Globalization, Greed and Outsourcing: Nothing More Than a Huge Trap

Western entrepreneurs have over the past years with the invisible assistance of local authorities and misallocation of funds (low interest rates), moved the bulk of the production of consumption goods to the East (China and India).

There were thousands of reasons and hidden incentives for moving the production abroad: cheap labor, lower costs, less taxation, no environmental rules, cheap energy and transportation, the absence of a suffocating legislation. Last but not least, payment could be done using worthless paper money which was subsequently even re-invested in the US and the EU.

The goods which were produced abroad needed only to be imported and distributed locally. The same applies to many agricultural products. Especially true for the USA. Whilst the manufacturing process was exported, the Western world muted into a ‘Service Society’.

Goods produced in the Far East are imported and consumed by the West. As the Chinese production cost of the goods is lower than the cost would be in the Western world, the nominal profits are larger and the profit taxation is added to the Western import duties and local sales taxes. The end result offers huge income benefits both for the Western authorities and the multi-nationals (globalism) with have since the very beginning sold this idea as a Win-win situation.

The trick, however, is that the Chinese are paid with worthless fiat paper money which is partly reinvested in the West and helps to keep interest rates low and consumption high.

The West however has overseen something extremely important. In order to produce these cheap goods, factories had to be built. Machinery had to be installed and local labor force trained.

West and East lived this win-win situation for many years. Everybody lived happy and each time Western demand started to fail and the fairy tale was fading away, fresh money was printed and injected into the economy.

One thing, however, was overseen. Money can be printed with no limits, but there is a limit on consumption and a more dramatic limit on the quantity of credit and debt. People can only in-debt themselves up to a certain point. Pass this limit and they can no more honor it. This is where the real estate markets started to collapse months ago.

As a result of the crisis, Western consumption is falling, imports declining and Chinese see exports and local production decrease (Von Mises) exponentially. Chinese factories are closing down. Unemployment is rising dramatically. This creates a huge problem as no previsions have been made for the local work force, which are now massively losing their jobs and income by the thousands.

Chinese goods were paid for with worthless fiat paper money but there is no way to move unproductive factories and all machinery out of the country. They have been sealed with Chinese concrete on Chinese soil. Over the past years, Chinese have learned to operate the machinery and to run the factories is a productive way.

Today, because of the danger for domestic riots, the Chinese authorities are - as expected - blackmailing the foreign owners to provide an unemployment compensation. If not, they will simply confiscate the factories and the machinery.

Disclosure: Author holds long positions in gold

Comments

[Sam Liu:]

would you have any references to your expose?

2008 Dec 05 06:16 AM

[CLH:]

No references because this article is 100% BS.

2008 Dec 05 07:05 AM

[Roger Knights:]

Typo: Two instances of "overseen" should have been "overlooked."

2008 Dec 05 07:30 AM

[Francis Sch...:]

Ludwig von Mises is the reference by excellence. I advice every body to read some of his books. "Human Behaviour" in particular.

2008 Dec 05 08:28 AM

[Thunderlight:]

wtf is this?
Does seekingalpha.com not proof read author's articles before posting them?

2008 Dec 05 09:17 AM

[BLIP:]

I am grateful for this article and for the reference to Ludwig von Mises.

t I understand something about human behavior after teaching ages 5 - 14 in the same town for thirty years. Our emotions may not mature much after age 15---until 40. I witnessed one generation grow and, as parents, attempt to create a better life for their children. When economics supports that compelling desire and serves as a way of sharing a sustainable good life, all will live well. Then, ostentatious strutting will not be admired, boats and extra homes won't get tax deductions and celebrities will be less symbolic. Rather than prisons, schools will be a growing industry. Medical care will be more like public education, both doctors and teachers will be respected and all will be comfortable living within a range of having enough. Competitors will find excitement and fulfillment without power struggles that become violent. Bad days will not be so awful that we use drugs to face the next day. People will express anger peacefully, without hurting children. Without child abuse, evil will disappear from our world and we will enjoy heaven on earth.

