Why do so many Western politicians and economists promote a trading system that increases Western unemployment levels and results in a gigantic transfer of wealth to the East every year?

Since 2000 many jobs have moved from Europe and America to Asia.  China, Taiwan, South Korea, Malaysia, and the Philippines have seen a huge rise in manufacturing jobs and India has taken a chunk out of back office service sector jobs.  A large number of the products and services produced in Asia have been exported back to Europe and America.

For many this is clearly a good thing.  Asia is becoming more affluent and millions of people have been pulled out of poverty.  For others this is a bad thing.   The trend causes a huge trade imbalance for the West, which helped to fuel the debt crisis.  The practice has also created more global pollution as cleaner Western factories have been closed down and replaced by Asian factories powered by coal and producing 'dirtier' byproducts.

From a Western perspective the main rationale for this form of outsourcing has been access to lower cost products.  Once the practice had been adopted by a few companies to produce goods in places like China, which gave access to cheap land, cheap construction, and cheap labour, it became very difficult for other Western companies to compete.  So they had to adapt as well.

But are these lower cost products really cheaper or is the low cost merely an illusion?  We frequently think that something is cheaper than it really is:  printer companies routinely sell customers good quality laser printers for £100; an amazing price.  But not so cheap when you discover that new ink cartridges can cost almost the same amount.  Consumers are offered “free” mobile phones and then are tied in to 24-36 month contracts worth hundreds of dollars.

History Future Now has looked at the cost of an imported product from a place like China and the impact of the 'cheap' products on higher levels of unemployment in Western societies.  Some simple maths will show that the consumer may pay a low price for the imported product but this short term gain is offset by a much higher price.  The cost is to fund fellow citizens who have no jobs and do not contribute taxes.  It is important to look at the life cycle cost of products, not just the up front cost.

Lets have a closer look

To start with, lets admit it up front: many products that are built in China have a lower retail sales price than a competing product that is made somewhere in Europe.

If you add up the cost of cheaper land, cheaper buildings and cheaper labour, a £100 laser printer imported from China may cost £115 if it were built in the European Union or in the US.  For people on a budget (most of us) this 15-20% increase in cost is a big deal.  And when comparing nearly identical products, spending 15-20% more on a product just because it is made in your home country is not something that most people are willing (or able) to do.

If most of the growth in manufacturing and service sector jobs is in Asia, albeit to provide goods and services for people in the West, then the result is that there are fewer jobs in the West.  Despite the efforts of economists to play down this issue, citing theories of comparative advantage, the reality is that unemployment in the West is a natural consequence of outsourcing. Under employment, is another major problem in the West as skilled jobs become scarce and people are overqualified for the jobs they are forced into doing.

According to Eurostat, which provides statistics for the European Commission, the European Union 17 (those in the Euro-zone) had an average unemployment rate of 12.1% for all people of working age population in October 2013.  Given the fact that Germany is the largest country in the EU17 and has an exceptionally low level of 5.2% the average for the EU17 excluding Germany is much higher.  Greece and Spain, for example, have an unemployment rate of 27.3% and 26.7% respectively.

Ricardian theory of comparative advantage does not seem to be working any longer and, (See P-) possibly never worked in the past.   If the theory worked in practice significantly lower levels of unemployment would be seen across the European Union as each worker would do the job to which they are best suited.

So lets get back on track.

What is the cost of this unemployment on society?  There are lots of ways of looking at it.  We will take the most simplistic way, as it is should be less controversial, although it is likely to understate the true cost quite considerably.

Lets make a series of assumptions, based on the UK’s economy.  The average income is £26,600 per annum, or £2,217 per month.  Of that 24% is taxed, resulting in a take home salary of £20,216 per annum or £1,685 per month.  The critical part here is the amount of Income Tax: £6,384.  The actual amount deducted as tax is higher than this figure as companies pay Employer’s National Insurance on top, but we will ignore it.

If you are unemployed in the UK the maximum amount you can get in benefits (from 2014) including housing and income support, is £26,000.  Curiously some of that is subject to tax.  Thus if you do not work and depend on the State the full cost of those benefits to the government (i.e. taxpayers) is £27,184.  This is sum the total of benefits paid by the government to the citizen plus the cost of missed taxes not paid by the citizen to the government.

In the UK of a population of 64m people there are 33m people of working age.  Of the working age population 2.5m are unemployed (7.6%).  This results in a theoretical unemployment cost of £67 billion per annum (2.5m x £27k per annum).  That means that of the 30m people in Britain who are working £2,236 of the £6,384 they pay in taxes (35%) goes to pay for those that are unemployed.  That is a lot.

