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Neoliberal globalization has transformed the production of all commodities, including labor-power, as more and more of the manufactured consumer goods that reproduce labor-power in imperialist countries are produced by super-exploited workers in low-wage nations. The globalization of production processes impacts workers in imperialist nations in two fundamental ways.
- Outsourcing enables capitalists to replace higher-paid domestic labor with low-wage Southern labor, exposing workers in imperialist nations to direct competition with similarly skilled but much lower paid workers in Southern nations,
- While falling prices of clothing, food, and other articles of mass consumption protects consumption levels from falling wages and magnifies the effect of wage increases.
The IMF’s World Economic Outlook 2007 attempted to weigh these two effects, concluding: “Although the labor share [of GDP] went down, globalization of labor as manifested in cheaper imports in advanced economies has increased the ‘size of the pie’ to be shared among all citizens, resulting in a net gain in total workers’ compensation in real terms.”
In his study of Walmart, Nelson Lichtenstein reports: “Wal-Mart argues that the company’s downward squeeze on prices raises the standard of living of the entire U.S. population, saving consumers upwards of $100bn each year, perhaps as much as $600 a year at the checkout counter for the average [US] family…. ‘These savings are a lifeline for millions of middle- and lower-income families who live from payday to payday,’ argues Wal-Mart CEO H. Lee Scott. ‘In effect, it gives them a raise every time they shop with us.’” Lichtenstein, 2005, Wal-Mart: The Face of Twenty-First-Century Capitalism (New York: New Press).
In other words, cost savings resulting from outsourcing are shared with workers in imperialist countries. This is both an economic imperative and a conscious strategy of the employing class and their political representatives that is crucial to maintaining domestic class peace. Wage repression at home, rather than abroad, would reduce demand and unleash latent recessionary forces. Competition in markets for workers’ consumer goods forces some of the cost reductions resulting from greater use of low-wage labor to be passed on to them.
Perhaps the most in-depth research into this effect was conducted by two Chicago professors, Christian Broda and John Romalis, who established a “concordance” between two giant databases, one tracking the quantities and price movements between 1994 and 2005 of hundreds of thousands of different goods consumed by 55,000 U.S. households, the other of imports classified into 16,800 different product categories. Their central conclusion: “While the expansion of trade with low wage countries triggers a fall in relative wages for the unskilled in the United States, it also leads to a fall in the price of goods that are heavily consumed by the poor. We show that this beneficial price effect can potentially more than offset the standard negative relative wage effect.” They calculate that China by itself accounted for four-fifths of the total inflation-lowering effect of cheap imports, its share of total U.S. imports having risen during the decade from 6 to 17 percent, and that “the rise of Chinese trade … alone can offset around a third of the rise in official [US] inequality we have seen over this period.”
[...]The increasingly global character of the social relations of production and the increasing interdependence between workers in different countries and continents objectively strengthens the international working class and hastens its emergence as a class “for itself” as well as “in itself,” struggling to establish its supremacy; yet, to counter this, capitalists increasingly lean on and utilize imperialist divisions to practice divide-and-rule, to force workers in imperialist countries into increasingly direct competition with workers in low-wage countries, while using the cheap imports produced by super-exploited Southern labor to encourage selfishness and consumerism and to undermine solidarity.
Neoliberal globalization has transformed the production of all commodities, including labor-power, as more and more of the manufactured consumer goods that reproduce labor-power in imperialist countries are produced by super-exploited workers in low-wage nations. The globalization of production processes impacts workers in imperialist nations in two fundamental ways. Outsourcing enables capitalists to replace higher-paid domestic labor with low-wage Southern labor, exposing workers in imperialist nations to direct competition with similarly skilled but much lower paid workers in Southern nations, while falling prices of clothing, food, and other articles of mass consumption protects consumption levels from falling wages and magnifies the effect of wage increases. The IMF's World Economic Outlook 2007 attempted to weigh these two effects, concluding: "Although the labor share [of GDP] went down, globalization of labor as manifested in cheaper imports in advanced economies has increased the 'size of the pie' to be shared among all citizens, resulting in a net gain in total workers' compensation in real terms.
In other words, cost savings resulting from outsourcing are shared with workers in imperialist countries. This is both an economic imperative and a conscious strategy of the employing class and their political representatives that is crucial to maintaining domestic class peace. Wage repression at home, rather than abroad, would reduce demand and unleash latent recessionary forces. Competition in markets for workers' consumer goods forces some of the cost reductions resulting from greater use of low-wage labor to be passed on to them.
