Wednesday, May 4, 2022

Inflation and Globalization 2.0: Worker-Focused, China Plus 1

I heard a bit of the interview with US Trade Representative Katherine Tai. She asserted we need Globalization 2.0, a form of economic trade that’s worker-focused instead of Globalization 1.0 which has been consumer-focused, i.e. emphasis on lower consumer prices, lower producer costs. Since the COVID-19 pandemic, she has observed that  a lot of companies have gone to a sourcing strategy of “China + 1”: less total dependence on Chinese production with additional sourcing in another country including the US. The idea is that producers’ sacrifice lowest cost for a hybrid cost to create a more robust supply chain. 

This, however, will increase overall costs and overall consumer prices, adding to inflation.

And since inflation is the biggest bugaboo in today’s economy, these seems like a more difficult, long-term strategy to implement if consumers decide to fight this trend. 

Now I haven’t had to research off-shoring options since the pandemic but, from the little I have seen, some analyses remain true. On-shore, more developed industrial country labor content in products is about equal to low cost labor country. Productivity equalizes the lower hourly cost from China. One report shows Chinese wages are now higher than Mexico’s and so if you must off-shore, do it closer to home. Obviously if the level of automation is equivalent in US, China and Mexico, the US will have a harder time competing. But transportation cost, warehouse inventory, market-introduction, product revision costs and so on may offset any higher labor costs even in those types of operations.

What I hope the US Trade Rep means by 2.0 being worker-focused is not a return to more tariffs that hurt the consumer and producer, but a focus on where worker well-being, worker productivity, worker skill development and workers’ community well-being is considered when we look at trade policies, like “Most Favored Nation” status.

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