By Jackson Hale
Yo, my question is this: how come companies move their factories to China and can sell their stuff for less. How does China make things for less?
Hey Mitch and everyone else, and welcome to Forward All Inquiries. You may be wondering, what is “Forward All Inquiries”? And I will tell you, its where I take questions from the public and make great strides not to answer them directly. It’s a little bit of mansplaining, a little bit research project, and a whole lot of killing time at work. I make no promises that I am accurate. Now that we are on the same page…
Hello Mitch, thank you for your question. I understand not everyone is as blessed as I am to have a granddad who was so dedicated to Unions. If you had, you would probably have heard something along these lines: “American companies don’t care about the working man. They send their factories to China where they abuse their workers. China and Mexico steal American secrets and use cheaper materials. China doesn’t care about its labor so it allows them to be exploited” On and on and on it goes, where it stops is a Trump presidency. (because everything stops, yaknow, due to nuclear winter.)
And while these things may be true (most aren’t specifically true, but could be true depending), there are other forces that better explain how production moves from a place like America to a place like China that I think are much more interesting and not nearly as depressing (mostly because jobs aren’t lost to trade deals or Mexico or China, they were lost in droves to mechanization).
But where to start? Lets start, where else, in Japan.
Imagine post-war Japan for a second. The Japanese economy is more or less in shambles. The framework with which business and finance intermingled – the powerful Zaibatsu family network of factories and banks – has been dismantled at the request (see coersion) of the American occupiers. Whats a developing economy to do?
Well, what Japan did flew in the face of all common sense in the minds of the Western World.
The common thought about how to develop economies was Import Substitution Industrialization (ISI). Economists attempted growth in Latin and South America by trying to get nations to replace their imports with domestic manufacturing. One great thing about these policies is they attempted to reduce the level of foreign involvement in these developing countries. For many Latin American states, with ISI came the switch from colonial-rule toward democratic states. (point USA). On the other hand, in this framework the state would sponsor and run the industries that it was seeking to replace (point USSR I guess).
Because ISI policies were geared to making states independent, there was an understanding that the state would set up heavy tariffs and protectionist trade policies. The belief was that these “infant industries” weren’t strong enough to compete with the imports they were supposed to replace, so they had to be protected. In effect, these ISI policies were isolationist. They were done to avoid trade. In effect, the state didn’t seek specialize in specific industries with their comparative advantage. Which makes sense right? They wanted to lower their dependence on trade, so they didn’t focus on policies that are beneficial to trade.
Ok, so you know about ISI. ISI was traditional wisdom. Yadda Yadda Yadda. To develop an economy, replace imported goods with state sponsored industrialization.
So back to Japan. The Korean war has just started. The Japanese economy is finding its footing, and the policymakers are looking for a launchpad for development. How to do it?
They focused on trade (specifically exports) for rapid development. During the Korean war, the Japanese economy was infused with a bunch of capital. Cold hard cash. So with that cash, Japan focused on basic manufacturing. They knew that they couldn’t produce goods as high quality as those in the states. But what they could do was make cheaper goods!
Now, maybe you can see where I am going with this. Japan did not do ISI, and instead did something called Export-Oriented Industrialization. Japan made cheaper goods, but instead of replacing imports, they made it for export. Who consumed these goods, you asked? Countries with capital. And that capital flowed into the Japanese economy. And with that cash, Japan invested in the means to make something of a little higher quality. And from there, sold more goods, got more capital, invested more.
Again this is all more complex than I have the room to write, and you the patience to read. But the highlights: Japan also had a ministry that worked to specialize industries based on comparative advantage (MITI), it`s labor force was rallied behind an imagined middle class lifestyle that served to promote industrialization, and the Kairetsu system of business and banking allowed a level of cooperation that the USA complained was collusion – see cheating.
The thing that was so shocking was that nobody believed that this was a good idea. And when it worked, to many Americans this was very troubling. They accused Japan of not following safety procedures (which was sometimes true), they said the Japanese government was colluding with businesses to give their products an unfair advantage (which again, was true depending on your perspective). They also were upset because Japan totally was using protectionist policies, and that was unfair where trade was concerned (which was true, but also unfair because the US totally protects specific goods like Corn through anti-import policies and also mad subsidies, so determine if that is fair or not.
But the Japanese experiment in economic development was so successful, that many countries followed suit in almost the exact same ways. These are called the four tigers. Hong Kong, Singapore, South Korea, and Taiwan.
So, to the good stuff. The thing about developing economies is that they progress. Goods at the start of this progression make products which don’t require any specialized knowledge. That’s why a big assumption is that developing nations will start with textiles. Nobody needs a college education to mass produce textiles. However, as a country develops they start making cars and TVs and Airplanes and really precise medical equipment. These more advanced goods require Human capital.
Last time we talked a bit about religious capital. Today we get another (more widely accepted) type of symbolic capital. Human Capital is education, is experience, its things that make a labor force better than their competitors. Human capital is probably one of the most important things for a developed economy to have. New products like the 777x, or the Oculus Rift, or high end electronics, have to be designed in an area with large amounts of human capital. There is a lot of engineering that goes into these things, and when investors are looking to an area, human capital tells a lot about the labor market in those areas.
But, the longer a product is around, the more the means of manufacturing that product become commonplace. And every year, as the speed at which goods are diffused globally and as the means of production are streamlined, the rate at which production of goods is commonplace and no longer needs specialized workers increases bit by bit. Furthermore, China is also seeking to develop rapidly, just like Japan did. They have a incredibly wide range of factories, ranging from low on the path to development, to at the highest ends.
So, China knows its labor can make cheaper goods, even if those goods may not be high quality. And it exports them to gain an influx of capital into its economy. And meanwhile, the Japanese economy is now designing and manufacturing incredibly human capital intensive goods like high quality steel, machine tools, and medical equipment.
So, how do they make cheap goods, you ask? Well, it could be said that those are the best goods for it to be making currently, for its own interests. If it can find buyers for these goods, and the US is willing to pay for the service, why would they not? They don’t intend to make cell phones forever, after all, and one day hope to make cars and stuff.
A better person might reasonably ask if development is a project worth pursuing anyways. Doesn’t development necessarily split the world into people on the high end of this chain, and the low end where dudes are stuck making cheap cell phones for export? Furthermore, as long as we seek to develop the world through capitalism, won’t there be people who get made poor? Also didn’t humans live a long time without development perfectly fine?
I don’t know about all that. But I will say that people like my granddad who consider themselves working men, blue collar men, are probably the ones who suffer the most. Lots of them do not have human capital, and as a result can’t compete with the price of labor in places like China. Lots of them feel as if globalization is bad for them. And in many ways, it really is.
But on the flip side, globalization has made it to where there are electronics of every price range, medical care around the world (except the US) is cheaper, food is cheaper, you can go on. If we are weighing weather or not globalization is a net good or bad, I’d say it is a net positive. But that’s just based upon my being a pro-TPP socialist.
Anyways, nothing’s perfect. Especially not the answer to this question.