there will never be a shortage of jobs to do, so long as we live in time and not eternal bliss. The phrase "shortage of jobs" can only be colloquial; there is never a shortage of things to do. It is only a question of price, and the best way to raise the wages is to make sure that people do what they are most suited to do—which can only be known by letting markets work.

High-level production such as the US specializes in refers not to every job but only the dominant industries; within each there also exists a sophisticated division of labor. Not every employee at Microsoft designs software; the firm also provides jobs to packers, shippers, artists, gardeners, and a thousand other professions. Not every employee of the financial industry is a bond trader; rather, a profitable bond business provides jobs to ever widening circles of employment.

Now, some people have been drawing attention to the supposed uniqueness of the current moment in international trade, in the following sense. US companies are not just foregoing certain production processes in order to allow them to be done by the Chinese. Instead, US firms are moving their plants to China, not to sell to the Chinese, but in order to re-import their products into the US to sell.

Is this a uniquely troubling situation? Again, not at all. US business owners have observed a profit opportunity and seized it. The alternative is that US business not notice the opportunity and let others get there first. This would hardly be something to celebrate. It is a testament to the acumen of US businessmen that they can go anywhere in the world, take advantage of local economic conditions and then sell to anyone else in the world. It so happens that American consumers are in a great position to buy the best products from everywhere in the world (so long as their government lets them). Thus do we see the end result of American capital producing for Americans in countries especially suited to host the process, while the US itself hosts ever more sophisticated production.

In the Winter 2003 issue of the Austrian Economics Newsletter, due out soon, Professor Shenoy discusses how the US is just now coming to terms with the long-run trend toward greater levels of development around the world, and why the US had better get used to it and make the adjustment. The Bush administration has done its best to slow down economic development via tariffs and every other manner of protectionism. But this is only delaying the inevitable.

There is no surfeit of wonderful trends in our time, but the progress being made through global trade (progress at home and abroad) is certainly one of them. Leave it to government to try to rob us of the blessings of prosperity and peace that come from trade. And it is no different with trade than with every other area of life. We can permit the market to work or we can hobble it with taxes as it eventually gets its way in the long run. That is our choice. As Professor Shenoy would say, the free market is not perfect, but it is always better than the results that come from any attempt by government to make it better.

---------

Llewellyn H. Rockwell, Jr., is president of the Mises Institute and editor of LewRockwell.com. rockwell@mises.org

[Huber]

A concise recap of some economics basics.

"(T)he free market is not perfect, but it is always better than the results that come from any attempt by government to make it better."

[Huber]

Free Trade PING!

[JustAnAmerican]

"Then we come to the question of why it is possible to make TVs more cheaply in China than the US.

In a word, 50 cents per hour labor. And any piece that fails to mention this is nothing but pure BS. When the people who write this garbage(US citizens of course), start working for 50 cents an hour and are able to feed/cloth themselves,take vacations and generally enjoy life, then and only then will I agree that China and the like don't need trade Tariffs.

[Cincinatus' Wife]

Giving thanks for capitalism*** GRATITUDE TO the Almighty is the theme of Thanksgiving, and has been ever since the Pilgrims of Plymouth brought in their first good harvest. "Instead of famine, now God gave them plenty," their leader, Governor William Bradford, later wrote, "and the face of things was changed to the rejoicing of the hearts of many, for which they blessed God." ***

[1rudeboy]

Some people, when told that American companies are fleeing high labor costs, assert that labor costs do not play a major factor in the cost of production. Then they (not you, specifically) turn around and claim that low wage rates are killing us.

[Starwind]

Q: "Then we come to the question of why it is possible to make TVs more cheaply in China than the US.

A: In a word, 50 cents per hour labor.

When ... US citizens ... start working for 50 cents an hour and are able to feed/cloth themselves,take vacations and generally enjoy life...

And therein lies the core issue, really.

Why can't Americans feed, clothe, shelter, etc, themselves at 50 cents/hour? What is it in America that makes it increasingly expensive to live and work here? What is it that keeps driving our cost of essentials of living higher?

What do we need to change to return to competitiveness on world labor markets? How do we make it possible for the average person to afford to live here, so they can be employed here at a competitive wage?

[Vaduz]

Insurance.workmans comp,taxes are the main cost of operating in the U.S. not working out.

[TruthShallSetYouFree]

"Then we come to the question of why it is possible to make TVs more cheaply in China than the US. In a word, 50 cents per hour labor.

This is implicit in the author's argument. Manufacturing televisions involves a fairly high amount of unskilled and semi-skilled labor. If, as you noted, a third-world worker is willing (and able) to perform the labor for 50 cents an hour, and the US worker gets ten dollars an hour, it is impossible to make the sets stateside at a price people will pay.

Government intervention acts as a tax on consumers and a subsidy to workers. I don't think there is a groundswell of enthusiasm by American consumers to pay $2000 for a nineteen-inch television set.

The real answer to the issue of Americans making a living wage and being able to afford some niceties in life is to get enough education and/or skills so that our jobs can't be duplicated by unskilled third-world workers.

