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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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Off-Shoring: "There's no such thing as Free Lunch"


For those of a younger generation, that's a saying from a long-ago time when saloons offered what was advertised as a "free lunch". Of course the saloons hoped to make up for that expense by selling more alcohol, likely of dubious quality and a somewhat higher price than usual. These days that saying suggests that if something seems too good to be true, it probably isn't true.

And so it is with off-shoring, to an extent. What at first glance looks wonderful (really cheap labor) also turns out to have some hidden costs- the inherent unreliability of that labor source due to a multitude of possible problems. Nevertheless, we have chosen to listen to economic "experts" who have led us down this path.

Another not-so-obvious cost is the "all the eggs in one basket" problem. Business decision makers have chosen to completely ignore the fact that the United States now depends on a potential enemy to provide critical materials in drug manufacture which we have decided to no longer produce here in America. When a number of those "precursor" drug materials were found to potentially cause cancer, it was regarded as a minor temporary problem.

Similarly, we now rely on a potential enemy to manufacture a very significant amount of high-end consumer electronics, as well as much basic but necessary electronic commodity: memory chips, as one example, which we no longer produce domestically because the Chinese product is so much cheaper.

In choosing to obtain their primary energy sources from a potential enemy Germany and much of Western Europe also listened to those same "experts".

How has that worked out for them?


Comments

  • China is a “frenemy” to the West on many fronts. This Ukraine war brings out the supply chain risk and many countries are recognizing it. So much for the push for globalization - free lunch.

    US is making move to reduce some dependence of semiconductor manufacturing by building factories in US. TSMC also announced to build another plant in Germany. Certain toolings, processes and materials for making specific chipsets are restricted for sale to China.
  • There are many different issues and concepts mixed in here. All worth discussing, but not a simple question. I'll just try to identify some of what's in the mix. Way too much to go into detail in a post of this type.

    Supply chain concerns - logistical costs and risks
    Offshoring/manufacturing - global economic efficiency
    Natural resources - limited sources

    Potential risks with supply chains extend far beyond geopolitical risks. There's a tradeoff between robustness and cost. Does one second and third source supplies, or does one rely on a low cost provider? You know what happens to gasoline prices when just one supplier (refiner) in Richmond Calif. goes down. It's not an especially robust domestic system.
    Supply chain managers and logistics experts are aware of all the potential problems, and have been debating the trade-off between “risk” versus “resilience” – the latter being the ability to minimise or quickly recover from a disruption – for the past decade or more. Low just-in-time inventories increase the risks of shortages when a crisis bites. “Resilience”, however, means bigger stockpiles, more workers, multiple suppliers and higher costs.
    https://www.theguardian.com/commentisfree/2021/oct/11/just-in-time-supply-chains-logistical-capitalism

    For decades, the US has continued to lead in semiconductor design (so-called fabless manufacturing), while offshoring manufacturing to foundries that do not design their own chips.
    https://anysilicon.com/what-is-a-fabless-company/

    This came about in part because of a natural division of tasks and escalating costs of manufacturing equipment and facilities. Taiwan's dominance in foundries did not come about because of cheap labor, but because of dedication and heavy R&D investment by its government.
    It began in 1974, when the Taiwanese government decided to focus on the semiconductor industry as a key industry. At that point Taiwan’s economy was primarily based on agriculture—“nothing but paddy fields, sugar cane, and pineapples.” The Ministry of Economic Affairs chose semiconductors as the industry to work on.
    https://nap.nationalacademies.org/read/10677/chapter/9

    Even today, the few fabs that TSMC has in mainland China are there more for market access than for cheap(er) labor. "The investment in China is aimed at increasing business opportunities in China, which TSMC said will have a positive effect on additional expansion in Taiwan."

    While companies offshore production to lower costs, underlying this is the concept of comparative economic advantage. Even when country A can do nothing more cheaply than country B, it will not lose all business to country B. Rather, country A will concentrate on what it does best, and country B will concentrate on its most efficient sectors. This may not be intuitive at first, but that's how global economic productivity is increased.
    https://www.econlib.org/library/Topics/Details/comparativeadvantage.html

    Automation has changed the equation; it has lowered the cost of domestic manufacturing relative to other domestic activities. Though it doesn't help the labor market.
    New automation technologies that offset higher wages are driving deglobalization by increasing efficiency. As labor becomes a smaller share of the total cost of manufacturing, companies that once offshored due to cheap labor are beginning to favor production in closer proximity to the markets they serve.
    https://www.assemblymag.com/articles/96038-how-automation-accelerates-reshoringpart-1

    Raw material sources are what they are. They can't be relocated. The best one can do is mitigate disruptions by: second sourcing to the extent multiple sources exist, conserving (using less), creating substitutes. For example, instead of blood diamonds, or mined diamonds generally, substitute lab grown diamonds.

