Ignorance Will Lead to an Economic China Syndrome – Outsourcing to China

A popular topic to talk about is the globalization of business. The terms international companies, multinational companies and exportation 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 affect on the United States. Unfortunately most of us living 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 American economics.

This is easy to say, but hard to justify when you consider the facts.

The economic expansion of China and their increasing trade and investments in the United States have resulted in a Chinese and US economy that are largely interdependent. My father used to say figures lie and liars figure. While that may be true, based on my research, I say thank god for Chinese trade with us…and for the wonton soup.

The point of this article is to identify the significant areas where this interdependence has been beneficial to the US economy and where China’s growth has had a positive impact on every citizen of the United States.

Fact #1 – Cost Savings resulting from Outsourcing of Manufacturing and Services

The phenomenon of outsourcing manufacturing and services sector activities to markets such as China used to be a consideration for American companies that were faced with the challenge of reducing costs. Now outsourcing is a necessity. And I can promise you, companies who are not outsourcing are jeopardizing American jobs.

China’s vast pool of low cost labor ensures that almost any industry can achieve greater rates of return even after transportation and export fees are considered. China’s cost advantage translates into as much as a 70% savings over US salaries.

– While China’s low-cost infrastructure leads to foreign direct investment (FDI) in China, the mass products and services produced are primarily intended to be exported back into other markets. China’s artificial exchange rate controls ensure that while its vast labor pool offers cost-efficiencies, its exchange rate creates cost-advantages to ship these product and services back into the US at prices that US-based manufacturers simply cannot meet.

American consumers benefit greatly from the inexpensive goods coming from China. The many US firms that have outsourced production and manufacturing to China have remained competitive and profitable and thus are able to repatriate earnings back into the US as well as pay corporate taxes on those earnings. Hey Mr. and Mrs. Main Street…what would you do without your 4 TV’s, 3 DVD players, fancy stainless steel refrigerator and scooter in your garage?

It is economics 101 – A company that makes more profits-largely due to lower expenses as a result of outsourcing some operations to China-pays more taxes due to a larger amount of taxable income. This certainly helps the US economy, right?

Fact #2 – Consumer Spending and its Effect on the Economy

US consumers have benefited from a glut of cheap, Chinese manufactured goods and services for many years. These goods provide the basis for much of the US economy’s consumer activity. This has kept consumer sentiment positive and mitigated the effects which the recession could have had on consumer spending in the US. Yes George W, we are in a recession.

Consider the following:

– “Cheap goods and easy access to them is critical for consumer sentiment which can assist the US economy to weather economic contractions related to job growth declines and gross domestic product (GDP) contractions”

Stephen S. Roach -Chief Economist, Morgan Stanley

– According to Catherine Mann at the Institute for International Economics, globalized production of I.T. hardware — that is, the off-shoring of computer-related manufacturing — has accounted for up to 30 percent of the drop in hardware prices. The resulting increase in productivity encouraged the rapid spread of computer use and thereby added some $230 billion in cumulative additional GDP between 1995 and 2002.

– Even when cheap Chinese goods are imported, there are benefits to the American economy. As most American consumers realize, most of the products they purchase at Wal-Mart are made in southern China by low-skilled laborers working 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 each year. A Morgan Stanley report claims American consumers have saved $600 billion in the past decade via Chinese imports.

– New opportunities are not only being created for American workers, but for shareholders as well. Starbucks CEO Howard Shultz announced that by 2008 the company hopes to have more cafes in China than in the United States. Similar stories can be told for McDonalds, KFC, Coca Cola, or Motorola. There are now 94 KFCs in the city of Shanghai alone, and the number is increasing every month. On a sunny Sunday afternoon, they are often jam-packed with people, young and old, enjoying sandwiches and sundaes

Fact #3 – Effect of Chinese Investments in US

China’s overall investments in U.S. firms increased to $9.8 billion in 2007, up from $36 million in 2006, according to Thomson Financial. By comparison, U.S. investment in China was $2.6 billion in 2007, down from $3 billion in 2006, said China’s Ministry of Commerce.

Chinese manufacturers, particularly those that import parts or raw materials from the US, are also investigating the establishment of assembly operations in the US. They would save on shipping costs, said Karen Shen, Washington State’s trade development representative in Shanghai since 2000. US States are now trying to capitalize on the growth in China:

– More than 30 states in the U.S. have staff members or representatives in China, according to the Council of American States in China. With the U.S. economy slumping and unemployment rising, even some tough critics of China and outsourcing are courting Chinese money. In March, a Missouri delegation included the governor, two U.S. senators, the mayor of St. Louis and two dozen other officials and businesspeople, with an aim to get Air China and Chinese officials to back Missouri’s bid to create an air-freight hub in St. Louis.

– Few states have been as aggressive in reaching out to China as South Carolina. In recent years, 10 Chinese businesses, including appliance maker Haier, have expanded into SC and created about 2,000 jobs, said John Ling, managing director of South Carolina’s China office.

Fact #4 – Impact on US Interest Rates

China realizes that to maintain its own economic growth and stability it needs to continue to support US economic policy through the continued purchase of US securities allowing it to artificially control its currency’s value vis-à-vis the US dollar. China’s currency policy seems to be indicative of a pervasive foreign policy that is increasingly more aligned with the US market’s own demands.

China’s use of the partial peg of the Yuan to the dollar may act to support its export market. However, in order to secure this artificial valuation, it purchased a great amount of US securities, helping to keep interest rates low, again, benefiting the US consumer greatly, especially so in its recently-ended real estate boom.

Therefore, it can be said that after American consumers pay for Chinese imports, much of the capital gets recycled back in the form of investments into 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 educations. As long as the Chinese have confidence in their American investments, this positive cycle will continue into the foreseeable future.

I wonder how many people who daily criticize outsourcing to China even consider this point…a point of great magnitude for all Americans.

If the US economy sinks and Americans stop buying Chinese goods, then it will compound the US slump as China first stops buying US bonds that have inflated the American bubble and then moves on to selling them. This would be an “uh oh” moment.

Fact #5 – Benefits from Rising Standards of Living in Developing Countries

Population in developing countries like China and India, now doing jobs outsourced from America, are seeing a rapid rise in their wages and standard of living. In the process, they are becoming more Americanized, which is translating into demand for American goods and lifestyles. Thus, according to the McKinsey Global Institute, for every $1 outsourced, the economic gain to the United States as a whole is $1.12 to $1.14; whereas the country to which a job is outsourced gains just 33 cents.

I am not a mathematician but it seems like this is a 3.45X advantage.

Okay you speakers of supposed truth, without research of the basic facts…to me a 345% advantage over China and other developing countries seems like a good thing and not something to fear.

You want something to fear? Fear the fact that American students are not just falling behind, but have fallen so far behind than other countries in Math and Science. Maybe Mr. and Mrs. Main Street should stop watching their 56 inch imported television for a few hours a week so that they can help their kids with their homework.

We will most likely never (notice I did not say never…can’t come back to me in 2025 and point out my error) be internationally competitive in manufacturing. Therefore, we must continue to lead the world in innovation. We also need to realize that a key commodity in 2008 is information. Imagine life today without Google.

Please American citizens, realize this big planet is actually a small trading village. We are interdependent and rely on each-other. Many people who claim that China and specifically outsourcing to China is a bad thing would be offended if they were called racists.

I think we can all agree that a base ingredient of racism is naivety and false assumptions. As we welcome people as one, let’s welcome economies as one, based only after research of facts. My fear? Those false assumptions by unformed politicians (that is not a stretch huh?) will negatively affect out positive relationship with China. Talk about a real China syndrome.

This article is the first of a two part series. The next article will address the responsibility of US companies outsourcing labor to produce quality products as well as ensuring the ethical treatment of the workers.