[Huber]

It is a basic business precept that you must choose to compete on the basis of cost, innovation or customer intimacy. It is in one of these three areas that you can differentiate yourself. Competing on the basis of cost ultimately leads to commoditization. Innovation and customer intimacy allow for differentiation, and therefore demanding a higher price for your product or service. The same precept that applies to companies applies to individuals. If individuals allow their contribution to production to become undifferentiated, they will only be able to compete on the basis of cost. Failing to do so means being out of business (unemployed).

The point is this. First, every working American needs to examine the contribution that he or she is making to our society, and do an honest assessment of whether his/her contribution is becoming an undifferentiated commodity or is differentiated. We then need to do some self-examination and determine whether we are content with the answer or whether we should begin planning to change the manner in which we are participating in the economy. For those who are content making an undifferentiable contribution to the economy, these individuals should educate themselves on the factors affecting cost - regulation, taxes, litigation, wages and benefits, etc, and work as activists to reduce those factors which are less valuable to them (Presumably we will choose regulation, taxes, litigation, etc. over wages.) These individuals should also recognize that tariffs are a shotgun approach to offsetting all of these simultaneously, and as a result, cloud the true factors causing any uncompetitiveness that may exist, and that tariffs also have negative side affects by artificially raising other costs in our economy.

During this Thanksgiving holiday, we should remind ourselves that our greatness will not be preserved by tariffs, but rather by our faith, our integrity, and our willingness to take God's gifts and combine them with our Yankee ingenuity!

[Starwind]

If individuals allow their contribution to production to become undifferentiated, they will only be able to compete on the basis of cost. Failing to do so means being out of business (unemployed).

And what is it precisley that prevents those individuals who in fact have differentiated themselves from then being force to compete with likewise differentiated foreigners who have a lower cost of living?

What is the 'barrier to entry' that will ensure the differentiated american worker will not in the near future (5 years?) need to re-differentiate themselves yet again? How often might one need to repeat college to obtain the credentials and education to sustain such differentiation and avoid competing on cost?

How has differentation preserved the jobs of aerospace engineers, software developers, and accountants? Even as the US shifts from 'undifferentiated' manufacturing to 'differentiated' service economy, these differentiated workers are still forced to compete on world labor cost.

Why can they not compete on cost after having differentiated themselves?

[Sabertooth]

Then we come to the question of why it is possible to make TVs more cheaply in China than the US. It is a matter of the widening circles of the division of labor.

In a large part, it's because it's US policy to penalize and inflate the costs of American labor through taxes and regulations. If there are no tariffs on the fruits of foreign labor, then US policy favors foreign labor at the expense of American workers.

China finds itself in a stage of economic development that allows it to specialize more and more in manufacturing at the expense of agriculture, even as the less developed nations are specializing more and more in agriculture. While this is taking place, more advanced nations are finding it economically advantageous to specialize in the production of goods and services that require more advanced labor skills and more capital expense.

If it's a good idea to have a diverse portfolio in one's financial holdings, why is it not also a good idea to have a diversity of industries in a national economy? Taking a lesson from agricultural economies, shouldn't we be a little cautious about planting post-industrial monocultures?

[captnemo1]

"Then we come to the question of why it is possible to make TVs more cheaply in China than the US. In a word, 50 cents per hour labor.

The concept of wages in and of themselves being the root cause is misleading at best and deceptive at worst.

An example: My stereo blew up. I grabbed a meter and a screwdriver and 15 minutes later had a list of all the bad parts. (Don’t try this at home unless you know what you are doing.)

I went on-line to look for the parts and found that it was cheaper to buy a new stereo than fix the 1 year old one even when I paid $0.00/hr for labor! Why does this mean anything? Because the infrastructure needed to build a TV or stereo in the USA does not exist. This is the real loss of American industry. It is not possible to build a USA only TV, there are no parts to buy to build it with.

Wait a minute you say, The USA is the world leader in computer CPU/brain chips!

Yes, the USA manufactures computer chips for the world, it’s true. But all the rest of your PC came from overseas, motherboard, video card, memory chips et al. A $1000 PC has, at best, $150 worth of CPU in it. (At OEM purchase prices per/1000) All the rest of the money goes to either, sales, overhead or overseas in the form of parts.

I think you can see where I’m going with this. It isn’t the low wages that are the problem. Rather the low wages are a symptom of a larger problem. One that is a bit more complex that the cost of wages.

The “Dumping” could be better described as “Country X is manufacturing transistors and selling them below cost to another of their manufacturers that turns them into finished goods, again below cost.

Then they are selling them to a country that is un-able to manufacture the finished goods as they can’t even make the transistors for themselves, let alone the finished product.

Is NAFTA, GAT and Globalization a good thing? Time will tell. But for now I am training for my fourth career.

Incidentally I believe this is why they have the H1-B visa. Employers can’t find an engineer with 10 years experience in a field. In 10 years an engineer will have had a minimum of 2 entry level engineering jobs both in totally different fields. So they have only 5 years experience in each one.

Regards…..

[TruthShallSetYouFree]

I think your posting, though interesting in and of itself, is a bit off point. You are comparing the cost of parts for repair to parts for a finished product. What is true for your stereo (cheaper to replace than repair) is true for nearly all small electronic items. I have a friend who used to make a nice living charging about 75 bucks to fix VCR's that, at the time, cost 400-800 dollars. He's not doing many of those repairs now, with VCRs selling for as little as fifty dollars.


We've all heard that, with an automobile, if one were to re-create a vehicle from scratch, part by part, the car would cost several times as much as one purchased at a dealer. This is true even for American made cars, where the infrastructure does exist, and has nothing to do with labor costs, as you correctly noted. It has to do with the economies of scale and division of labor that any manufacturer must utilize in order to stay competetive. These advantages are not available to the individual who attempts to make (or even repair) a product by himself.


I have some experience in electronic sales. A manufacturer of a stereo, for instance, will attempt to purchase each of the thousands of component parts from the cheapest (reliable) source. The first model might come out at a price of $500. Parts manufacturers from competitors might then be able to undercut other suppliers, selling a power supply, for example, for five dollars, when the previous manufacturer charged ten. Multiplying potential savings on many parts leads to an overall lowering of the stereo maker's costs, which he will pass on to the consumer to remain competetive and/or increase market share. This process is one of the main reasons that consumer electronics items always decline in price.


This same process takes place irrespective of the location and labor costs involved. Clearly, all things being equal, hourly wages of fifty cents will lead to lower prices than hourly wages of ten dollars, unless labor costs are a minisucle component of the manufacturing process. That is, if automation or robotics replaces most of the labor, ingenuity can reduce costs. Of course, this doesn't do anything for the semi-skilled American worker either.

[LibertyAndJusticeForAll]

“…more advanced nations are finding it economically advantageous to specialize in the production of goods and services that require more advanced labor skills and more capital expense.”

Manufacturing is “the production of goods”, and we are losing our manufacturing plants; a recipe for a lack of national defense. The “advanced labor skills” like high-tech are also leaving the country Mr. Rockwell.

“What about workers who lack the job skills to fit into the higher and higher levels of sophisticated production in which the US is specializing?”

Once again Mr. Rockwell, we are losing our high-tech jobs. At the moment, American corporations seem to be specializing in raw corporate greed.

“…make sure that people do what they are most suited to do…”,

Does this mean that Christians imprisoned in Red China are more suited to forced SLAVE labor to produce cheap goods for you Mr. Rockwell?

[Huber]

Good questions. In general:

1) The line between differentiated and undifferentiated economic contributions is a moving target, so yes, it is no longer just manufacturing jobs that can become solely cost driven. Conversely, there are manufacturing-like jobs employing innovation and customer intimacy (artisans and trades) that still command high wages, so it is certainly not a blue collar/white collar thing.

2)No one should need to repeat college. The point of college is to learn how to learn, which is a life skill adaptable to all situations.

3) All of us are at risk if we become stagnant and to not continuously acquire new skills. Fortunately, when human beings learn and adapt, we are at our best.

[gcruse]

I wish the 'fair trade' proponents could see the damage their shortsightedness leads to. Socialism is attractive only from afar. Up close, the rot is unmistakable.

[azcap]

The real answer to the issue of Americans making a living wage and being able to afford some niceties in life is to get enough education and/or skills so that our jobs can't be duplicated by unskilled third-world workers.

 

Even if workers educate themselves from unskilled to skilled they are then just entering a different league of competition. There is no trade, skill, or profession that the foreigner cannot compete in anymore. Unskilled manufacturing jobs hot hit first, then skilled manufacturing, now we are seeing technical and professional work moving overseas. There are great accountants and programmers in India, great genetic researchers in China, etc, etc. Education and job training ( the politicians favorite - both Rat and GOP) is not the answer. In the end only innovation, creativity and entrepreneurism separate the American from the rest of the world. We have no monopoly on those but our market, politics, and culture give us a distinct advantage. The biggest problem I have with education as the answer is that being smarter or more skilled doesn't necesarily change your attitude. Every good worker I know has a job. I know some folks who don't have jobs. I know people with no college degree who are well paid in the business field and I know MBAs who still can't find a job after 3 years. The problem with taking an unskilled worker with no job and teaching him advanced medical research skills is that in the end despite his new found knowledge you often just have an unemployed medical researcher with the same attitude and sense of entitlement.

 

[gcruse]

why is it not also a good idea to have a diversity of industries in a national economy?

If there is a niche for adequate return on investment, be sure there will be.
Allocation of capital will be decided on return from same, not whether government should either tax into existence or subsidize (tax into existence) any industry dubbed by its labor unions or Luddites to be strategic.  In short, I'm surprised at you.  The NEP didn't and won't work.

[Huber]

Sabretooth,

Great points. Do you think, however that we should strive to avoid a "post industrial monoculture" through activist government intervention (such as industrial policies, etc.) or through elimination of the artifical barriers that we have created within our own society?

[Huber]

Your point about Christians in red China is analogous to saying that God is evil because there is so much suffering in the world. Yes, life is challenging and not always fair. Conservatives understand and accept this, utopian socialists do not.

It is important to keep in mind Churchill's famous quote that "The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries."