Hasn't Anyone at the NYT Heard of Exchange Rates?

The NYT has a lengthy piece on how Apple has outsourced all of its manufacturing operations over the last two decades. This is seen as telling a larger story about the loss of U.S. manufacturing jobs.

Remarkably, the piece never once mentions exchange rates. This is a major determinant of relative prices. If the dollar rises by 30 percent against other currencies, as it did in the late 90s, then it becomes 30 percent more expensive to produce goods in the United States relative to other countries. This rise in the value of the dollar was the major factor behind the explosion in the trade deficit at the end of the 90s and at the beginning of the last decade.

The dollar is also supposed to be the mechanism through which trade is rebalanced. Large trade deficits are supposed to cause currencies to fall in value. This leads their deficits to move back toward balance. This has not happened to any significant extent with the United States in the last decade in large part because foreign governments have placed a high priority on accumulating large amounts of dollars, buying up trillions of dollars of U.S. government debt and other dollar denominated assets. If the dollar were allowed to fall to a level consistent with more balanced trade, then many manufacturing jobs would return to the United States.

The piece also treats the issue as one of being whether middle class manufacturing jobs can exist in the United States and be competitive. The United States is no more competitive with higher paying professional jobs, like doctors and lawyers. The main difference is that these are politically powerful groups who manage to maintain barriers that make it difficult for foreign professionals to come to the United States.

If the government had made the same commitment to eliminate barriers to foreigners in these professional services, it is likely that the pay of doctors, lawyers, and other highly educated professionals would be half or less of what it is today. The issue here is not one of skills, it is one of relative political power. The NYT should have presented the voice of someone who could have made this point.

The article also claims that the United States has a shortage of well-trained manufacturing workers. This assertion is contradicted by the fact that there is no large group of manufacturing workers for whom wages are rising rapidly, which would be the case if there were really a shortage.

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written by skeptonomist, January 22, 2012 9:32 AM

The relative wage rate differences between the U.S. and third-world countries are larger than even potential variations in exchange rates. These wage differences are what drive outsourcing. Exchange rates can be important when it comes to competition of finished products with those of similar economies, such as those in Europe; but there is little outsourcing to Europe. The overall dollar index came down sharply after 2002

http://research.stlouisfed.org/fred2/series/TWEXBMTH

and this did not reverse the trade deficit. And if you're expecting the Fed to fine-tune the value of the dollar, forget about it - the most powerful central bank in the world apparently has little to say about the US-China exchange rate. Exchange rates are just one of the things which influence international trade. The claims of Dean and others about exchange rates seem to be based on some sort of other-things-being-equal ideal theoretical world.

Asia, Inc.
written by Bart, January 22, 2012 10:53 AM

I'd like to read more analysis of the host of issues in the NYT article.

If Foxconn and its adjoining dorms and 12 hour shifts are the only answer, our sun would seem to have set.

the Achilles' heel of exorbitant privilege
written by David B. Schuster, January 22, 2012 11:31 AM

The NYT would readily admit that China is the largest owner of US government debt. By purchasing dollar denominated assets, rather than using that money to pay higher wages in yuan, the dollar strengthens and the yuan weakens. The Chinese figured out long ago how to game the system; maybe someday the NYT will realize how it works.

Apple engineering jobs are located where ?
written by AndrewDover, January 22, 2012 11:51 AM

If the United States is not competitive with higher paying professional jobs, then why does Apple try to fill thousands of software engineering jobs in the United States?

http://jobs.apple.com/index.ajs?BID=1&method=mExternal.searchJobs

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written by paulc, January 22, 2012 12:22 PM

What if protectionist measures for professionals were removed. This would mean that foreign workers could come in and do the job of lawyers doctors etc at a lower price. Does this benefit the economy as a whole. I presume its neutral for the economy since the gains everyone gets from lower health and legal costs is balanced by the much lower income accruing to those in employment in those professions?

