Since 2000, we have had two recessions, the second being the “Great Recession,” both with “jobless recoveries” – jobless, as we will see, because we were busily sending production jobs overseas. In fact, long before these recessions, we had started shipping our production jobs, and increasingly service jobs, overseas. Why and how did this happen? It happened due to actions and policies of both private companies and governments, in the U.S. and abroad:
The four actors in offshoring U.S. jobs:
U.S. Private Sector
U.S. Public Sector
Foreign Countries’ Private Sector
Foreign Countries’ Public Sector
Before looking at each of these, we should note that there is another set of actors taking part in the situation: American consumers. In fact, there are three categories of consumers:
Companies acting as consumers
Governments acting as consumers
If these individuals, companies, and governmental units were not purchasing all of these foreign products, then the other four “actors” could not be offshoring jobs. We will return to that subject. But first, let’s have a look at the four actors who have brought us offshoring.
Perhaps the most egregious example of offshoring is the practice of closing up a U.S. plant and replacing it with one located outside the U.S. to produce goods to be sold back into the U.S. market. These plants have been referred to as “rogue plants,” [i] and the practice has been referred to as the “Apple effect”, with reference to Apple’s closing its computer production plants in California and Colorado and replacing them with plants in China.[ii] Perhaps its earliest manifestation was in the “Maquiladora” plants established just over the border in Mexico, where workers’ families typically live in a hovel next to such a plant. Sending a plant outside the U.S. is the most fulsome form of offshoring in the sense of adverse impact on the American economy and communities.
[i] Daniel J. Meckstroth, Ph.D., “The Decline in the Number of U.S. Manufacturing Plants,” 5.
[ii] Donald L. Barlett and James B. Steele, The Betrayal of the American Dream, 83-97.
A close second is the practice of keeping an assembly plant in the U.S., but sourcing “intermediate inputs”, such as brake assemblies for automobiles, overseas. This sourcing can be a straight arms-length market transaction, or the American buyer can become involved in the creation, and perhaps the ownership, of the overseas manufacturing facility. In terms of volume, this practice far exceeds that of sending plants offshore.[i] At the time of this writing, General Motors and Ford are reported to be creating “captive” automobile parts manufacturing capacity in China.
[i] Meckstroth, supra, at 3.
The third mechanism for offshoring jobs is a bit indirect, because it is not engaged in by a manufacturer of products but rather by a marketer. The marketer can be a retail channel, such as Walmart. Or, the marketer can be a “brand” such as Arrow Shirts or Oneida. Oneida used to make stainless steel products, but by 2003, it had stopped manufacturing altogether and had become a branded marketer of products produced in other countries.
In the case of a brand, the business model can be summarized as follows:
Design or make specifications for a product. (This step is optional.)
Buy cheap stuff in China.
Brand the products as being cool.
Add a “social good” dimension to the brand.(This step is optional.)
Sell the product into the American market.(Perhaps over the Internet, cutting out middlemen)
Whether a bricks and mortar channel (such as Walmart, Macy’s, or Sears) or a brand (such as Nike or L.L. Bean), the company has the effect of offshoring American jobs when it sources its products overseas instead of in America, or requires its suppliers to do so.
A fourth aspect of offshoring jobs is connected with U.S. companies’ investment in foreign production capacity aimed at a foreign market. Recent experience in the Chinese market shows that these firms are creating substantial research and development and engineering capacity in connection with their foreign production facilities. However, they are engaging in a Faustian bargain, being required by the Chines state-owned companies who are their joint venture partners to share their most proprietary technology. Companies are falling all over themselves, rushing headlong to tap the enormous Chinese market, even if it means giving the Chinese their most valued and hard-won trade secrets. For example, Caterpillar, Inc. has established a modern, state-of-the-art research and development center in the Chinese city of Wuxi, 125 miles west of Shanghai.
U.S. companies would not have been able to engage in these practices were it not for the enactment by the Congress and various Presidents of laws implementing free trade agreements and other manifestations of “free trade.”
These began with a series of “rounds” of negotiations of lowered tariffs beginning in the 1960s. They included a number of “free trade agreements” with specific countries, the most notable being the North American Free Trade Agreement among the United States, Canada, and Mexico in 1994. The single action with the greatest impact was the U.S. Congress’ enactment in 2000 of legislation approving the admission of China to the World Trade Organization in 2001, guaranteeing it the lower tariffs applicable to permanent members.
Meanwhile, several of our major trading partners were adopting export-oriented, “mercantilist” policies that were the opposite of ours. Mercantilism is broad terms is a country’s practice of intentionally exporting more products than are imported, achieving economic growth by selling into other countries’ markets.
Modern mercantilism, as practiced by Japan and now by China, goes like this:
As have seen, the combination of free trade policies by the U.S. (the only major economy to adopt them) and mercantilist policies by our major trading partners has been a recipe for disaster from the U.S. point of view.
Foreign companies have worked hand-in-glove with their governments in practicing mercantilism, benefiting from government subsidies and both formal and informal barriers to imports from the U.S. and other countries, coordinating plans for increased production capacity, and engaging in unfair pricing of exports, below the price followed in their home country and/or below the cost of production. For example, Hyundai automobiles were sold for many years into the American market at a loss, in order to support larger sales and gain market share.
These companies are not operating in an economy like that of the U.S. Their economy has aptly been described as “state capitalism”, capitalism, but bearing the heavy imprint of the state, in terms of planning, subsidies, and protectionism (and often a good dose of cronyism and corruption). One things is for certain; they are not operating on the “level playing field” referred to so much by advocates of free trade. The proof is in the persistent, growing trade in goods deficits these companies’ governments have been running with the U.S., as described in “Where did the jobs go?”
These private and public policies, and the resulting trade deficits, have not been without their effects in the United States.
May 15, 2014, Ontario, CA - MIAA's founder, Jim Stuber, delivered the keynote address at the 20th annual World Trade Conference sponsored by the U.S. Department of Commerce and the California Inland Empire District Export Council in Ontario, California. To view the conference agenda, click here:
May 7, 2015, Radnor, PA. MIAA's founder, Jim Stuber, appeared as the guest of host Richard J. Anthony, Sr. on The Entrepreneur's Network TV at Radnor Studio 21. The program featured a discussion of the problems caused by offshoring manufacturing and white collar jobs and how consmers can solve the problem with their spending decisions.
Studio 21 has made the program available for viewing here: