Chip Taylor

Offshore production

Unless you just awoke from a coma you may have read something about some controversy over US firms opening production facilities in other countries.

From what I've read, the critics of the practice seem to take for granted that companies do this primarily to take advantage of cheap foreign labor and then import to the US what they produce to sell it to Americans at higher American prices.

Now, some of that certainly takes place, but that doesn't represent the location or purpose of most US offshore production. Read the cover of the June edition of National Economic Trends, published by the St. Louis fed. It puts the lie to both of those assumptions:

Most workers employed by foreign affiliates of U.S. corporations are located in other high-wage countries, even though the share of overseas employment by U.S. corporations in high-wage countries declined between 1987 and 2001. In 1987, 68.3 percent of workers employed by foreign affiliates of U.S. corporations were located in high-wage countries; in 2001, this share fell to 61.4 percent.

It lists as high-wage countries the 15 countries of the European Union (as of 2001), Australia, Canada, Japan, New Zealand, Norway, and Switzerland.

So most offshore production isn't going to countries where people work for a nickel a week.

In fact, the 49 countries designated by the United Nations as the least developed
(with an annual per capita GDP under $900) account for less than 1 percent of the foreign employment of U.S. foreign corporations.

Much offshoring is related more to market access, rather than cheap labor.

One way to gauge the importance of market access is to look at the destination of the sales of foreign affiliates. Sixty-five percent of the sales of foreign affiliates of U.S. corporations went to the local market. An additional 24 percent of sales were shipped to other foreign countries, primarily in the local region. Only 11 percent of sales consisted of exports to the U.S. market.

Although the percentage of production in low-wage countries intended for the United States is typically higher than the 11 percent average, even in these countries the bulk of production is for the local market. For example, in 2001, 28 percent of the sales of U.S. affiliates in Mexico were exported to the United States, whereas 64 percent of the sales went to the local market.

In China, 71 percent of the production by U.S. affiliates was sold to the local market. This indicates that for some companies the attractiveness of investing in China is not the access to cheap labor but access to a billion consumers.

Armed with this info you'll be able to win many arguments down at the union hall. You'll be so popular.