Published On: Wed, Jan 1st, 2014

Why buying cheap imported products is more expensive for individuals and not just society

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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.   It caused a huge trade imbalance for the West, which helped to fuel the debt crisis, and has created more global pollution as cleaner Western factories were closed down and replaced by dirtier Asian factories and coal power stations to energise the economy.

From a Western perspective the main rationale for this outsourcing drive has been lower cost products.  Once a few companies had set up operations in places like China, where they had access to cheap land, cheap construction, cheap labour and new factory designs, it became very difficult for other Western companies to compete.  So they had to move 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.

In this article History Future Now looks at the cost of an imported product from a place like China and then the cost of higher levels of unemployment on Western societies.  By some simple maths it becomes clear that the consumer may pay a low price for the imported product but is paying a higher price to fund fellow citizens who have no jobs and are not contributing to taxes.  We need 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, this 15-20% 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 to do.

But if most of the growth in manufacturing and service sector jobs to provide goods and services for people in the West is mainly taking place in Asia, rather than in the West, it means that there are fewer jobs in the West.  Despite the efforts of economists to play down this issue by talking about comparative advantage the reality is that unemployment and under employment, where people are doing jobs for which they are over-qualified for, is a major problem in the West.

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 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.

Unemployment_rates,_seasonally_adjusted,_October_2013

 

 

Ricardian comparative advantage does not seem to be working any longer and, as described in an earlier article, never probably worked in the past.   If it had worked, you should see significantly lower levels of unemployment across the European Union as everybody does what they are best suited to do.

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 which is taken in taxes: £6,384.  The actual amount taken in taxes is actually higher as companies pay Employer’s National Insurance on top of that, 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 taxed.  Thus if you do not work and you get full benefits it costs the government (i.e. taxpayers) £27,184 to support you in terms taxes not paid by the citizen to the government and benefits paid by the government to the citizen.

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

If, miraculously, there was no unemployment and the money was returned to them, they could, 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.  Looking back to the laser printer example earlier, it costs £115 to build in the EU but £100 to import from China.  A £15 difference.  If the reason for EU unemployment is solely put on cheaper labour in China (which is an exaggeration) and if there was zero EU unemployment you could buy the equivalent of 149 laser printers per year (149 x £15 = £2,236) from the EU rather than China and be no worse off economically. That is a lot of manufactured goods.

Using the same assumptions, but switching the unemployment rate to 12.1%, which is the number for the EU17, it would cost the UK £107bn (vs £67bn) to pay for all of these unemployed people. Thus 59% of all the personal income tax that they pay (£3,742 of £6,384) would be used for nothing other than paying for other 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 pay for all of these unemployed – which is higher than the £6,384 in tax they actually pay.  It is the 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 this number of unemployed would devastate the UK’s budget.  At £242 billion this is only a little less than all the money spent on defence (£39 billion), education (£91 billion) and health (£130 billion).

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

 

792px-Youth_unemployment_rates,_EU-28_and_EA-17,_seasonally_adjusted,_January_2000_-_October_2013

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 paying job in the future. This means that over time unemployment rates are likely to go up, not down, and average salaries are likely to go down as well.

This means that the cost to society for unemployed people is likely to go up over time, resulting in permanently stressed budgets.  Or unemployment benefits will be slashed, which is likely to merely result in an increased budget requirement for law and order as increasingly desperate people move to a life of crime to help make ends meet and more prisons are required to house all of those “undesirable” people.

So sure,  a consumable product or service may be 10-15% cheaper using outsourced labour.  But focusing on the low cost of the product and ignoring the actual cost to you as an individual taxpayer is exactly the same behaviour that tricks people into buying cheap laser jet printers with absurdly expensive cartridges or buying a product on your credit card and paying 27% interest per annum to your credit card company.

By looking at the life-cycle cost 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 from countries with lower incomes.

A final note

This article only focuses on the cost of imported goods from the perspective of an individual buying a product vs the cost of paying for large numbers of unemployed.

In a previous article, Why do we need the military? History Future Now looked at 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 so that it can ensure open access of the Pacific and Indian Ocean to help promote 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 US man, woman and child.  This money accumulates to become part of the US’s 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 this system.  They need to compete with each other for market share and customers.  Getting your products to market cheaper than your competitor is likely to result in more sales.  They don’t want to worry about external costs to society – such as unemployment, pollution, workers rights and paying taxes – especially when they actively see themselves as transcending the nationality of their original home country.

It is also easy to understand why individuals in the West are happy with this system.  They can buy cheaper imported goods and services and it is hard to make an explicit connection with 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.

 

 

 

 


History Future Now, ebook edition, is now available from the Apple iBookstore!  So if you have a iPad or iPhone click on this link to download it.  It is currently on at a special offer of 99c.   The Kindle version has been submitted to Amazon and should be available shortly.

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