    The US could serve as a second source for energy for Europe if the president asked people to share the sacrifice, to conserve by turning down the thermostat a bit. But we know what happened the last time a president made that suggestion. Hint: he was wearing a cardigan sweater.
    https://www.treehugger.com/jimmy-carter-moment-energy-conservation-5223822

    Finally, with regard to free lunches, remember that you get no (free) bread with (just) one meatball.

  • edited December 2022
    @msf- Thanks for your expansion of this discussion. You're absolutely correct- it really isn't a one-size-fits-all simple problem. But it seems to me that the US needs to intensively examine what critical resources we are presently importing from potential enemies (ie: precursor drug ingredients) that could also be manufactured or sourced here, or from a friendly alternate backup location.

    Leaving critical decisions on what is in the best interests of the US to the business community is just plain stupid.
  • msf
    edited December 2022
    But it seems to me that the US needs to intensively examine what critical resources we are presently importing from potential enemies (ie: precursor drug ingredients) that could also be manufactured or sourced here, or from a friendly alternate backup location.
    Again, an observation that comes laden with a lot of issues.

    Precursor? I'm guessing you are referring to active pharmaceutical ingredients (APIs).

    Critical? An input ("precursor") to something downstream (final product) would seem to be critical only if at least one of its final product were critical. As an example of a final, non-critical product, it is hard to think of Zantac (old formulation) as a critical drug.

    Friendly? If a nation is a potential enemy but is currently friendly, what then? Is India friendly? Can't help but think of Tom Leher's line from Who's Next in the early 1960s about France: "they're on our side, I believe". (For context: "Franco–American antagonism of the 1960s ... culminated with France's partial withdrawal from NATO in 1966")


    On a nation by nation basis, India supplies about half of all APIs. (I believe this pie chart represents unweighted percentages of all APIs, not weighted by volume produced.) Of course this doesn't mean that for any given API there is any source outside of China.

    Another graphic can be found here (use arrows to move to slide 2). I believe this represents percentages by amounts produced ("global market share"); China is at 40%, India at 20%, US at 10%.

    image
    Source: https://qualitymatters.usp.org/geographic-concentration-pharmaceutical-manufacturing

    From your description of the precursor risk, I'm guessing that you're talking about active ingredients tainted with nitrosamines.
    https://www.bloomberg.com/news/newsletters/2022-08-17/a-threat-of-contaminated-drugs-persists-four-years-later

    Here's a good, short piece, admittedly commentary, from Science:
    https://www.science.org/content/blog-post/sartan-contamination-story

    The writer reports that a related contaminant was found in a drug using an API manufactured by a company in India. (See also here.) He goes on to speculate that based on the chemistry, it looks like the industry changed its process for producing these APIs around 2012. Thus, there was a problem that wasn't caught for years, and to address your point, sourcing domestically wouldn't have changed anything.

    I may have less faith in the FDA than you. The FDA is the organization keeping us safe from Canadian certified drugs. Did you know that if you want to mail order drugs from Canada you have to use Amex because the government has pressured MC and VISA to refuse to process these sales?
    In March [2004], Visa and MasterCard announced that they will not service Canadian mail order pharmacies because they have been under pressure from the FDA to cease their support of payment processing. They cited pressure from the FDA and have warned their member financial institutions to avoid so-called ``illegal'' transactions.
    https://www.govinfo.gov/content/pkg/CHRG-108shrg93889/html/CHRG-108shrg93889.htm
  • How about if we simply ask this question: If China attacked Taiwan next week, and simultaneously cut off all trade relations with the US, what critical resources (if any) would we not be able to replace in a reasonable amount of time?

    As far as I'm concerned, "next week" is a matter of "when", not "if".
  • edited December 2022
    At what point does referring to fellow human beings who share 99.9% of the same DNA with you as “potential enemies” become self-destructive if you and the potential enemies both have weapons that can end life on the planet and the planet is facing a climate crisis? Tribalism must end if we as a species are to survive. A potential enemy can also be a potential friend or at least that relative at dinner you tolerate to keep the family peace during holidays every year.
  • Thank you Lewis. I had related thoughts. That wondering about how much the US has to do itself to protect the US carries with it the idea that every other country has to likewise act on its own to protect its own self interests only. From an economic perspective, incredibly wasteful; from a human perspective, we must be able to do better than that.
  • edited December 2022
    You two surely know that I very much respect your intellects, thoughts, and opinions. With respect to the protection of our country though, all I have to say is ask the Europeans what they now think of their energy source choices.

