Corporate Relocations of Production to Low-Wage Areas

In view of the xenophobia that seems to be rearing its ugly head in various parts of the world, I broach this topic with hesitation. To be very clear from the outset, I am not an opponent of international trade. I do think there need to be controls and safeguards, and the ideal should be ‘fair’ and ‘managed’ rather than so-called ‘free’ trade. I think it is in the interests of any nation to develop a broadly based network of production to enable self-sufficiency in the event of external conflict. And moves to weaken sovereignty and democracy (such as through the Trans-Pacific Partnership Agreement and similarly notorious “trade” deals) need to be resisted. When it comes to the negative impacts of global capitalism, I am not inclined to privilege the interests of disgruntled westerners over workers in lower-income countries. Many westerners, judging by post-Second World War voting patterns, appear to have thought it perfectly okay for much of the world to be poverty-stricken and war-ravaged just so long as they retained their relatively high-paid jobs. It’s not clear why the workers of any particular country have the right to a job or income over anybody else. If somebody is going to miss out, why not westerners who only now react against the social and ecological calamity that is global capitalism, and even then in a misguided manner? The problem is the existence of war and environmental destruction per se; poverty amidst plenty per se; exploitation per se; the fact that many who want decent living conditions and the opportunity to contribute to society in a meaningful way are denied their chance. The mistreatment of a westerner is abhorrent; the mistreatment of anybody else, equally so. Having spelled out my starting point, I want to comment on a statement tweeted out by Donald Trump (hat tip to Matt Franko, who reproduces the actual tweets in this post).

Here are the tweets in consolidated form:

The U.S. is going to substantially reduce taxes and regulations on businesses, but any business that leaves our country for another country, fires its employees, builds a new factory or plant in the other country, and then thinks it will sell its product back into the U.S. without retribution or consequence, is WRONG! There will be a tax on our soon to be strong border of 35% for these companies wanting to sell their product, cars, A.C. units etc., back across the border. This tax will make leaving financially difficult, but these companies are able to move between all 50 states, with no tax or tariff being charged. Please be forewarned prior to making a very expensive mistake! THE UNITED STATES IS OPEN FOR BUSINESS.

As with anything Trump says, it is unclear whether the statement comes with genuine intent, but for present purposes, we can take it as read. Setting aside the low corporate tax bias, there is, in my opinion, a degree of legitimacy to one aspect of the policy position expressed, though also a hole (or double standard) in it that would limit any benefit it could have for US workers.

The legitimate point is this. Corporations that relocate production to low-wage regions with the intent of selling back into the high-wage region are, in a sense, ‘free riding’. Every consumption-goods-producing firm wants to sell its product into a relatively high-wage market where consumers, due to the higher wages, have the capacity to pay higher prices. The firms want access to the high-wage market. They just don’t want to pay the higher wages. If they can get away with it, they will gladly place their production sites where wages are low and sell the resulting product where wages are high. The dynamic set in place, globally, is a race to the bottom on workers’ pay and conditions.

But the statement is also misleading and to a degree empty once the misleading aspect is taken into account. What is misleading is that there is much the same dynamic in a federal system (such as the US system) to the extent that pay and conditions and other relevant regulatory requirements are determined at the state rather than federal level. When corporations relocate production to low-wage states with the intention of selling the product back into high-wage states, they are basically free riding on the demand for consumption goods that is created in the high-wage states. This is very similar to the practices of a multinational corporation that engages in this behavior globally. Again, a race to the bottom on pay and conditions is set in place as states try to entice corporations to set up inside their boundaries.

I do think there is a clear distinction between this kind of activity, in which a corporation relocates production outside its chief target market(s), and what might be called genuine international trade.

The multinational corporation that locates production in one area to sell into another essentially conducts a transfer of resources internal to itself that bypasses whatever competitive pressure might apply when exporting products in a more conventional way. The competitive pressure that applies in export markets will tend to reduce the price markup over wages. But if this competitive pressure is bypassed, it will not be surprising if the price markups for corporations with substantial market power are extreme. Either the workers in the low-wage country will be drastically underpaid relative to the product’s price or consumers in the destination market will be charged excessive prices. In all likelihood, a combination of these two things will occur – both ‘super exploitation’ and over pricing.

