Saturday, July 23, 2016

How rooted are you in this footloose world?

Switching over from electrical engineering to graduate school in an alien field meant that every single day I was encountering ideas and arguments that I had never ever come across in my life in India.  I suppose to some, this is the worst approach because the more one keeps going after new ideas, the less one specializes.  Well, unless one is talented and able like this person, for instance, and I ain't! ;)

"Footloose" was one of those new ideas that made an impression on me.  No, not that footloose. All these years later, it turns out that neither Donald Trump nor Bernie Sanders has had that concept explained to them!  If they looked it up on Wiki, they would have understood this about footloose industries: "an industry that can be placed and located at any location without effect from factors such as resources or transport."

Note the key idea there--located anywhere.

That "anywhere" was China, for most manufactured goods.  Honest academics have known about this footloose nature for a long time.  But, we academics are mere buzzkills and we have no idea how to energize people like how demagogues can.  One of these days I should assume the name of Major Buzzkill, which describes me really well ;)

So, we now have a strange spectacle of Trumpeters from the right and Berniacs from the left yelling and screaming about China.  Meanwhile, China is also beginning to understand footloose:
In today’s China, however, workers face a more troubled outlook than Mr. Trump suggests. They are losing their jobs because of a slowing domestic economy, rising costs and stiffer foreign competition — including from the United States.
Presidential candidates “are screaming about yesterday’s problems,” said Jim McGregor, chairman of the consulting firm APCO Worldwide’s Greater China operations. “Manufacturing for export is getting harder and harder” in China.
Yep, they “are screaming about yesterday’s problems.”  But, you think you can explain these things to Trump and his maniacal supporters?
 Labor costs in China are now significantly higher than in many other emerging economies. Factory workers in Vietnam earn less than half the salary of a Chinese worker, while those in Bangladesh get paid under a quarter as much.
Gooooooooood Morning, Vietnam!  Or, even India, like in this case:
Taiwan’s Foxconn, best known for making Apple iPhones in Chinese factories, is planning to build as many as 12 new assembly plants in India, creating around one million new jobs there. A pilot operation in the western Indian state of Maharashtra will start churning out mobile phones later this year.
Now, it does not mean that the industry will always move only to lower labor cost countries.  My favorite way to explain this to students is this: If it were truly about the cost of labor alone, then every manufacturer would be based in countries like Ethiopia or Tanzania.  But then students, too, do not listen to me.  I write op-eds about the footloose economy and, well, nobody cares.  Story of my life! ;)

Anyway, back to China:
Rising costs have also significantly altered China’s competitive position compared with the United States.
In a 2015 study, the Boston Consulting Group said the costs of manufacturing in China’s major export-producing zone were now almost the same as in the United States, after taking into account wages, worker productivity, energy costs and other factors.
Oh, but don't jump up and celebrate thinking that this will bring in a gazillion jobs to the US.  Most manufacturing is and will be highly automated--machines can be awesomely cheap workers, if the technology is there.

BTW, you can now see why economic geography is such a fascinating intellectual field.  The intersection of economics and geography when viewed through how it affects the human condition, and what the policy implications can be is not only brain fodder but with immense real world implications.  If only our "leaders" had taken an introductory course in economic geography!    


Mike Hoth said...

If only our leaders would put geography back in schools! That helps us to understand the world and it creates new jobs as a bonus! Of course, geography has nothing to do with those STEM or medicine fields, so we certainly can't be bothered to teach it instead of having every graduate know how to use the quadratic formula.

On a side note, I'll be doing my annual week of charity work in the desert starting tomorrow (yes, I do know there's a heat wave coming) so I won't be able to respond to your blog posts until the 30th.

Ramesh said...

Major Buzzkill - please check the registrations for Economic Geography 101 coming fall. You'll find a Donald J Trump and a Bernard Sanders in your list :) (how come Bernie does not have a middle name - isn't that a sacrilege in your country ?)

Global businessmen have always known the value of nimbleness; the ability to organise your business where it is most efficient and to constantly reengineer as others get more efficient than you. As you rightly point out, its not just cost; it is all round efficiency. The eroding competitiveness of China has long been known. In the service industry, for instance, the gap between India and China has only increased as India is way more efficient than China is.

And that's the real solution for America ; not anti globalisation rhetoric and abrogating trade deals. Get more efficient. For example BPOs in places like Albuquerque have started to be as efficient and only 2X more expensive than India and therefore not worth offshoring. Get your costs down and work hard. Get your medical and social security costs down (at least to the levels of the UK ; let alone more efficient countries such as South Korea ). Raise your bar for Medicare and pensions to 70 years. Work hard (In India we work night shifts in the IT & BPO industry ; show me one IT or BPO company willing to work after 5.00 PM in the US). With all the natural advantages that the US has, it can get back to full employment.

Can't resist preaching to Uncle Sam :) And applying for a guest lecture slot in Major Buzzkill's course :):)

Sriram Khé said...

I am always impressed by people like you, Mike, who practice their own words. Good for you for doing it.

Oh yeah, if you lived anywhere close by, I would have had you as a guest-speaker in my class already, Ramesh.
It seems like in the US we are rapidly getting to (or have gotten to) a state where:
a. We want everybody to live well
b. However, we don't want people to work hard in order to live well
c. We don't want to let into the country people from other countries who want to work hard in order to live well
d. We don't want people in other countries who work hard in order to live well to do the jobs that we don't want to work hard to do.
Or, in simple terms, we want to have it all without any tradeoff involved.