    The decisions made by political and military leaders take absolutely no account of common DNA.
    cf. Ukraine, Russia.
  • The world has shrunk via internet and all of the various, incredible technological advancements. But that means Failed States or Rogue States or explicit enemies can that much more easily F*** us up. And it does not even need to be recognized political countries, but monstrously evil doink-brains who are warped and loaded for bear. That can include countries where the population isn't necessarily hostile to us, but their leader is just an asshole bent on a quixotic agenda. We must prioritize re-shoring production--- including stepping-up mining of minerals we DO have here. Strengthen Unions again. Rescue our own reputation in the world from the disastrous Trumpster era. OJ is right about European regret re: such extensive dependence upon Russian energy until recently. Ukraine will need a gargantuan Marshall Plan, when the Poot-brain eventually loses. We will be better able to not only assist, but take the lead in that effort. (Unfortunately our chickenshit "leaders" won't give Ukraine what it TRULY needs the most. So that conflict will drag on.)
  • edited December 2022
    I suspect some of the board members here are old enough to have been alive when the first atom bombs were dropped, or, at least, to have grown up with the "duck and cover" school lessons in the early years of the atomic age. I sometimes wonder what that was like mentally, not the dropping of the bomb itself, which has its own unique horror, but the realization that we now really have the means to destroy ourselves entirely. After that, doesn't it becomes a question I think of whether we can afford to have the same tribalistic mentality we did regarding "enemies" prior to that age? The stakes seem so much higher than when we just had sticks and stones.

    Yet I don't deny there are significant geopolitical risks today. It would be good to recognize though that both OJ and Crash used the word "leaders" subsequently in mentioning the problems. It's the leaders, not the entire people of Russia or China or the U.S., who are the problem. If we start buying into the premise that entire nation states are the enemy, it seems to me a perilous path in the post-atomic age. Shouldn't something have changed strategy-wise, or psychologically, for all of us after those first bombs dropped? Interestingly, I would also say something should have changed psychologically when Darwin realized we had common ancestors, but people continue to perpetuate these tribalistic and ethnic myths that are toxic for us as a species in the post-atomic age. We have too much to lose now for those myths to continue.

    @Crash Regarding labor unions, how can labor unions recover if capital is global while labor is local? Sure, on-shoring, but maybe that ship I think has permanently sailed. Even if you on-shored everything, which I think is impossible today, much of labor isn't even part of a company's permanent employees anymore to unionize, but are independent contractors and freelancers--the so-called Uberization of our economy. For labor to have power again, there must be global labor standards and/or global unions to address the global economy. Again, recognizing our commonality as opposed to our tribal national differences is essential to survival in a world that has changed so much in the past century. Folks like Putin and Trump represent that old tribalistic world--extreme nationalism at the expense of humanity.
  • edited December 2022
    both OJ and Crash used the word "leaders"

    Well, of course. I really don't understand how we got sidetracked into an assumption that entire peoples or citizens of a particular country were the prime concern. People are people, pretty much the same everywhere from what I've seen in travel. You're nice to them, they're nice to you.

    Politicians? Military brass? Who the hell knows from day to day?
  • edited December 2022
    You're probably right that I'm being overly-sensitive to the term "enemies." But then I think the term is also almost certainly being used by some of our own current leaders to refer to these nations and they aren't referring just to leaders like Putin. They do mean the entire nations. The term can so easily escalate to real warfare. Leaders can be replaced, ousted, arrested, extradited, ocassionally assassinated. Enemies of the broad national kind tend to be targeted for extermination.

    The term "enemies" also tends to have ramifications in nations like ours where there are immigrants from every nation. I don't think it's an accident that there has been a sharp surge in anti-Asian hate crimes and attacks in the U.S. in recent years since the political rhetoric attacking China as the enemy responsible for our economic woes and Covid also increased: https://nbcnews.com/news/asian-america/anti-asian-hate-crimes-increased-339-percent-nationwide-last-year-repo-rcna14282
  • I sure agree with you on all of that.
  • ignorant violent scum target asians. Dim-witted, brainwashed, deranged.
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