In contrast, a locally owned private corporation or government-owned enterprise that engages in international trade locates production in its own country, pays wages commensurate with the level of development in its own country, and attempts to export its output into high-wage markets. The danger of super exploitation will be reduced if workers have a greater capacity to win concessions when pitted against domestic, rather than foreign, capitalists. The scope for over pricing will be narrowed provided competitive forces are operative in export markets.

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21 thoughts on “Corporate Relocations of Production to Low-Wage Areas

  1. Just a couple of points:

    What matters is not labor costs but unit labor costs. Developed economies have higher wages because they have higher labor productivity through the use of capital. In the end, what matters is how much labor is embedded in each widget that is produced, i.e., unit labor costs.

    Also, trade is based on comparative advantage. What matters is opportunity costs, not absolute costs. In David Ricardo’s famous example, England could still trade with Portugal despite Portugal having an absolute advantage in terms of labor costs in the production of both wine and cloth.

  2. Good thoughts, Ahmed.

    I think comparative advantage is a fine (and very clever) analytical insight, and certainly useful, but it does have its limitation in that it is essentially static, taking what a country has a comparative advantage in as given rather than something that can be developed through conscious long-term strategy and intelligent industrial policies. I am thinking of arguments along the lines presented by Ha-Joon Chang.

  3. The point about unit costs is certainly true and also well taken. As you aptly note, the productivity of labor is critically influenced, especially in manufacturing, by the level of technical advancement of equipment (produced in the past) that workers are utilizing.

    If a role has been largely deskilled and equipment can be installed in a low-wage rather than high-wage region, the potential for offshoring of production is increased.

    To the extent I have concerns about offshoring, it is more to do with the gains made by the multinational corporation at the expense of both workers in the low-wage country and workers suffering job loss (and possibly consumers paying excessive prices relative to cost) in the high-wage country.

    Ideally, poorer countries would gain access to up-to-date technical knowledge and be able to acquire equipment and develop plant to use on their own terms, rather than in a way that is compromised by the pressure to entice a multinational corporation, typically through inducements of low taxes, low wages, a compliant workforce with few rights, and so on.

    And, ideally, in the rich country, the workers who lose their jobs due to foreign competition would be provided with decent employment and able to maintain a decent standard of living and fully participate in the social life of their society.

    Given the present level of economic development, everyone in the world who desires it should be entitled to a decent job at a living wage (and in my opinion the option of a smaller basic income, though I know this is not the view of many). Beyond the minimum pay level that is currently feasible, which will depend on the degree of inequality that is tolerated, it is not obvious that citizens of currently wealthier countries are any more entitled to the best opportunities than the citizens of any other country. Actually, I think it is pretty clear that they are not.

    If the wealth of the rich nations had been acquired legitimately, maybe there would be a case that they were entitled to a privileged position. But the wealth and privilege of the richest nations (and the English-speaking countries are certainly no exceptions to this, to put it mildly) has to a large degree been built on the brutal oppression of the poorer countries.

  4. peterc,

    Thank you for your response. I learn so much from your articles and your comments.

    “When corporations relocate production to low-wage states with the intention of selling the product back into high-wage states, they are basically free riding on the demand for consumption goods that is created in the high-wage states.”

    In regards to corporations moving south in the US, it is important to keep in mind that what matters are real wages, not nominal wages. Studies have shown that while nominal wages are lower in the mainly southern right-to-work states, the cost of living is also lower, which almost completely offsets the lower wages. Also with more people working, that puts less burden on government in respect of social services, and by extension lower taxes.

    By the same reasoning, the high-wage states also have a higher cost of living so that means there is not much difference between high-wage and low-wage states, once you adjust for the cost of living.

    That doesn’t go against the point you made about labor arbitrage between low-wage and high-wage states but it’s an important point to keep in mind when talking about wages. Because some make the argument that the absence of union rights leads to worker impoverishment when you can clearly see that it doesn’t, again, once you take into account the cost of living.

