By NEIL S. SISKIND
American businesses’ desperate need for Chinese consumers was self-inflicted. By offshoring rust belt jobs to China, we created the “circle of rust”, where, as a result of the offshoring, companies needed to offshore “even more”. Here’s the way “the circle of rust” worked, and how offshoring begot offshoring.
- American companies offshored work to China to lower costs and increase profits
- The more companies that did this, the more companies that had to do the same in order to compete on price
- Lower costs led to lower inflation- due, primarily, to stagnant wages
- Stagnant wages led to less pricing power for companies
- Less pricing power led to the need for even lower costs, in lieu of better margins, to increase profits
- Less pricing power led to the need for greater revenues, in lieu of better margins, to increase profits
- Companies, today, often, achieve more revenues by obtaining more customers, rather than by expanding their margins- and those customers are overseas- especially in China- which makes US companies and Us policy more deferential, or more accepting, or totally blinded, to China’s unfair and illegal behaviors
- Low inflation from low wages leads to low interest rates, which allows companies to achieve more scale through borrowing cheap capital and attracting private equity and forego the idea of better margins as a path to growth- and makes China an indispensable plan for any company’s future.
Offshoring begot offshoring. The Rust Belt and manufacturing base of America got rustier and rustier. And the more it rusted, the less employee/consumer incomes rose, and the less margin that could be achieved through raising prices on consumers- as is normally justified by rising cost pressures- especially wages. Instead, prices had to go “lower” as wages stayed flat. Wages could not rise because companies could not raise prices on consumers with flat wages (and, actually, lower real wages when looking at education and health care costs). The more offshoring needed to lower costs to grow profits- the rustier our manufacturing sector became. China grew stronger, as they used the jobs we offshored from our “Rust Belt” to grow their own middle class and finance things like their “Road and Belt”.
A vicious circle of offshoring begetting offshoring has been the prime cause of America’s decline and China’s rise.