If, miraculously, there was no unemployment and that proportion of tax was returned to the working population, each would, theoretically, have an additional £2,236 per year to spend on whatever they wanted. That is the equivalent of 1.3 months of additional salary per year. Returning to the laser printer example, it costs £115 to build in the EU but £100 to import from China.  A £15 difference.  If the sole reason for EU unemployment is attributed to cheaper labour in China (which is an exaggeration) and if there was zero EU unemployment each worker could buy the labour only equivalent of 149 laser printers per year (149 x £15 = £2,236) from the EU rather than China without busting their personal budget. That is a lot of manufactured goods.

Using the same assumptions, but switching the unemployment rate to 12.1%, which is the average rate for the EU17, it would cost the UK £107bn (vs £67bn) to pay benefits to unemployed people. Thus 59% of all the personal income tax that employed people pay (£3,742 of £6,384) would be needed to pay for people that are unemployed.  That is equivalent to 2.2 months of additional income per year.

It gets worse if you use Greece’s unemployment rate of 27.3%.  If the UK had this level of unemployment, 8.9 million out of the 32.6m working age population would have no job.  It would cost taxpayers £10,208 per year (£242 billion) to foot the bill for the unemployed – a sum which is higher than the £6,384 in tax an average worker currently pays. The cost to each worker for each non-worker would be equivalent to 6 months additional income per year.  That is the equivalent of a huge number of low cost goods from China.

The UK’s total budget for 2012-2013 was £683bn so the cost of supporting unemployment at the current Greek level would devastate the UK’s budget.  At £242 billion the cost of unemployment is only a little less than all the money spent on defense (£39 billion), education (£91 billion) and health (£130 billion) put together. 

What is alarming is that youth unemployment in the European Union is significantly higher than total unemployment.  The chart below shows the average youth unemployment rate for the EU as a whole and in the EU17 (Eurozone) in particular.

If you are young it is very hard to find a job.  And if you can’t find a job now you are less likely to find a well paid job in the future. This means that over time unemployment rates are likely to go up, not down.

These statistics show that the cost to society for unemployed people is likely to go up over time, resulting in permanently overstretched budgets and/or increased government borrowing.  Alternatively unemployment benefits could be slashed.  This solution would be likely to result in an increased budget requirement for law enforcement to control increasingly desperate people who would resort to crime to help make ends meet. More prisons would be needed to house all of those “undesirable” people at an additional cost.

So sure, a consumable product or service may be 10-15% cheaper using outsourced labour.  But by focusing on the low cost of the product and ignoring the actual cost to us as an individual taxpayer we are fooling ourselves.  It is exactly the same mindset that tricks people into buying cheap laser jet printers only to find that they require absurdly expensive ink cartridges, or into buying a product with a credit card without considering the resultant cost of an extra 27% interest per annum to your credit card company.

By examining the life-cycle cost this way it is clear that the cost of high levels of unemployment is more expensive to a citizen than the benefit of importing lower priced products.

A final note.  

This chapter focuses on the underlying cost of cheap versus the cost of high unemployment levels.

In the chapter  Why do we need the military? we examine the cost of securing energy supplies and trade.  The US spends $137 billion per year on its military in the Pacific, mainly on its navy, to secure open access of the Pacific and Indian Ocean to support commerce.  But the US loses a huge amount every year in trade to Asian countries: $295 billion per year to China, $63 billion to Japan, $13 billion to South Korea, $15 billion to Taiwan and $14 billion to India, a total of $400 billion per year.  This annual transfer of wealth, plus the military cost of transferring this wealth, amounts to a staggering $537 billion per year for the US and is the equivalent of $1,700 per American man, woman and child.  This budget busting spending has contributed to the US’s mindboggling private, commercial and government debt, all of which needs to be paid for at some point.

It is easy to understand why multinational companies are more than happy with outsourcing employment.  Corporations need to compete with each other for market share, profit margins, customers etc. Getting your products to market cheaper by undercutting your competitor is likely to result in more sales.  Companies don’t want to worry about the external costs to society of their actions. – High unemployment, increased pollution, workers conditions are issues for the Government.   As for paying taxes – especially when Corporations actively see themselves as transcending the nationality of their original home country -  this is viewed solely as a cost to the bottom line not as a social obligation.

It is also easy to understand why individuals in the West are happy with the status quo.  We can buy cheaper imported goods and services.   And it is hard to make an explicit connection between the higher taxes and higher unemployment levels that result from it.

However, it is a real mystery as to why so many Western politicians and economists promote a trading system that increases Western unemployment levels and results in a gigantic transfer of wealth to the East every year.

They ought to know better.