  5. The main subject missing from both the US presidential election and the Brexit chaos in the UK is how can “effective demand” be achieved both nationally and cross-nationally. Included in this subject are the key issues of how is money best created and distributed and how is global trading best structured. The following Randy Wray video interview reveals how Keynes was one of the first economists to point out how laissez-faire economic ideology (or Neo-Liberalism as we call it today) worked against “effective demand” :-

    https://www.youtube.com/watch?v=5P_J9IJqxaY

    Matt Franko’s consolidated Trump “protectionist” Tweet reveals how “effective demand” will be clumsily pursued in the United States when the obvious solution is to link “floating tariffs” with “floating currencies” since the “valuableness” of the latter can be rigged through government exchange control and subsidy.

  6. Ahmed, glad you find the blog worthwhile. Thank you for your own quality comments. I probably don’t say it enough, but the same goes for other substantive commenters, past and present. The comments enrich the blog a great deal. When I don’t respond, it is usually that I am trying to let commenters have the “last word”, not that I don’t appreciate the comment.

  7. Schofield, thanks for the link. I enjoyed it very much. Randall Wray always makes for fascinating listening.

    Your remark about floating tariffs and currencies is intriguing. I would be interested to see more on the idea.

  8. In regards to corporations moving south in the US, it is important to keep in mind that what matters are real wages, not nominal wages. Studies have shown that while nominal wages are lower in the mainly southern right-to-work states, the cost of living is also lower, which almost completely offsets the lower wages. Also with more people working, that puts less burden on government in respect of social services, and by extension lower taxes.

    By the same reasoning, the high-wage states also have a higher cost of living so that means there is not much difference between high-wage and low-wage states, once you adjust for the cost of living.

    That doesn’t go against the point you made about labor arbitrage between low-wage and high-wage states but it’s an important point to keep in mind when talking about wages. Because some make the argument that the absence of union rights leads to worker impoverishment when you can clearly see that it doesn’t, again, once you take into account the cost of living.

    Ahmed, you mentioned “studies”. Data and/or references about (1) real wages being the same and about (2) lack of union rights not leading to worker impoverishment, please.

  9. Pete,

    By those things in life, Paul Krugman wrote yesterday about the subject of how things should ideally be with international trade.

    So what would a political manifesto aimed at winning over these voters look like? You could promise to make their lives better in ways that don’t involve bringing back the old plants and mines — which, you know, Obama did with health reform and Hillary would have done with family policies and more. But that apparently isn’t an acceptable answer.

    Can we promise new, different jobs? Job creation under Obama has been pretty good, but it hasn’t offered blue-collar jobs in the same places where the old industrial jobs have eroded.

    So maybe the answer is regional policies, to promote employment in declining regions? There is certainly a case in principle for doing this, since the costs of uprooting workers and families are larger than economists like to imagine. I would say, however, that the track record of regional support policies in other countries, which spend far more on such things than we are likely to, is pretty poor. For example, massive aid to the former East Germany hasn’t prevented a large decline in population, much bigger than the population decline in Appalachia over the same period.

    And I have to admit to a strong suspicion that proposals for regional policies that aim to induce service industries to relocate to the Rust Belt would not be well received, would in fact be attacked as elitist. People want those manufacturing jobs back, not something different. And it’s snooty and disrespectful to say that this can’t be done, even though it’s the truth.

    So I really don’t know the answer.

    http://krugman.blogs.nytimes.com/2016/12/05/trade-facts-and-politics

  10. Thanks for the link, Magpie. Interesting post. I notice Krugman gave a link as well to a short paper. I’ve downloaded it, but haven’t read it yet. Will check it out.

  11. Pete,

    You’ll notice that Paul Krugman, for all intents and purposes the voice of the Democratic Party in economic matters — which is to say, the American Left — says “I really don’t know the answer” to the problem of how to compensate the American working class, which in his rendition is the white working class (as if working class people were all white).

    I don’t know how you read that, and maybe I’m mistaken, but I can almost see him shrugging.

    And I don’t know he is the only one. I am worrying that the modern left seem to have discovered a more fundamental class conflict: one where the exploiters are no longer the capitalists, but the working class of developed countries (particularly the white working class).

  12. I think many on the left have developed a blind spot on economics, or are ignorant of it, or something. I am fully on board with the modern left’s positions on social issues and find the derogatory references to “social justice warriors” and so on to reflect ignorant sentiments coming from what appears to be a bigoted element in what remains of the old left. But for all intents and purposes, by default the modern left are basically neoliberal when it comes to economics, probably without knowing it. My impression is that it’s more out of ignorance than anything else. The TINA mantra has really done a number on most people who have been led to believe the economic developments of the past forty years are unavoidable and inevitable, like a law of nature or something.

