Competitive Advantage

The American Family Gazette

Vol II, 1110

 

At dinner last evening with friends, the subject of US employment (unemployment!) came up and the usual suspects were discussed.  Among them, of course, was the now well established practice of sourcing overseas in lower labor-cost countries .  One among the group said he had recently discussed this with a friend in a management position with one of the unions.  His—my friend’s—suggestion was that everyone here in the USA, starting with head honcho in DC, should accept a fifteen percent reduction in pay.  He felt that this might be enough to coax business back to sourcing here in the USA, due to a lower resulting labor-cost. The union person, he said, expressed the position that unions had already “given back” as much as they should be required to.  And, in some cases, I’m sure this is a supportable position.  In others, it may well not be.  In any case, the gap, or divide, between average worker wages here and in many other countries, especially those still classified as developing, or less developed, is a reality. In some instances, what a US worker earns (directly) per hour exceeds the daily pay for a foreign worker doing similar work. One can hardly fault business for trying to maximize profits. That’s their objective.  In some cases, moving production overseas has been considered a defensive maneuver.  But for whatever reason this option, this cost-free ability to “go abroad,” it  has had, is having and absent some correction, will continue to have adverse consequences of both an economic and social nature for our country.  No doubt it is making some of us richer, but on balance, it appears to be making more of us poorer, individually and as a community.

The concept of free trade, internationally, is if not a noble one, is at least one that one that merits positive support, in theory. Based upon a concept of competitive advantage, it should offer consumers everywhere a broad range of options at the best prices and allow those most efficiently able to produce and market their goods under the most favorable conditions to succeed.  If country A is good at producing “widgets” and country B is good at producing  “whiz-bangs,” they will tend to maximize wealth if both specialize and then trade to satisfy their reciprocal demands for these goods.  Those not able to so compete are, according to the theory of creative destruction, destroyed. We have long practiced free market capitalism across geographic (state) lines within our own national borders. But in doing so, over time, business has demonstrated that, left to its own, it will take undue advantage of both the market and the factors of production—where and when it can— in its own narrow self interest: profit.  Again, it may be hard to “fault” business in such self-interest, but there are wider considerations to consider.  Issues such as safety, working conditions, health & sanitation, and the environment come readily to mind. Therefore, government in response to these and other issues has passed laws or issued regulations to be followed by business in its pursuit of profit here within our national borders. In most instances, complying with these rules and regulations increases business’s cost of doing business. There is also little doubt that many of these increased costs of business figure in the final prices of their products to the market.  However, competition laboring under the same or similar rules and regulations tends to keep business “competitive” within its market(s).  In a firm’s drive to succeed, it continually looks to improve its competitive position.

A scrutiny of America’s import and export trade figures over the past twenty to twenty-five years confirms the evidence that we are making less here in America and importing more from other countries. Imports “for consumption” jumped from $491 Billion in 1990 to $1,460 Billion in 2004. (Table 1289) Of these, $1,175 billion represented manufactured goods (Table 1288).  Of these, some fifty-five to sixty or so percent originate in what are categorized as developing, or less developed countries. Here is primarily where our “competitive advantage” issue works against us and for them, and so called free trade is most likely to b e to our detriment.  Consider:  how is a domestic manufacturer going to compete in a free market against a foreign supplier whose costs of production are considerably lower?  Other things being equal, he can’t.  Other things also being equal, he won’t if he can avoid it.  How does he avoid it?  He takes his manufacturing abroad to the same lower cost producing country (s) and competes on a “level playing field” for
his domestic (US) business. This makes sense for the business.  It makes less sense for the domestic workforce that he no longer needs to employ. They are out of work! That creates not only economic but social and community problems here “at home”.

Just how much of our unemployment, or under-employment is due, directly and indirectly related to transferring sourcing from US suppliers to foreign suppliers?  Some of it is certainly due to the changing nature of technology and innovation in automation and computer applications.  Currently a good bit of it is due to the economic slump America and other countries find themselves in.  But it is hard to support a position that imports do not materially affect employment here in our country.  They do. If this is truly the case, what is to be done about it, if anything?

