I just read Offshoring Bias in U.S. Manufacturing, by Hausman et al. It was illuminating, especially in relating the offshoring bias to the outlet bias in the CPI, an issue that I understand.
A brief update for readers
The outlet bias is the problem of Super Wal-Mart and everyday low prices. Do these prices really mean that shoppers are getting a better deal or does Wal-Mart offer lower prices because it’s a worse place to shop.
The way the BLS adds things up it assumes the latter, however, some economists have argued this doesn’t make sense.
- Some of the goods are really indistinguishable and the price difference would have to amount to an enormous difference in quality of shopping experience
- When Wal-Mart comes into town everyone else lowers their prices. If Wal-Mart’s prices were lower because its an inferior place to shop this wouldn’t happen
- Wal-Mart drives other folks out of business. If Wal-Mart were inferior this wouldn’t be happening.
Ok so now lets more to international relations and think of China as the new Wal-Mart. When China moves into a sector the prices drop. Is this because Chinese goods are worse or because they are just cheaper.
All the reason that make us think Wal-Mart is just cheaper make us think China is just cheaper.
But here is where I still have questions?
For consumer goods its clear that this matters because we are comparing dollars to utility. Its not totally clear why it matters when we are comparing intermediate goods, which is what offshoring is about.
Lets give an example, this is fictional though though real names are used to implicate the guilty.
Apple Starts out building its own Ipods in California.
It pays $200 for product manufacture and sells the device for $250. That’s $250 of American GDP.
Now Apple figures out that the device can be made in China for $50. It still sells the device in America for $250.
How much American GDP is that. Is it $200. That is the $250 sale price minus the $50 import price.
Is it $50 of GDP. The Chinese manufacturing only cost $50 but it is the same as $200 worth of American manufacturing. Thus we really imported $200 worth of stuff and sold it for $250. So that’s only $250 – $200 = $50 of GDP
Mike Mandel and the Haussmann paper seem to be arguing the later. However, the former still seems right to me.
In this case the value-added of retailing the product simply shot up.
It seems that this has to be the case because otherwise the consumer price of the Ipod would have fallen to $100.
If Apple is capable of selling a product that cost only $50 to manufacture for $250 then it must be producing value somewhere.
Now there can be a robust argument about where. Maybe it all comes from supply-chain management rather than traditional innovation. Yet, if so that is a skill.
You might say “doesn’t it come from China” but if it did come from China then why doesn’t either competition drive down the consumer price or drive Chinese export prices up?
I am open on this but at this point I still need some help seeing the point.