Industrial Policy
written by Juan, January 22, 2012 12:56 PM

What gets little discussion about China is it's industrial policy. The GEs of the world love setting up shop in China because China builds facilities where the occupant only has to plug in the power cable to get started. No other country makes it so easy. While it is true makes it difficult to repatriate money out of the country, firms such as GM with factories in China are doing well. Exchange rates are important but other factors play into factory location.

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written by PeonInChief, January 22, 2012 1:02 PM

This article was reprinted in our local paper, and what I found most interesting is that it starts out dissing American workers for expecting things like weekends and being unwilling to work 12-hour days, but then (after the jump) notes that labor costs are a tiny percentage of the cost of the product. What China really provides: subsidies, subsidies and more subsidies. So of course Apple is going to move its production there.

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written by PeonInChief, January 22, 2012 1:25 PM

Two other points and then I'll shut up: First, there's nothing wrong with subsidies. I used to cringe when (it seems a lifetime ago) American manufacturers dissed Japan for providing subsidies to their manufacturers. My position was simply that, if it worked, we should do it too.

Second the engineer who appears in the article is insufficiently credentialed for upper management. What does that mean, since he had a degree in engineering? Well, most likely, not the proper middle class background--perhaps he went to a state school on a scholarship, didn't know the "right" people etc. That's how this works, but to fail to explain what "credentialed" means is one more way to beat up on labor.

US worker shortage vs demand
written by tatere, January 22, 2012 7:00 PM

Maybe you can address this question in a subsequent post:

... there is no large group of manufacturing workers for whom wages are rising rapidly, which would be the case if there were really a shortage.

Wouldn't that only be the case if there was a demand for those workers in the US? In other words, if manufacturers conclude from the start that they won't be able to find the workers they need in the time they need, then they won't even try. And so nobody is hiring those workers, and so there is no "shortage" as such. Any pool that might have existed at one time will dry up for lack of opportunity - people retire, move to other professions, don't stay up to date technically, and so on.

It might be interesting to look at the wages of that group over time, as manufacturing has moved out of the US.

Its Regulatory Arbitrage, not Labor
written by Steve Williams, January 22, 2012 10:54 PM

If your business model says you need to dump dioxins in the river, you move to China. Labor costs are not the major factor. I can refine rare earths in your backyard if you're willing to make a few concessions.

Love of $ is the root of all evil
written by Luke Lea, January 22, 2012 11:11 PM

"because foreign governments [namely China] have placed a high priority on accumulating large amounts of dollars"

How's that gonna work out eventually? Not well for an autocratic, non-market society whose government controls the banking system, dictates loans, prohibits free speech, and does not enforce the rule of law. Why should we trade with them in the first place?

Prophesying war
written by Luke Lea, January 22, 2012 11:23 PM

How do we benefit from trade with a country that doesn't reciprocate? Basically we are arming China by making her powerful and de-industrializing ourselves in the process. When we finally say enough is enough it will destabilize China, who is totally hooked on exports, and may cause her to take it out on her neighbors, which is what autocrats usually do when they are embarrased at home.

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written by liberal, January 23, 2012 6:15 AM

Luke Lea wrote,

Basically we are arming China by making her powerful and de-industrializing ourselves in the process.

Agreed. Not that I wish it's the way the world is, but given the way the world is, deindustrializing and handing key industries over to a potential geopolitical enemy is just nuts.

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written by Arnie, January 23, 2012 2:20 PM

The article clearly says that it is not the cost of wages that forces apple to manufacture in china, it is their effective supply lines,and ability to turn new products and changes in products so quickly. The labor cost is a small percentage of the product cost.

Arnie, please don't believe what Apple says
written by AndrewDover, January 24, 2012 2:02 PM

The reason the iPhone labor cost is small is precisely because labor costs ARE small in China.

The question is: what increase in costs would occur if the iPhone were made in the United States.

A guess is that the labor costs would rise from less than ten dollars to less than fifty dollars.

Considering that the estimated parts cost is around $200, there would be a 20% increase in cost.

http://allthingsd.com/20111019/apples-iphone-4s-cracked-open-money-spills-out/

Of course Apple does not want to highlight why it manufactures in China when selling to U.S. workers.

Hasn't Anyone at the NYT Heard of Exchange Rates?

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