+ + the joy of outsourcing + +

THE JOY OF OUTSOURCING

The Theory of Comparative Advantages is applied on a global scale with the China, India, Vietnam and other Asian countries being the chief beneficiaries.

Those countries receiving much cheaper goods in return do manage to keep the CPI down and the USA as one of the recipients, has benefitted.

Elaborate arrangements in the Capital markets by these producers of cheap goods also tend to keep the US inflation down by supporting lower US interest rates.

So, on the surface the system works well both ways. As further outsourcing occurs, there will be some distinct disadvantages accruing which unless rectified, can be very troublesome to the US and other recipients:

1. Imports and exports. While the US imports finished goods from China, China needs raw materials to produce the goods. In time it could make nearly all the finished goods it needs. The US imports about 40% of their goods from China.

2. Saving: Chinese are big savers: about 40% of their income while US savings are about zero. Much of the Chinese savings is channelled into capital formation leading to manufacturing and exports.

The US only exports goods to the value of 8% of GDP. Much of the US taxation incentives and the advantage of much lower interest rates has gone into speculation instead.

3. Trade deficits: In the year to Nov. 2004, the U.S. had a total merchandise trade deficit of $653.8 billion. The cumulative merchandise goods trade deficit was $4.97 Trillion during the last 19 years (since 1985).
And these deficits are increasing, partly due to OUTSOURCING. Lowering of the USD has not managed to turn this around, let alone, even slightly decreased it.

The combination of high consumption (70% of GDP), virtually nil savings and little Capital formation to produce goods for export is souring the Financial performance of the US. More Outsourcing makes it worse.

4. Velocity of Money Circulation. As the manufacturing sector is slowly being annihillated, the resulting salaries and wages wil be lost. And with it the spending it normally produces. The dollar turns over more when manufacturing takes place at home then compared with large importers of Chinese goods directly selling to the public (Walmart).

5. Flow-on effects from massive Outsourcing.
5.1 Salary and wages: The Unions will lose much of their strenght: while inflation is increasing at the current true rate of about 6%, the wage/salary earner lost 0.6% in the last six months. This wil affect consumption after a timelag.

5.2 Social. Increasing unemployment due to Outsourcing will increase costs incurred by the US Government. Crime may wel increase also and therefore a larger police force may be needed. Overall health deteriorates as costs will induce some unemployed not to seek medical advice.

5.3. Training. Fewer Apprentices are needed and this is a distinct disadvantage for young people looking for work. As Outsourcing becomes more prevalent, R&D will be shifted from the US to the countries producing these cheap goods. This in turn must affect the uptakes of students by the US Technical Institutes and Universities and with it their income and expenditure.

6. The Future.
In the beginning there were call centres established in India and cheap clothing as well as other items produced by China, Indonesia and Vietnam, Formosa. I refer to this as Level 1.

At Level 2, computers, car- and other spare parts, washing machines, refrigerators and the more expensive items will be produced by these countries with cheap labour. That is happening now.

At Level 3, massive exports of cars from "cheap " countries occur (These will drive out any existing US producion) Also much expensive heavy mining and agriculture machinery as well as trucks will be exported.

Much R&D would have been transferred to these "cheap" countries. This Level is very hurtful as much US labour and subcontractors will be affected.

At Level 4, Planes for export will be produced by the cheap producers for the US and other countries. They are then ready to take over chemical industries as well.

SUMMARY. Outsourcing leads to cheaper products but the cheaper producers are huge savers while US consumption is very high and saving is very low.

So, the theory of Comparative Advantages doesn't work well here as the US and other countries won't be able to export much to these cheaper producers who have consequently high trade surpluses.

These can be used to buy up US or other assets resulting in profits leaving the rich countries. Unemployment in the more "expensive" countries is rapidly increassing and with it social problems.

Unbridled outsourcing carried to extreme levels will force a richer country to redress the negative outcome to some extent, either by convincing these cheaper countries to revalue, by trade protection measures or both.

Revaluing has some drawbacks, eg these cheaper countries have a very high savings rates and won't be importing many finished articles anyway. Some tend to have high trade surpluses. Inflation in the US and other countries will also increase.

TRADE WARS: HERE WE COME!

Gerry
Sourse of some financial numbers: M.W Hodges: http://www.financialsense.com/editorials/hodges/2005/0412.html

According to economist Steve Roach of Morgan Stanley (4/05), "the average Chinese manufacturing worker made 12,496 yuan in 2003, which translates into about US$29 per week. By contrast, average weekly earnings of US manufacturing workers amounted to $636 per week in 2003.