2008 Dec 05 11:16 AM

[Francis Sch...:]

I want to thank Blib for his comment. He sure understands what is failing in today's society. Galbraith also did and his analyse can be read in "The Age of Uncertainty".

2008 Dec 05 01:44 PM

[Osterix:]

Francis,

I gather CLH can't afford to subscribe to the Wall Street Journal or he doesnt bother to read it. Maybe its because he has trouble with words of more than one sylllable like our current president.

I am a big fan of Galbraith. I enjoy your articles. I am a believer in the Continental European theories of economics. I am familiar with "Colbertisme" and the ideas of Mueller and List. I commented at another article that I believe the Chinese economy is beginning to implode. What you wrote is a general consensus of what is happening in China by most analysts and observers. I recommend the on-line Christian Science Monitor for anyone interested in in-depth news coverage to supplement the normal NY Times and Washington Post.

To Thunderlight: What do you want for free? Editing too?

To Roger Knights: As someone who has studied four foreign languages I would like to point out that is is extremely difficult to be perfectly idiomatic in a foreign language no matter how well you know it.
I assume Francis is Belgian. Therefore his native language is Dutch or French, not English.

2008 Dec 05 11:10 PM

[Third Party...:]

"As the Chinese production cost of the goods is lower than the cost would be in the Western world, the nominal profits are larger and the profit taxation is added to the Western import duties and local sales taxes."

China has most favored nation status with the U.S. They have very low tariffs, therefore American taxpayers have been subsidizing the outsourcing to China. This means that the profit from duties and any taxes would be at best recouping money already spent. BTW, it is worse in the Free Trade zones.

2008 Dec 06 08:09 PM

[Ray Tapajna...:]

Free Trade and Globalization are the scams of the century.

First of all Free Trade is not trade as historically practiced and defined. Trade is based on trading products per se. Free Trade is primarily based on portable production. Factories are moved from place to place for the sake of cheaper labor. Workers are the real commodities being traded. Workers are put on a global trading block to compete for the same jobs down to the lowest levels of impoverished workers and even children.
In addition it is senseless to talk global warming and protecting the ecology when we have products like the energy saving 8000 miles light bulbs that take 8000 miles of long haul shipping and extensive packaging to get to the USA. This product like many others are also manufactured in dirty conditions. In this case mercury is out in the open during manufacturing cycles.

See www.phillyfuture.org/n... ( and node/5297 )

It also does not make any sense to deflate the value of labor and workers. In the USA a new working class has been put in place and outside the country we have underclass workers making our products now.

This is senseless in our economy that is based on making money on money rather than making things.
Workers and labor are a real tangible value and asset acting as a money standard. When the value of workers and labor are deflated, it also deflates the values backing up the printed paper dollars that need manipulations to give images on paper a value.

The first question to ask is this.
Who said we had to compete like this in a global economic arena?

The second question is part of the answer.
Why did the US Federal Government sponsor the moving of factories our of the US starting in 1956 with this "temporary" program never ending.
It evolved into the maquiladora factory program and Free Trade.
After getting it confirmed, President Clinton and the "Contract with America" Republicans rushed $20 Billion dollars to Mexico to save the peso and bail out Mexico. President Clinton also said he would funnel more money to Mexico through the international money funds.

In turn, imports like the PT Cruiser made by $1 an hour workers in Mexico flooded the USA.

Our auto makers and other industry were in essence told - Compete with this!

Obama comes from the same line of Globalist Free Traders. Until he denounces this betrayal of workers everywhere, not much will change.

For more information see
tapsearch.com/tapartne.../
tapsearch.com/flatworl.../
www.bizarrepolitics.co... and
www.bizarrepolitics.co...
tapsearch.com/flatworl... ( Thomas Friedman fables )

2008 Dec 23 05:51 PM