In his study of Walmart, Nelson Lichtenstein reports: "Wal-Mart argues that the company's downward squeeze on prices raises the standard of living of the entire U.S. population, saving consumers upwards of $100bn each year, perhaps as much as $600 a year at the checkout counter for the average family.... 'These savings are a lifeline for millions of middle- and lower-income families who live from payday to payday,' argues Wal-Mart CEO H. Lee Scott. 'In effect, it gives them a raise every time they shop with us.'" Lichtenstein, 2005, Wal-Mart: The Face of Twenty-First-Century Capitalism (New York: New Press).
Perhaps the most in-depth research into this effect was conducted by two Chicago professors, Christian Broda and John Romalis, who established a "concordance" between two giant databases, one tracking the quantities and price movements between 1994 and 2005 of hundreds of thousands of different goods consumed by 55,000 U.S. households, the other of imports classified into 16,800 different product categories. Their central conclusion: "While the expansion of trade with low wage countries triggers a fall in relative wages for the unskilled in the United States, it also leads to a fall in the price of goods that are heavily consumed by the poor. We show that this beneficial price effect can potentially more than offset the standard negative relative wage effect." They calculate that China by itself accounted for four-fifths of the total inflation-lowering effect of cheap imports, its share of total U.S. imports having risen during the decade from 6 to 17 percent, and that "the rise of Chinese trade ... alone can offset around a third of the rise in official inequality we have seen over this period."
Our picture is completed by the addition of a third iconic global commodity—the cup of coffee. Perhaps you have one clasped in your hand—don’t spill any on your T-shirt or your smartphone as you read this! Coffee is unique among major internationally traded agricultural commodities in that none of it, apart from small quantities grown in Hawaii, is grown in imperialist countries, and for this reason it has not been subject to trade-distorting agricultural subsidies such as those affecting cotton and sugar. Yet the world’s coffee farmers have fared as badly if not worse than other primary commodity producers. Most of the world’s coffee is grown on small family farms, providing employment worldwide to 25 million coffee farmers and their families, while two U.S. and two European firms, Sara Lee and Kraft, Nestlé and Procter & Gamble, dominate the global coffee trade.
In common with other global commodities, the portion of the final price of a bag or a cup of coffee that is counted as value-added within the coffee-drinking countries has steadily risen over time. According to the International Coffee Organization, the markup on the world market price of coffee for nine imperialist nations that account for more than two-thirds of global imports averaged 235 percent between 1975 and 1989, 382 percent between 1990 and 1999, and 429 percent between 2000 and 2009.72 As this report points out, these impressive figures significantly underestimate both the magnitude of the markup and also the pace of its increase, since it is based on the assumption that all imported coffee is sold to consumers at market prices, whereas an increasing percentage of coffee consumption takes place in local cafés, where the markup is considerably higher. How much higher can be estimated by considering that a barista typically obtains 60 shots of espresso per pound bag of coffee, that is, approximately 15¢ per shot. Adding another 15¢ for milk, sugar, and a disposable cup, the $3 retail price represents a 900 percent markup over the cost of its ingredients.73
Coffee differs from the T-shirt and the iPhone in one important respect: unlike the other members of this profane trinity, coffee does not arrive in the consuming nations as a finished good, already bagged and labeled and ready for sale. Part of the gross value-added captured by coffee retailers within the imperialist countries production therefore corresponds to the roasting and grinding of the dry cherries, and also, in the case of coffee consumed in cafés, the production labor of the barista. Yet this does not change the overall picture. Roasting and grinding coffee beans, in contrast to their cultivation, is not labor-intensive, one reason why the imperialist monopolies that dominate the global coffee economy have not been tempted to outsource this production task. Another reason is to ensure that monopoly power remains concentrated in their hands: the big markups and juiciest profits are in the processing of the raw beans, unlike in the clothing industry, where the big markups are obtained from the retailing of finished garments, or smartphones, where Apple’s fat profits arise from patented technology as well as branding and retailing. Those who cultivate and harvest the coffee receive less than 3 percent of its final retail price.78 In 2009, according to the International Coffee Organization, the roasting, marketing, and sale of coffee added $31bn to the GDP of the nine most important coffee-importing nations, more than twice as much as all coffee-producing nations earned from growing and exporting it—and, as noted above, this does not include the value-added captured by cafés and restaurants.