    Krugman appears to be more an establishment liberal than left-wing, but it’s hard to know for sure because to retain his position, he would have to be strategic with what he writes and says. If he oversteps whatever the respectable line happens to be at the moment (not that he necessarily would want to), he would soon be on the fringe like the rest of us.

  13. As for the actual left, I think many have developed a blind spot on economics, or are ignorant of it, or something. I am fully on board with the modern left’s positions on social issues and find the derogatory references to “social justice warriors” and so on to reflect ignorant sentiments coming from what appears to be a bigoted element in what remains of the old left. But for all intents and purposes, by default the modern left are basically neoliberal when it comes to economics, probably without knowing it. My impression is that it’s more out of ignorance than anything else.

    The problem with the actual left is that there is no actual left. What is happening — step by step — is that the actual left is becoming a liberal party (liberal, in the British, John Stuart Mill, sense of the word: Whig): the Australian Labor Party, for instance.

    This is John Quiggin (as you know, no radical by any means) writing about that in Labor’s case:

    The socialist objective
    July 31st, 2015 John Quiggin
    http://johnquiggin.com/2015/07/31/the-socialist-objective/

    The result is a party economically indistinguishable from however the local reincarnation of the Tory Party is called (in our case, Liberal Party of Australia, to make things more confusing); their central and only distinguishing feature — their “secret sauce” — being their “positions on social issues”.

    What we seem to be witnessing is the next — maybe final — step in that metamorphose. Which in itself is not an entirely bad thing: at least now we can see things as they are, who is on one side, who is on the other.

    The problem is that to justify their move, to make it legitimate before the voters, the logical requirement is to demonise the working class: it’s not the party who turned their back on them, it’s them who are “deplorable” and “irredeemable”. Thus, the working class as homogeneously white and invariably racist, inherently opposed to the party’s “positions on social issues”, and intent on maintaining their privileges by hook or by crook.

    Let’s try to avoid the stereotype ourselves.

    ———-

    Incidentally, that need to find a scapegoat driving the actual left doesn’t look that different — at least from where I stand –from the need the right has to target ethnic, religious, gender, and other minorities. As I see things, it’s only the identity of the target that changes.

    A few years back in Australia the target of opportunity were the boomers. In Britain, after the London riots, it was the youth.

  14. Yes, very true. Point taken, Magpie.

    I didn’t really have manufacturing workers specifically in mind with that rather loose remark. Lowest-common-denominator strategies by the major parties seem to attract voters from a wide cross section of society. I mainly had in mind the history of laborism in Australia, which has been a pretty racist one, much like this country’s history in general with the notorious “White Australia” policy and so on.

    Did I just dig myself in deeper … ?

    I will try to be more circumspect in future.

  15. Pete,

    Did I just dig myself in deeper … ?
    I will try to be more circumspect in future.

    Nah. No worries.

    Since the Trump victory I’ve been trying to hear all the sides of the controversy. This is an exercise we all should try. It took me a lot of effort, because I’ve never had much interest in that. I don’t have too much time, either.

    I won’t say I know much. I am no expert, only a foreigner curious about all the hullabaloo.

    But a few things I’ve found seem to me symptomatic of the political, intellectual, and moral failure of the American “left” and its identity politics.

    An example.This is a story published recently by a New York Jewish community historically liberal/”left” newspaper (Forward):

    Speechless Rabbi Admits Losing Argument Over Racism and Israel to White Supremacist Richard Spencer
    Daniel J. Solomon. December 7, 2016
    http://forward.com/news/national/356363/speechless-rabbi-admits-losing-argument-over-racism-and-israel-to-white-sup/

    Rabbi Matt Rosenberg attended an event where Spencer (a Trump supporter and by most accounts something of a neo-Nazi, white supremacist, or whatever).

    I take it at some stage Rosenberg addressed Spencer:

    “You come here with a message of radical exclusion. My tradition teaches a message of radical inclusion, as embodied by Torah,” said Rosenberg, who attended the media event at the urging of one of his colleagues. “Would you sit down and study Torah with me and learn love?”

