Sep 12 2008

“In-sourcing”: a new trend among US manufacturers?

U.S. companies are rethinking manufacturing in China – Sep. 11, 2008

As the US presidential campaign trudges ever forward, both Obama and McCain have had much to say about “job creation” in the USA. Elaborate plans aimed at retraining workers displaced by globalization, arming them with 21st century skills that will enable them to thrive in our advanced economy, and assure that the hardships imposed by free trade are minimal and all Americans have the skills they need to find employment. These are good goals for America, but even as they preach their job creation plans across the country, right under the candidates’ noses jobs are being created thanks to the invisible hand of the market economy.

Talk of a reverse migration of manufacturing from China to the U.S. has been buzzing across union halls and factory floors, corporate boardrooms and Wall Street.

The cost of shipping outsourced goods from China to U.S. customers has doubled in just two years thanks to high oil prices, and labor costs in China are rising sharply.

“There’s a shortage of technical and managerial talent,” reports Anand Sharma, CEO of TBM Consulting Group. “To attract managers Chinese companies are talking about salary increases of 15% to 30% year-over-year.”

The phenomenon of jobs being “in-sourced” to America after a decade or two of being done by Chinese workers may seem surprising. Certainly, wages are still lower in China than in the US labor market. This is true, however, the demand for highly skilled labor in China is driving wages up higher and higher, due to its relative scarcity in a country where reliable, well-educated factory managers are nearly fully employed by the thousands of foreign and Chinese firms operating plants there. Competition among producers means the only way to attract new managers is to continually offer higher wages. This leads to a form of “wage-spiral inflation” where rising costs lead to higher priced output.

Despite its much smaller work force, the percentage of American workers with the managerial and technical skills needed to run a plant is much higher than in China, and the weak manufacturing sector growth in the US has meant relative wages between the US and China are closer than ever before.

Take into consideration the rising cost of fuel and the fact that China’s economy is producing at or beyond full employment, and it becomes clear why manufacturing certain products in China has become less attractive to American firms. To be sure, not all manufacturing jobs are being “in-sourced” back to the US. As Chinese wages climb and skilled labor becomes more scarce, the giant’s Asian neighbors are beginning to enjoy the re-allocative effects of the “invisible hand”.

…plenty of manufacturers will continue looking for ever cheaper places to produce. In fact, as the cost of doing business in China rises, many companies – including Chinese firms – are shifting their production to less expensive markets, such as Vietnam.

Discussion questions:

  1. What is the “invisible hand” referred to in the post above?
  2. How do higher wages in China benefit Americans? How do they harm Americans?
  3. Some critics of free trade argue that multi-national corporations exploit workers in developing countries. Does the article above illustrate give an example of exploitation? Discuss…

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

10 responses so far

10 Responses to ““In-sourcing”: a new trend among US manufacturers?”

  1. Benjinatoron 12 Sep 2008 at 8:24 pm

    The invisible hand of the market forces companies to seek cheaper labor and location in order to make their goods. This could be described as taking advantage of the people of that nation. But whilst taking advantage of their low costs, they are not exploiting them as such since it is only natural, in fact they are almost forced to with the economic crisis looming. The invisible hand is a term referring to the collective migration of companies from one nation to another as their production costs are most beneficial and profitable. What serves The American people though, is that the costs of production in china are rising because of wage rises and other economic variables. This makes the wages very similar to the wages in America, so the costs of production could in fact be less if companies produce within America because of the fuel costs of shipping it. This is very advantageous to the American worker because it creates more jobs, and oppertunities, as well as more money for the economy of America because they end up with more money coming into the country then out. As fuel prices drop though, which they must eventually, the hand of the market will intervene again and production will increase in other developing countries which offer cheap labor solutions, like Vietnam’s.

  2. Dominic McNameeon 14 Sep 2008 at 2:13 am

    The invisible hand is each company cutting costs by moving its factories to where ever the labor is cheapest.

    The higher wages in China may increase the quality of the goods, however these costs are still passed on to the consumer.

    From the view of a first world country citizen it may appear that multi-national companies are exploiting the people of developing countries, however without that "exploitation" there would be a huge loss of jobs in those countries. Working for a dollar a day is still better than starving on the streets.

    I wouldn't be surprised if some companies moved their factories away from China or even Asia. A quick google search shows that the minimum wage in Mexico for a days work is a third of what a US worker would receive in an hour. It wouldn't surprise me companies set up factories in Mexico and other politically stable south/central American countries. This would be a good way to significantly reduce shipping costs. Also, it would be more viable to use better American ex-pats there due to the smaller distance from home.

  3. Bastien Vogton 14 Sep 2008 at 9:57 pm

    The invisible hand is the effect of countries e.g. China raising their labour prices and forcing factories to look elsewhere for cheap labour.

    I believe that cheap labour is important in countries like China. There are so many people in China who would starve if they didn't work in factories. So although it may seem like exploiting chinese labour is bad, it is important for chinas economy and that of the U.S.

    This article to me is saying that chinese skilled workers have realized they were being exploited and so the government has decided to end the exploitation of skilled craftsmen.

  4. Bjorn Borgerson 15 Sep 2008 at 11:08 pm

    Companies will produce wherever it is cheapest to do so to maximize revenue, and most importantly, profits. This time however its working out in their favour. Asian products in general are often seen as cheap, and lower quality products. Now if these same products were to be produced in the US, they automatically would get a better name. Another positive sideeffect would be (provided that these products' main market is the US) that it would majorly reduce transportation costs and fuel usage, which doesn't just reduce their overheads, but it also is better for the environment. The only thing is that when there is less demand for Chinese production, its price will also decrease, and maybe we will go back to where we are now…

  5. BjornKvaaleon 16 Sep 2008 at 1:47 am

    The invisible hand is referring to supply and demand. Both the United States and China are searching for cheap goods, yet it requires well-educated managers to overlook the whole process. The Chinese market is currently at full employment or even greater, making the labor resource scarce. This, in turn, drives the prices of well educated laborers up. A large percentage of the US workforce are well-educated laborers. Since the relative wages between USA and China are at the same level, many US companies are using American labor instead. There is a demand for well-educated laborers and the supply is coming from America.

    Higher wages in China benefit Americans because jobs are being created in America. The relative wages between the two countries are almost the same. Many companies are in turn giving Americans the jobs, where there is a surplus of well-educated jobs. This in-sourcing could harm Americans because

    Multi-national corporations do exploit workers because they are searching for the cheapest way to produce goods. When one economy, like China, has overpriced workers, the corporations tend to look to other nations to exploit the workers there. The exploitation often results in bad wages, long hours and even human rights abuse. The Chinese are looking for cheaper economies, such as Vietnam, in order to exploit its workers there.

  6. Marc Lemannon 16 Sep 2008 at 2:46 am

    The Invisible Hand is the effect on countries where foreign companies invest in factories and labor trying to minimize their own expenses to increase their profits. Higher wages in China benefit Americans because the quality of the goods increases. It may also give more Americans their jobs back if the jobs are "in-sourced" because it becomes cheaper in America again. It may harm Americans because the price of goods will increase, to pay for the better quality, and there may be Americans moving to the East to the new "land of opportunity", where they might get better jobs, with better salaries(if they continue increasing at 15-30% every year) with their current education. In some cases foreign companies might exploit workers in developing counties because of the low wages, but this article shows the opposite. The workers in China may have been exploited for some time, but it has now begun to benefit them because companies attempting to attract better managers have increased wages, which has increased the quality of life for Chinese workers and created a drive for working better.

  7. Sabrina Walshon 16 Sep 2008 at 3:40 am

    The invisible hand, as refered to in the article, is the economic demand for certain rsources. The hand works to find and use those resources. For example the Chinesse do not have the skilled labor certain companies demand (i.e. skilled labor is scarce) so China has added insentives to draw in that skilled labor force in the form of wage increases. However in the US the skilled work force is already present, so the companies are moving to the US, where the resource is located.

    The increase in wages in China create opportunit cost for the businesses. Are they willing to pay so much for this skill level? or pay a more for a higher skill level? which is more benficiary? This new onset of questions that businesses are facing help the american public, who posses that higher skill level that is desired by the firms. TH=he increase in chinesse wages isn't fully positive for Americans. There are other Asian countries that have a skilled labor force, whos wages are still lower than that of the US. So while some jobs may return to the US, not alll of them will, and with teh constant competitio the desired labor force, and location there of will change.

    Exploitation of workers is common. But exploitation is differnt to the viewer. For exaple this may sound terrible, but in a developing nation a room full of women on sewing machines (sweat shop) is still less expensive than one giant loom. But although conditions are sub-standard that is still a room full of women who are earning money they would not have prior to said exploitation. the outsourcing of jobs to Asia doesn't really seem to be terrible exploitation. Yes some working conditions are not equivalent to those in the US, but the standard of living in the countries with recent investments has gone up, and now the wages are escalating as well. And do to the scarcity of certain labor resources as mentioned in the article, schooling may also become more stressed. For example china now has an average of 11 yars of schooling per person.

  8. Simon Strongon 16 Sep 2008 at 8:38 pm

    Obviously companies will do the necessary to create lower costs that maximise profits. However, In past years China has been seen as the cheapest place to produce. However, since the demand for factory managers in China is so high the wages go up. Because there is less demand but more people in america the wages for them are lower. In this way the situation is aiding Americans because it is more enticing for companies to move to America, create work for them, meaning more jobs for more people.

  9. Finlay Smallon 17 Sep 2008 at 8:33 pm

    i would say the invisible hand that is referred to in the text is just a symbol of the free market. The American presidential candidates are talking about these plans to "create jobs" and reinforce the American work force, but one can consider that the government is trying to take more contorol of the economy. The invisible hand represents the free market in the way that, when out-sourcing to other countries its cheaper than the firm will do that to maximize there profits. Therefore when work was very cheap in India and China then companies out-sourced to those countries rather then in there own country. Now as literacy rates are increasing in china so is the cost of work meaning that firms will start to out-source to different countries, either America or Vietnam for example. This “invisible hand” reinforces that the free market will self right itself.

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