Just as, according to the economists and accountants, not one cent of Apple’s profits comes from Chinese workers and just as H&M’s bottom line owes nothing to super-exploited Bangladeshi workers, so do all of Starbucks’ and London-based Caffè Nero’s profits appear to arise from their own marketing, branding, and retailing genius, and not a penny can be traced to the impoverished coffee farmers who hand-pick the fresh cherries. In all of our three archetypical global commodities, gross profits, that is, the difference between their cost of production and their retail price, are far in excess of 50 percent, flattering not only Northern firms’ profits but also their nations’ GDP.79
Squeezing wages allows markups to increase. Thus UNCTAD reports that “clothing, footwear, textiles, furniture, miscellaneous manufacturers (which includes toys) and chemicals all experienced import price declines (relative to U.S. consumer prices) over two decades of more than 1 percent per year on average, or 40 percent over the period 1986–2006.”80
Milberg's recognition of outsourcing's growing preponderance leads him to rhetorically ask, "Why should arm's-length outsourcing be of increasing importance in a world where transnational corporations play such a large role? ... Why should cost reductions be increasingly prevalent externally rather than within firms?" He answers, "The growing tendency toward externalization implies that the return on external outsourcing---implied by the cost reduction it brings to the buyer firm---must exceed that on internal vertical operations.... These cost savings constitute rents accruing abroad in the same sense that internal profit generation does for a multinational enterprise." This is a crucial insight, yet it poses a perplexing puzzle. As the three global commodities discussed in chapter 1 illustrate, "rents accruing abroad" appear, in company and national accounts, to accrue instead from the domestic design, branding, and marketing activities of the lead firm. We will return to this puzzle a few pages hence, but first we'll consider some reasons why the arm's-length relationship might be increasingly favored over FDI.
One reason why arm's-length outsourcing may be more profitable than FDI is that, as Martin Wolf notes, "transnational companies []{#10_Chapter03.xhtml#page_81}pay more---and treat their workers better---than local companies do." Citing "detailed econometric evaluation" that takes into account "the educational levels of employees, plant size, location, and capital- and energy-intensity ... the premium is 12 percent for 'blue-collar' workers and about 22 percent for the 'white-collar' workers." Jagdish Bhagwati also reports that TNCs "pay an average wage that exceeds the going rate, mostly up to 10 percent and exceeding it in some cases." Writing in The Economist, Clive Crook gives much higher estimates: he claims that wages in the affiliates of TNCs in "middle-income countries" are 80 percent higher than those paid by local employers, and in "low-income countries" their wages are 100 percent higher. Thus one reason why TNCs increasingly prefer to externalize their operations is that forcing outsourced producers into intense competition with one another is a more effective way of driving down wages and intensifying labor than doing so in-house through appointed managers.
A further incentive to "deverticalize"---that is, to move from a vertical parent-subsidiary relationship to a horizontal contractual relation between formally equal partners---is that arm's length also means "hands clean"---the outsourcing firm externalizes not only commercial risk and low value-added production processes, it also externalizes direct responsibility for pollution, poverty wages, and suppression of trade unions. One notorious example is Coca-Cola's operations in Colombia, the hub of its Latin American soft drinks empire, where the food workers' union, SINALTRAINAL, accuses company management of colluding with death squads who have assassinated nine union members and leaders since 1990 and forced many others into exile. "Eighty percent of the Coca-Cola workforce is now composed of non-union, temporary workers, and wages for these individuals are only a quarter of those earned by their unionized counterparts.... Coca-Cola is in fact a stridently anti-union company, and the destruction of SINALTRAINAL, as well as the capacity to drive wages into the ground, is one of the primary goals of the extra-judicial violence directed against workers." Coca-Cola's Atlanta-based international directors wash their hands of any responsibility either for the poverty wages paid to their workers or for the violent repression of their efforts to remedy this, on the grounds that its Colombian bottling plants are independent companies operating under a franchise, enabling it to make the legally precise claim that "Coca-Cola does not own or operate any bottling plants in Colombia." Mark Thomas, an investigative journalist, commented that this is
[]{#10_Chapter03.xhtml#page_82}the "Coca-Cola system," operating as an entity but claiming no legal lines of accountability to the Coca-Cola Company.... The case here is similar to that of Gap and Nike in the 90s ... [who] outsourced their production to factories in the developing world that operated sweatshop conditions. It was not Nike or Gap that forced the workers to do long hours for poor pay, it was the contractors.
The "Coca-Cola system" not only distances TNCs from direct responsibility for super-exploitation, pollution, etc., during normal times, they don't have to take responsibility for imposing mass layoffs during times of crisis. Though the arm's-length relationship may have political or public relations benefits, the bottom line is its effect on TNC profits and asset values. A third reason is that arms's-length relationships also allow TNCs to offload many of the costs and risks associated with cyclical fluctuations in demand and with much larger disruptions in world markets, as exemplified by the whiplash effect felt in the lowest rungs of global value chains following the collapse of Lehman Brothers in 2008. As UNCTAD reports, "Jobs in labor-intensive NEMs [Non-Equity Modes] are highly sensitive to the business cycle in GVCs [Global Value Chains], and can be shed quickly at times of economic downturn."
Finally, not only does the arm's-length relationship not generate any S-N flows of repatriated profits, it does not involve any N-S capital flows, enabling Northern firms to divert investment funds into what Silver et al. call "financial intermediation and speculation." In other words, the increased profits delivered by outsourcing are not invested in production either at home or as FDI, and can be entirely devoted to leveraging asset values, through share buyback schemes and generous dividend payments, or invested in financial markets in order to reap speculative profits, thereby feeding the financialization of the imperialist economies.
In sum, it is possible to identify four major reasons why outsourcing firms might favor an arm's-length relationship with their low-wage suppliers: 1) foreign investors find it necessary to pay higher wages than domestic employers, limiting the desired reduction in costs; 2) arm's-length means hands clean; 3) transference of risk; 4) avoidance of FDI in favor of what UNCTAD calls a "non-equity mode" releases funds for investment in financial markets or to finance acquisitions and share buy-backs (two ways in which the fragmentation of production can accelerate the concentration of capital).
The puzzle posed by Milberg's insight that a large portion of the profits of firms in imperialist countries (he does not call them this) is accrued []{#10_Chapter03.xhtml#page_83}in distant production processes can be restated as follows. The foreign direct investments of northern TNCs generate a gigantic S-N flow of repatriated profits, but in complete contrast, between Southern firms and Northern lead firms there is, in the data on financial flows, neither sign nor shadow of any S-N profit flows or value transfers. Furthermore, the various subterfuges indulged in by transnational corporations to conceal part of this flow from tax authorities (transfer pricing, under-invoicing, etc.) are not available in arm's-length relationships. These are large benefits to forgo---yet TNCs increasingly find the arm's-length relationship to be more profitable than in-house FDI. Does the fact that the S-N flow of value and profit is invisible mean that this flow doesn't exist? If not, what becomes of the profit-flows that are visible in the case of an in-house relationship but completely disappear when this is replaced by an outsourcing relationship?
This is the question left unanswered by Milberg, Gereffi, etc., a conundrum that cannot be resolved without breaking free of the neoclassical framework, which presumes markets to be the "ultimate arbiter of value" and price to be its ideal measure, precluding the possibility of hidden flows or transfers of values between capitals prior to their condensation as prices. This calls to mind the physical phenomenon known as sublimation---when the application of heat to a visible solid turns it into a flow of invisible vapor, only for it to rematerialize as a visible solid at a different relocation. Similarly, the flow of value from Southern producers to Northern capitalists is invisible---that is, there's no sign of it in standard data on global capital and commodity flows. According to the bourgeois economists, if it's not visible it doesn't exist; and since value can only appear in the form of price, this, to positivist economics, is its measure. This, the central premise of neoclassical economics, crassly precludes the possibility that value is transferred or redistributed between capitals in order to achieve equilibrium prices that equalize profits. Conversely, to recognize the existence of such flows is to dislodge the keystone of the ruling economic theory, causing the entire edifice to collapse. Renaming "profit' as "rent," as do Milberg, Kaplinsky, Gereffi, and others studying this phenomenon, does not clarify this question. In fact, it blurs the important distinction between profit and rent. Milberg's notion of "rents accruing abroad" implies that the South-North flow continues; and simply calling it rent says nothing about a really interesting implication of this. These "rents accruing abroad" appear in the GDP---the gross domestic product---of the importing nation---even though they were "accrued abroad." The solution of this paradox, which we have been hinting at so far, will be presented in chapter 9, "The GDP Illusion."