Some Portions Of The Military Industrial Complex Are Not Turning A Bigger Profit Offshore

Some Portions Of The Military Industrial Complex Are Not Turning A Bigger Profit By Moving Production Offshore. What Gives?

By John Thielking


How many times have you heard the often repeated phrase that 'we [the USA workers] can't compete with those workers in China because they get paid only $1 per hour or $2 per hour'. Well, it is about time that that assumption was tested with some real facts. First off, while it is true that the wages paid to a worker in China or India are about 1/10 the wages paid to a worker in the USA(2), that does not paint a complete picture concerning the production costs of producing products offshore. In the example of moving production to China or India, it turns out that the productivity of the workers in those countries is only 1/6-1/10 of the productivity of the workers in the USA(3), In the case of moving production to Mexico as of 1996-2000 the actual production cost savings was only 40%, in an example cited by University of Mass. Amherst (1). Given that the labor cost as a fraction of the final retail price of a typical shirt made in the USA or Mexico is only 3-6% of the final retail price, it seems likely that a firm can remain competitive in the marketplace while keeping production located in the USA. (1)

It has been pointed out that all of the anticipated cost savings combined (labor, dumping waste directly in the river instead of transporting it to a toxic waste dump, tax breaks and free money giveaways by the host countries) are often not enough to make the production of goods offshore more profitable than producing the same goods within the USA. Often times many competing firms will relocate production to exactly the same place offshore. This 'herd mentality' has the unintended consequence of driving up wages in the local labor market, wiping out the potential 40% or so reduction in production costs cited in the 1996 Mexico example (4). Other factors to consider besides just labor and the environmental regulations are the infrastructure surrounding the production plant, the lag time that it takes to get products to market on a 2 month journey across the ocean on a boat, etc. Some firms are now choosing to relocate production back to the USA (5). Many times they do this because the wages of production workers in the USA have been driven down. But other times it is a matter of wanting to locate the production plant near the Research and Development facilities of the company, for example.

Realizing labor cost is only 3%-6% of the retail price of a product and also realizing that workers in the USA are more productive, this author decided to interview a few of the vendors at the Saturday Market in downtown Eugene. The people who make jewelry and crafts by hand for the Saturday Market report that they are not able to earn a decent living wage making jewelry or crafts and selling them at the market. However, there are a couple of cases, including this author's own experiences, that suggest one can at least in theory make at least minimum wage selling your own artwork if it is reproduced as a print or sticker by a machine.

Also, it would be good to see how the idea that offshore production is often not more profitable fits into the bigger puzzle of the workings of the Military Industrial Complex. Why does it make sense to source critical parts for US weapons systems from facilities in China if you often can't even just make more money by doing so?

In addition, since people are willing to pay only up to 125% of the regular price of an item to be sure that it has not been produced in a sweatshop (plus the fact that only 3%-6% of the retail price is taken up by the labor cost of an item, even when the production workers wages are doubled) (1) (8) it seems unreasonable for sellers of fair trade crafts to jack up their prices 200-300% when the actual production costs and the demand in the marketplace don't justify such high prices. If fair trade crafts are going to be sold in the mainstream and be mass produced to benefit large numbers of workers, that needs to change too.

References and further reading:

(1) Global Apparel Production And Sweatshop Labor: Can Raising Retail Prices Finance Living Wages?
http://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1012&context=peri_workingpapers

(2) http://www.china-briefing.com/news/2014/06/11/complete-guide-minimum-wage-levels-across-china-2014.html

(3) Productivity rates in different countries:
http://www.economist.com/blogs/graphicdetail/2013/02/focus-3

(4) http://www.economist.com/news/special-report/21569575-companies-need-think-more-carefully-about-how-they-offshore-and-outsource-herd-instinct

(5) http://www.huffingtonpost.com/2013/05/31/companies-us-jobs-reshoring_n_3340278.html


(6) http://www.smw9.com/why_value.html


(7) http://fortune.com/2015/07/24/hillary-says-capitalism-needs-a-reset/


(8) Personal communication with the manager of Guatemala Wholesale indicates that the skilled craftspeople making hackey sacks for $1 each wholesale cost are earning a profit equaivalent to 4-8x the minimum wage of $3-$6 per day.