Why outsourcing jobs to China has helped the world’s poor

Promoting his newly released book Deep South: Four Seasons on Back Roads, Paul Theroux has an op-ed in the New York Times, where he lambasts American CEOs for their “hypocrisy”. He states,

EVERY so often, you hear grotesquely wealthy American chief executives announce in sanctimonious tones the intention to use their accumulated hundreds of millions, or billions, “to lift people out of poverty.” Sometimes they are referring to Africans, but sometimes they are referring to Americans. And here’s the funny thing about that: In most cases, they have made their fortunes by impoverishing whole American communities, having outsourced their manufacturing to China or India, Vietnam or Mexico.

Unfortunately, there are many people who share this opinion. They view trade as a zero-sum game. if China wins, America loses. However, they are gravely mistaken because Sino-American trade has benefited both economies. For instance, before opening up its economy in the late 1970s, Chinese foreign direct investment to the U.S. was zero. In 2014, it was $12 billion, according to the Rhodium Group, a consultancy. As the graph below illustrates, Chinese FDI also support more than 80,000 well-paying jobs in the U.S.

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The American author adds,

No, oddly enough, China has been enriched by American-supplied jobs, making most of the destined-for-the-dump merchandise you find on store shelves all over America, every piece of plastic you can name, as well as Apple products, Barbie dolls or Nike LeBron basketball shoes retailed in the United States for up to $320 a pair. “The uplifting of impoverished people” was one of the reasons Phil Knight, Nike’s co-founder, gave in 1998 for moving his factories out of the United States.

Ironically, most of the cheap Made in China products that Theroux criticizes so much help Americans afford a decent living. In addition, a Made in China t-shirt has cotton farmed in Mississippi with American-made Deere tractors with the help of cheap credit thanks to Chinese purchase of US treasuries, etc… Even an Iphone 5 assembled in China has more than 95% of components made by US and other OECD-headquartered firms, as shown below. So, Instead of abhorring these cheap Chinese made products, we should be lauding these companies for extending their supply chains and providing jobs to the “Bottom Billion“, who needs it the most.

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Concluding his opinion piece, he says,

The strategy of getting rich on cheap labor in foreign countries while offering a sop to America’s poor with charity seems to me a wicked form of indirection. If these wealthy chief executives are such visionaries, why don’t they understand the simple fact that what people want is not a handout along with the uplift ditty but a decent job?

Some companies have brought manufacturing jobs back to the United States, a move called “reshoring,” but so far this is little more than a gesture. It seems obvious that executives of American companies should invest in the Deep South as they did in China. If this modest proposal seems an outrageous suggestion, to make products for Nike, Apple, Microsoft and others in the South, it is only because the American workers would have to be paid fairly. Perhaps some chief executives won’t end up multibillionaires as a result, but neither will they have to provide charity to lift Americans out of poverty.

Yes, American workers want jobs instead of handouts, but we live in a global economy, where countries and workers compete with one another in the market place. Given China’s large unskilled population, 21st century United States cannot compete with China in this area (low-skill manufacturing). As Chinese labor cost increases, however, some companies are “reshoring” or  going elsewhere to search for opportunities to provide low-priced products to consumers and maximize profits for their shareholders.

A Congressional Research Service report puts it this way,

China’s rapid economic growth has led to a substantial increase in bilateral commercial ties with the United States. According to U.S. trade data, total trade between the two countries grew from $5 billion in 1980 to $592 billion in 2014. China is currently the United States’ second-largest trading partner, its third-largest export market, and its largest source of imports. Many U.S. companies have extensive operations in China in order to sell their products in the booming Chinese market and to take advantage of lower-cost labor for export-oriented manufacturing.3 These operations have helped some U.S. firms to remain internationally competitive and have supplied U.S. consumers with a variety of low-cost goods. China’s large-scale purchases of U.S. Treasury securities (which totaled $1.22 trillion as of February 2015) have enabled the federal government to fund its budget deficits, which help keep U.S. interest rates relatively low.4

Are there people and communities in this country hurt by outsourcing jobs to China? Affirmative. However, there are many jobs that have been created downstream and upstream thanks to trade and investment between the two largest economies. More important, we live in a better world with a stable and middle-income Chinese economy than a poor and unstable one. Also, as the world’s factory, China has to import most raw materials, components, and other inputs. So, to say that outsourcing jobs to China is bad for the U.S. is one-sided and untrue, because it obfuscates the true nature of today’s globalized economy.

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