    Spencer may be many unpleasant things, but a dummy doesn’t seem to be one of them. This was the reply Rosenberg got:

    Spencer shot back by comparing Israel’s vision as a homeland for Jews with his own goals for a state for whites.
    “Do you really want radical inclusion into the State of Israel?” Spencer responded, as Rosenberg said nothing. “Jews exist precisely because you did not assimilate to the gentiles… I respect that about you. I want my people to have that same sense of themselves.”
    Rosenberg refused to respond, effectively leaving unchallenged Spencer’s assertion about Jews and Israel.

    Now, maybe a more adept debater would have managed to produce a witty or sarcastic remark, or some kind of philosophically-sounding platitude, if not to refute Spencer, at least to save face. And it’s hard for you and I to admit it, but it seems to me Spencer scored a point. If that’s acceptable from the State of Israel why not from them? If that’s not acceptable from the State of Israel where are the heated denunciations from the American liberal “left”?

    Personally, other than “you’ve got a point”, I can’t imagine how Rosenberg could have given an honest and effective reply to that, when Trump has some support even among prominent members of the American Jewish community.

    Perhaps more importantly, the audience seemed to give Spencer a point (check the comments). The politics of the State of Israel towards Arabs are far from kosher, but they are virtually impossible to challenge: every single criticism against the State of Israel is received with cries of anti-Semitism, up to now, from the liberal American “left”.

    Their position is strictly based on moralising: they are the judges of what can be said and what must be silenced, who deserves praise and who don’t. And it just so happens that the State of Israel cannot be criticised, it’s sacrosanct; the white working class can, because it did not follow their directions: however misguidedly, it tried — perhaps for the first time in decades — to decide where its interests are.

    It’s not only the American intellectual “left” who is at fault. I am not free from guilt. I’m just a second-hand Aussie of wog background but I myself have refrained from commenting on the State of Israel precisely because of the fear of being labelled “anti-Semite”. That’s cowardice.

    But that fear did not deter fascists. They don’t give a shit about political correctness or being labelled anti-Semite. And they claim their right to their own identity politics. How can American liberal “leftists” argue against that? They opened Pandora’s Box. Spencer learned that trick: as it happens, he is literally learning from the State of Israel!

    He is not alone. Stephen Bannon, who by all accounts is also a quasi-fascist, is another case:

    Stephen Bannon and the old/new anti-Semitism
    Equating criticism of Israel with anti-Semitism covers up the bigotry of the likes of Stephen Bannon.
    Amy Kaplan, November 30, 2016.
    http://www.aljazeera.com/indepth/opinion/2016/11/stephen-bannon-oldnew-anti-semitism-161129145402158.html

    American liberal “left” intellectuals are worse than Bannon and Spencer: they not only are bigots like the latter, they are sanctimonious, cowardly and stupid. I have nothing but contempt for them.

  16. @Ahmed

    Perhaps I wasn’t clear. 🙂

    Let A be this passage:

    “Once cost of living is accounted for, workers in right-to-work states enjoy higher real, spendable income than workers in non-right-to-work states.” —Erin Shannon (from the link you kindly provided)

    And let B be this:

    “Studies have shown that while nominal wages are lower in the mainly southern right-to-work states, the cost of living is also lower, which almost completely offsets the lower wages.” (from your comment on 5 December 2016 at 5:35 PM)

    I understand that A and B, in English, mean exactly the same. One passage reiterates what the other says. The only difference is that A was written by someone called Erin Shannon (although the name itself doesn’t ring a bell, I suppose she must be extremely famous to be quoted as authority), while B was written by you.

    I understood the message the first time. What I asked you for was DATA. Where is the DATA, the numbers, supporting those passages (A and B)?

    The link you provided contained no DATA, except for a table used to explain that right to work legislation (RTW) was associated with a halving in the union membership in Idaho (from 9% to 4.7%), in Oklahoma it was associated with a slight increase in union membership (from 6.8% to 7.5%), a slight decrease in Indiana (from 11.2% to 9.3%), and had almost no effect in Michigan (from 16.6% to 16.3%), perhaps because RTW legislation in Michigan was only enacted in 2013.

