A popular topic to talk about is the globalization of business. The terms international companies, multinational companies and exportation seem to be in every edition of the Wall Street Journal.
A popular complaint among many Americans is that outsourcing to China has a negative affect on the United States. Unfortunately most of us living in what used to be the most “powerful and respected country on the planet” are often easily convinced by politicians looking for a vote that China is bad for American economics.
This is easy to say, but hard to justify when you consider the facts.
The economic expansion of China and their increasing trade and investments in the United States have resulted in a Chinese and US economy that are largely interdependent.
Cost Savings resulting from Outsourcing of Manufacturing and Services
The phenomenon of outsourcing manufacturing and services sector activities to markets such as China used to be a consideration for American companies that were faced with the challenge of reducing costs. Now outsourcing is a necessity. And I can promise you, companies who are not outsourcing are jeopardizing American jobs.
China’s vast pool of low cost labor ensures that almost any industry can achieve greater rates of return even after transportation and export fees are considered. China’s cost advantage translates into as much as a 70% savings over US salaries.
While China’s low-cost infrastructure leads to foreign direct investment (FDI) in China, the mass products and services produced are primarily intended to be exported back into other markets. China’s artificial exchange rate controls ensure that while its vast labor pool offers cost-efficiencies, its exchange rate creates cost-advantages to ship these product and services back into the US at prices that US-based manufacturers simply cannot meet.
American consumers benefit greatly from the inexpensive goods coming from China. The many US firms that are outsourcing manufacturing to China have remained competitive and profitable and thus are able to repatriate earnings back into the US as well as pay corporate taxes on those earnings.
It is economics 101 – A company that makes more profits-largely due to lower expenses as a result of outsourcing some operations to China-pays more taxes due to a larger amount of taxable income. This certainly helps the US economy, right?