While offshoring by US manufacturers is often attributed to corporate greed, much of it really is caused by a potent combination of business consolidation and failure to enforce antitrust laws.
Much of what Donald Trump and his many supporters believe about why offshoring has occurred is rooted in the notion of corporate greed. Trump asserts that business leaders chase the cheapest labor wherever it is located to maximize their profits at the expense of higher-paid U.S. workers. He argues that trade agreements like NAFTA and China’s entry into the WTO emboldened American firms to abandon costly operations here at home and look for greener pastures abroad.
In reality, our research reveals that managers are not primarily motivated to offshore their operations because they are greedy. Rather, the offshoring phenomenon is much more about basic survival. In other words, the majority of business leaders who resolve to offshore do so to keep their companies afloat.
Trump is right that free-trade agreements have played a significant role in enabling offshoring to occur. What Trump gets wrong is why so many American companies ever offshore in the first place. Our research demonstrates that the primary driver for the offshoring of manufacturing is rooted in the consolidation of almost every sector within the U.S. economy over the past 40 years.
In the 1970s, the liberal Democrat Jimmy Carter started a path towards deregulation, which has been endorsed by every American administration since. Whole sectors like transportation, energy, communications and finance were opened up for more competition. Paradoxically, at the same time, Justice departments under every president since Carter failed to halt the explosion of private mergers and acquisitions. Antitrust laws were rarely, if ever, enforced. Consequently, many industries that were previously highly regulated are now once again controlled by a handful of powerful firms, this time outside of the regulated control of government.
Over the past four decades, the American economy has metastasized into a dysfunctional landscape where the concentration of power rests in the hands of a small number of corporate giants.
If Trump and his followers are truly serious about bringing manufacturing jobs back to the U.S. and unleashing the power of real competition, they could start by breaking up the oligopolies that rule so much of American business and enforcing current antitrust legislation.
—Andrew R. Thomas
At the practical level, small and medium-sized companies, the backbone of American capitalism, have borne the brunt of this industrial consolidation. With no other options to sell their products except to their oligopolistic Mega-customers, and no way to increase top-line revenues because of the incessant price demands, many manufacturers viewed offshoring — and the initial cost savings on the labor side — as the only viable option to stay in business.
One business owner we interviewed detailed how ongoing price demands from their biggest customer — who controlled 70% of the entire marketplace — eventually led to the closure of his Ohio plant and its re-location to Monterrey, Mexico. It is a common tale. When learning that the operation would now be in a lower-cost labor market, the Mega-customer immediately demanded another 50% price reduction, and got it. Stories like this are the rule, not the exception. Power has inexorably shifted away from producers and innovators to the Mega-players in each industry.
It is no secret that offshoring to Mexico or China is full of risks: intellectual property can be easily stolen, quality compromised and brands tarnished. Dishearteningly, our research indicates that manufacturers viscerally recognize these risks; and, yet, still move forward to offshore, knowing they have no other real choice.
Small and medium-sized firms have quickly learned that the business landscape is rigged against them. The reigning oligopolies have taken advantage of government inaction to squeeze ever more concessions out of suppliers. Something has had to give. In the end, it was millions of manufacturing jobs in the U.S.
While NAFTA, China WTO and other international agreements have been advertised as opportunities for corporations to take advantage of greater globalization, America’s political leaders balked at maintaining a strict antitrust regime at home. This dreadful combination has corrupted free trade and caused much more pain to American firms and workers than ever needed to be.
If Trump and his followers are truly serious about bringing manufacturing jobs back to the U.S. and unleashing the power of real competition, they could start by breaking up the oligopolies that rule so much of American business and enforcing current antitrust legislation. Then, and only then, can the playing field be level — and America’s dynamic system of capitalism once again work for all of its citizens.