    That says nothing about real wages, cost of living or nominal wages.

    I mean DATA, numbers, like, for instance, the chart I linked to in my comment on 6 December 2016 at 9:08 PM,which you did not comment on. The DATA on increasing productivity and stagnant wages in the whole of the US since 1980 for men and women, blacks or whites.

    In other words: where is your DATA, your numbers, your charts?

    ————-

    Incidentally, I also understand that a think tank (as the Washington Policy Center under whose auspices that article was written) may not be an independent source. The CPC, according to the SourceWatch wiki, is a member of the American Legislative Exchange Council (ALEC) as of 2011. ALEC, as a Koch brothers initiative, is funded to promote RTW.

  17. @Ahmed,

    I’ll help you out with the data.

    Data on union membership and wages, from the US Bureau of Labour Statistics (hopefully, WordPress won’t block the link):
    http://www.bls.gov/news.release/archives/union2_01252008.pdf

    An extract from “Table 2. Median weekly earnings of full-time wage and salary workers by union affilitation and selected characteristics” contained in that release.

    All figures are median weekly wages/salaries in $

    Total, 16 years and over
    ________________________2006______2007
    Union members___________$833______$863
    Represented by unions___$827______$857
    Non-union_______________$642______$663

    White, 16 years and over
    ________________________2006______2007
    Union members___________$859______$889
    Represented by unions___$854______$884
    Non-union_______________$659______$684

    Black, 16 years and over
    ________________________2006______2007
    Union members___________$707______$732
    Represented by unions___$694______$727
    Non-union_______________$520______$533

    Asian, 16 years and over
    ________________________2006______2007
    Union members___________$834______$853
    Represented by unions___$840______$881
    Non-union_______________$774______$823

    Hispanic, 16 years and over
    ________________________2006______2007
    Union members___________$686______$736
    Represented by unions___$681______$729
    Non-union_______________$469______$487

    It may be just me, but the data suggests unions make a difference.

    ———-

    By the way — and just to be on the safe side of the identity thing — the same applies to male and female, and to male and female workers by race.

    The BLS doesn’t offer data by religion or sexual orientation, so it’s not my fault I don’t present that data. If someone has to be blamed for that, blame them.

  18. Hi Magpie. Excellent comment on 8 December 2016 at 6:22 PM and thanks for the link concerning the debate between Rosenberg and Spencer. FWIW, I agree with you. I think, as we both agree, the appropriate response to Spencer was obvious but required a critical disposition toward the actions of the state of Israel. That was clearly not an avenue Rosenberg, or many others, wish to go down, for the reason you identified, and no doubt Spencer understood that also and exploited the weakness. Checkmate. I know in my own case, another aspect is feeling unqualified to comment. It’s far from being my area of expertise and can be difficult to know who and what to believe when it comes to media reports.

  19. Money is clearly an “institutional” creation meaning it’s a man-made communication device which enables us to contract with each other for the goods and services we all need. It has, however, antagonism built into as a device because it’s also used as a measuring device not least to allow us to assess the “effort time” involved in producing particular goods and services. However, a key insight of MMT is that money has no intrinsic value merely a nebulous attribute that can be called “valuableness.” We know this attribute can be manipulated for global trading preferment through currency rigging. However, few understand why such rigging of global trade is economically subversive. A story of how Iran was persuaded to drop its nuclear weapons development policy provides a good illustration.

    Iran is a country heavily dependent on imports for its citizens’ standard of living. Iranian oil exports are the principal source of income for the country to pay for its imports. The United States was able to successfully persuade the insurance companies around the world to boycott providing maritime insurance for the oil tankers shipping oil out of Iran. This action substantially reduced Iran’s income and the value of their currency, the Rial, creating a severe fall in the standard of living of many Iranian citizens which in turn put pressure on Iran’s rulers to come to the negotiating table.

    The “moral” of the story is that countries needing to import goods and services because they cannot achieve self-sufficiency need to be able to export sufficiently in order to pay for their imports and on fair terms. The “sufficiently” means being able to build up an exporting industry that is competitive based on an internationally agreed measure of being able to balance a country’s global trading account. The fair terms means other countries not manipulating the “valuableness” of their exports. These are the twin roles floating tariffs would play alongside floating fiat currencies.

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