R EA L CA SE
Out sourcing t o China
It was not a difficult choice to make. Between 1998 and decision to make in the early 2000s. It could either out-
2001, US imports of household cooking equipment from source its production to China or see its market share
China more than doubled to $640 million, forcing National continue to deteriorate. In 2002, the company closed
Presto to decrease the price of its pans from $49.99 to plants in Mississippi and New Mexico, reducing its US
$29.99 during that period. Cheap labor—Chinese labor is workforce to less than half, and expanded its production
six times lower than Mexican labor—accounts for this price in China. By 2003, all significant products marketed by
deflation. Continuing operations in the United States and the company were to be sourced from China.
remaining price competitive was simply not feasible. Proponents of free trade argue that political rhetoric
Competition on quality, which can shelter domestic against trade with China is meant to appease US fears of
manufacturing from outsourcing to developing countries, job losses. Yet, as seen in the following table, only 2.5 per
was not an alternative because Chinese products for cent of all job losses in the United States in the first quar-
export are just as good. When high labor intensity is tied ter of 2004 were the result of overseas relocation. While
to quality, the Chinese can outdo industrialized countries. some argue that this percentage is undervalued because it
Another factor is that the Chinese have a combination of does not take into consideration potential job gains that
highly skilled management and low-skilled labor, ensur- never materialized, others argue that given economic con-
ing that production is efficient and that quality standards ditions there was no assurance that firms that created
are met. This ability to produce high-quality goods is also new jobs in China would have chosen to create these jobs
what allows China to move from export manufacturing in the United States if outsourcing to China has not been
of Christmas decorations, toys, footwear, and clothing to a possibility.
household, consumer appliances, and, increasingly, the IT Like many other US, European, and Japanese companies,
manufacturing sector. National Presto uses an agent in Hong Kong to subcon-
National Presto, a US firm that makes high-quality tract production to manufacturing plants in mainland
pressure cookers and electric frying pans, had a difficult China. Larger companies like Motorola, Philips, IBM,
Out sourcing and job losses in t he Unit ed St at es, China are import barriers, unclear legal provisions ap-
first quar t er of 20 0 4 plied in a discriminate manner against US imports, limi-
tations on foreign direct investment, and an undervalued
Reasons f or job losses Losses % of t ot al
yuan. The last one has generated the most controversy in
Overseas relocation 4,633 2.5 the last few years. The Chinese yuan has been fixed at
Domestic relocation 9,985 5.5 8.28 to the dollar since 1994, a rate that critics argue to
Other 167,838 92.0
be up to 40 per cent undervalued. Yet economists do not
Total, private non-farm sector 182,456 100.0 all agree that the yuan is undervalued. Some fear that a
Note: Data only covers layoffs in companies with at least 50 workers, who
sharp deterioration would hurt not only the Chinese
have filed for unemployment insurance, for at least 50 workers, and where economy but also those trading partners that are most
unemployment lasted more than 30 days. heavily dependent on Chinese imports.
Source: US Bureau of Labor Statistics, “ Extended Mass Layoffs Associated with
Domestic and Overseas Relocations,” June 10, 2004. Sources: “ Chinese Trade Reform ‘Is Failing’,” BBC News, April 1, 2004;
“ China Defiant on Currency Exchange,” BBC News, September 2, 2003; Mary
Toshiba, and GE have more control over their manufac- Hennock, “ China: The World’s Factory Floor,” BBC News, November 11, 2002;
turing plants in China. Kyocera of Japan, for example, w w w.w orldbank.com ; and “ Kyocera to Build High-Tech Industrial Park in
Dongguan” , People’s Daily, September 13, 2000.
invested $90 million in the early 2000s to construct a
high-tech industrial park in Shilong Town of Dongguan
City, Guangdong Province. Only 20 years ago Guangdong 1 Does t he t heory of comparat ive advant age
was dominated by paddy fields; today it is China’s largest apply t o China’s t rade w it h indust rialized
manufacturing cluster. count ries? How ?
China has become the world’s fourth largest manufac- 2 How does t he f act or endow ment t heory apply t o
turer, after the United States, Japan, and Germany. It has China’s t rade w it h indust rialized count ries?
outpaced Japan to become the country having the largest 3 Are any of t he count ries ment ioned operat ing in
trade surplus with the United States. US politicians and aut arky?
lobby groups blame Chinese protectionist practices for
4 How can dist ribut ion of gains f rom f ree t rade cause
the growing trade deficit between the two nations, which
much of t he polit ical debat e regarding t rade w it h
in 2003 was estimated at $124 billion. Among the barriers China?
the United States claims prevent a free flow of its goods to
