Many of our detractors keep insisting that we don't have a clue what we are talking about. However, as our predictions come true one after another, we can't wait for their spin. Today we are going to comment about two of them.
This is the process that companies who have off-shored their manufacturing operations undertake when they bring said operations back to their countries of origin. A few days ago a new survey was released by the Boston Consulting Group (BCG). This survey indicated that many large US companies that off-shored to China, Mexico, Western Europe and the rest of Asia are now bringing production back to the US to the tune of about 50%. This is, their goal is to produce half the goods off-shore and half in-shore.
The question that the BCG group made is also very much relevant to us. It was: "Given the fact that China's wage costs are expected to grow, do you expect your company will move manufacturing to the United States?"
The answers varied. Many companies were indeed being affected by raising wages to the point that there was little advantage in producing off-shore. Some mentioned the lack of skilled labour. Some mentioned transportation costs. Some mentioned that producing and selling for the internal US market was easy than to do the same for the Chinese market. And some pointed out that having direct, local control over supply chains produced better quality and yields.
Additionally, many companies plant to invest heavily in automation as its costs continue to decrease. This will allow them to become even more competitive.
How big is this move? Big. Within 5 years these companies want to be 50/50 off-shore/in-shore. This will produce a drastic decrease in Chinese manufacturing of about -11 %, a decrease of 21% from 2013.
Another interesting trend that nobody wishes to talk about and for which statistical figures are almost impossible to come by, is reverse immigration. Typically what used to happen was that people from poorer countries would migrate to rich ones and establish a family. They would stay in those countries for many generations with no end in sight. This trend is now over. Yes, many people still migrate from poor to rich countries but as soon as they are wealthy enough, they either return back to their countries or migrate to "retirement" countries.
WHAT'S THE POINT?
The point is that in both these processes the root cause is the free market. Both groups are acting rationally (see Austrian Economics For Dummies - The Rationality Of Action) despite of what governments want them to do.
In the same manner in which the US government was unhappy and the Chinese happy with companies off-shoring decades ago, the Chinese government is now unhappy and the US government is now happy. Companies acting out their own rational best interests have achieved what decades of government intervention could not: to raise the standards of living for Chinese people to an equivalent level as in the US or EU. Don't kid yourself, this is true. Ask any Chinese person who had lived in modern Chinese cities and migrated out, if they miss any of the big city conveniences. The inevitable answer will be no. True, for this to happen the US and EU had to suffer -temporarily- but in the end standards of living are equalizing world over. This is the classic scenario of Austrian Economics. When wealth is being created it spreads throughout all people. Yes, companies that went to China became much, much richer, but so did all the Chinese people who before that could only farm and be exceedingly poor.
And for those who believe that the Chinese government had something to do with this, rest assured it did not. Let's be clear. The Chinese government did two things:
They shifted from a planned economy (i.e. Communism) into a monetarist economy (i.e. western economy) and flooded the market with cheap (i.e. fiat) money.
They opened their borders to foreign investment but, more importantly, to foreign know-how.
These two elements were and continue to be the drivers of the Chinese economy. As China moves more into the failures of monetarism, it will suffer its consequences. It must be understood that flooding the market with cheap money is nothing but accelerating growth now to the expense of future (severe) busts. The real Chinese economic engine is the know-how and modern technology that western companies brought with them. The Chinese were in the dark ages, technology-wise, until western companies stepped in. This is exactly what Chinese leaders wanted and they were willing to pay the price of allowing profits to be exported and a great deal of free-ish enterprising to go on. And so they reaped the benefits. The standards of living in modern Chinese cities is now equivalent to the ones in the West… or better.
However, we need to emphasize this again, this happened not because of what the Chinese government did, but because of what enterprising people did. The Chinese government wasn't even the enabler, it has the hindrance that removed itself to a large degree thus allowing for the free-ish market to operate.
This is exactly what were saying all along and continue to say and will continue to say. Free markets produce wealth and with it higher (much) higher standards of living. In the case of China this is patently clear. The less "economic management" you have the more wealth is created. If you want to have maximum wealth for everybody (as we want) you must have no economic management whatsoever. This translates as no governments at all. Anywhere.
And what about companies leaving China, won't they have a negative effect on Chinese wealth levels? Absolutley! But that's not the point. The point is that Chinese people will be far, far better off even when companies downsize than how they were during communism. The point is that the wealth effect remains active and growing for as long as there is no economic intervention. The point is that all these ups and downs are entirely due to imbalances created by governments. Should governments not exist, the world over would have equivalent standards of living, adjusting for local conditions geographic and/or sociologic conditions. And those standards of living would be pretty high! Significantly higher than today's.
What these big companies are doing is significant in terms that they are big enough to disregard governments to a large degree. To move a factory from US to China and then move it back is no trivial affair. It is extremely costly, disrupting and time consuming. There must be compelling economic arguments to do so. As such these companies can act more or less as if our managed economies would be free ones. The decision to reshore is primarily based on economic principles and conditions and not on political ones. As they move from one market to the next they are spreading wealth and exploiting local economic advantages. These advantages are the one that allow these companies to remain competitive thus enhancing our standards of living by providing more choices (products and services) at continuously deflating prices.
Eventually, all places on earth will have the same standards of living (adjusted for local conditions). At that point it really won't matter where a product or service is produced or delivered, what will matter is at which price. Once we are all similarly wealthy, the biggest race will be for the lowest retail price.
But this process is not, repeat not, driven by governments; it is driven by entrepreneurs. Governments are a hindrance to this process in all places and at all times. Governments consume and prevent entrepreneurs from doing what they do best: to become rich and in the process spreading that wealth to all of us.
How about retirees? They are also acting in their own economic and rational manner. They move where economic conditions are better (i.e. lower taxes, good and reasonably priced health care, sanitation, shelter, etc). But these considerations are all heavily dependent upon private entrepreneurship. In general terms these conditions are better in countries where government "economic management" is the lowest. But it governments are not "managing" these economic conditions, who is providing all those goods and services? Private enterprising!
People moving to those places are in fact preventing their wealth from being stolen by greedy politicians and bureaucrats by moving into places with less greedy politicians and bureaucrats. But this should not be this way. There should not be any greedy politicians and bureaucrats whatsoever!
In moving to better places, retirees are also taking their wealth with them and spreading it around wherever they go. This means that the local population also benefits from this. Again, retirees are indeed enterprising people which are setting up market conditions for companies to service. In the previous section we looked at companies looking to better serve markets. In this section we are looking at markets wishing to be better served by companies. This is exactly how free markets operate. Each economic actor is looking after his/her own benefit but in so doing they are creating or enabling the creation of wealth from which other people will benefit. What governments do is just the opposite. They prevent companies from looking at better serving their markets and they prevent markets from looking for conditions and places to be better served. We must never forget that all market-related laws, rules and regulations are prohibitions, this is, stuff that people must not do. The only thing they accomplish is to hamper markets by preventing them from operating and in the process destroying wealth and with it lowering our standards of living.
Reshoring And Reverse Immigration are beautiful real-life examples of the principles of free markets in action. They clearly demonstrate the power of free markets to provide and generate wealth for all to have. They also clearly demonstrate the negative effects that government actions, any government action, will have on our wealth and well-being.
If you wish to be free and wealthy, then here is your answer. On the other hand, if you prefer to be dependent and poor, then go ahead and continue supporting governments. It is, of course, your choice. Just be aware that in so doing you are condemning all your fellow citizens to the same fate. It is now up to you and your very own personal ethic or moral principles. Good luck, you are going to need it.
Note: please see the Glossary if you are unfamiliar with certain words.