In the past, and to some extent still today, import quotas and import duties were used to provide protection to domestic industry.  We did it, and most other countries did too. The move toward freer trade via a world-wide movement, such as the World Trade Organization, was intended to reduce discrimination among countries such that “free trade” would be more possible, to the expected benefit of all.  Has this really been the case?  In many instances, yes, probably.  The amount of trade world-wide is up significantly in the past twenty-five or so years.  World-wide, this has meant employing millions more workers around the world. This has accelerated economic and social development and improved lives for many, many people.  It continues to do so in many areas of the world. Who can argue that this is not over-all human progress?

The international business community will argue that this progress is not, and should not be, a zero-sum game; that what one community gains, another loses. I agree:  it should not be.  But ask the family that has lost its bread-winner’s income because his job has been “transferred abroad” about it?  He or she might be able to find new employment in his or her profession within a reasonable radius of their home, or they might not.  What if they can’t? It would seem that the overseas employee doing what the now domestic unemployed person was doing sure looks like a zero-sum move. Whose responsibility is it now to support this unemployed family entity?  Whose should it be?  Who is involved in this situation anyway?  The company transferring the work and the worker, most directly.  There may be a union involved as well. Indirectly there is the workers’ dependents, the community they live, work and pay taxes in. On the company’s side, management, stockholders and the company’s customers are all affected by the decision to source abroad.  It seems in many, if not most, cases the decision to move sourcing overseas is for the benefit of the company, management and stockholders.

You can argue that if the company decides s to continue their sourcing domestically and compete with lower cost/priced competitors, it stands a good chance of going out of business, in which case the employees will lose their jobs anyway. That certainly doesn’t make sense to the owners and management of the business, who stand to lose their jobs and their investment.  What we have appears to be the classic lifeboat dilemma:  Who gets tossed so the rest will survive?  Not hard to see who it will be, or who it has been for so many ears now:  the workers at the bottom of the pecking order.

As a former business manager, I would side with the company on making these decisions.  It has to be done, for one of two basic reasons:  First simply to compete with those currently having the competitive advantage.  If they don’t, they lose.  Another reason may be to increase the profitability of the firm by costing down using overseas suppliers. Again, it’s difficult to fault management (or ownership) for opting to maximize returns.  But again, it is at the expense of someone, or some group:  the workers at the bottom of the pecking order.  Well, that’s life, you say.  Well, yes, maybe once-upon-a time it was.  Today, it isn’t, or at least it shouldn’t be.

Today when this situation occurs, many businesses do feel some responsibility, and often provide some form of compensation to those let go.  Usually it’s limited and/or temporary in nature. The longer term costs of these moves are felt not only by the person let go, but by family, community and the state and federal governments who are looked to to provide safety-net assistance. In some cases such assistance is sufficient to see the worker through a transition period into another job.  In other case, it isn’t.  What then?  Usually state supported assistance of one form or another.  Who pays for that?  We, the tax payers, do (You might or might not include the company in this latter tax-paying group).  In any case, it is public financing that is covering this private loss.  Longer-term, that does not seem right.  That seems like an undue subsidy to business to enable it to practice “free trade”  capitalism. On an individual basis, a subsidy to a firm that continues to operate and make profits; maybe even more profits than previously.  Does that sound reasonable?  Not to me!

Well then, what if anything, can be done to correct this private sector subsidy to engage in Free trade? Do we need to abandon the concept of free trade, revert to the earlier environment of quotas and tariffs to protect jobs (and businesses) here in our country?  If we do, will others do the same thing?  If so, that will shrink world trade.  So what? Well, I’m not sure.  Fewer options, less choice in the marketplace could be the result.  Higher prices in view of a sheltered industry could be another.  But if those are the prices of continued full employment opportunity here at home, the price may well be worth it.

But there are, or should be, alternative ways to look at this problem  that today sure looks like a public subsidy to private business. One of the issues to consider is the financial result of locations abroad.  In many if not most instances, the benefit is in almost all ways accrues to the company. To the degree this windfall, if I can describe it as such, is not at the expense of taxpayers, I have no problem with it.  To the degree that it does amount to a subsidy, I do.  There are ways to level the playing field here that are not being considered by those who represent us in government, or at least not being employed if they have been considered.

If anyone is interested, I’ll be happy to give my recommendations in this connection. Let’s make it a win-win situation rather than a zero sum game.

 

Thomas Richard Harry
November 2010

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