Reference no: EM132276964

Businesses have long sought new and innovative ways to lower their costs for producing goods and services. Sometimes their quest includes buying raw materials and equipment from overseas suppliers for lower prices. Sometimes they might borrow from foreign lenders who are offering lower interest rates than can be obtained domestically. But for the last several decades at least, the focus has been on moving jobs to countries where labor costs are low. This practice is called offshoring. In fact, it seems like just yesterday that manufacturers were moving their production facilities to Mexico. A business-friendly government combined with an abundant supply of low-cost labor made the northern Mexican border a perfect place to set up shop. The North American Free Trade Agreement (NAFTA) made it relatively painless for businesses to move materials and finished goods back and forth across the U.S.-Mexico border as needed. But the good times slowed beginning around 2003 as Mexican wages crept higher and higher. At the same time, though, China began to emerge as the world’s newest low-cost manufacturing center. Low wages, combined with a nearly endless supply of potential workers, caused hundreds and hundreds of manufacturers to start shutting down their Mexican operations (as well as operations in other low-wage countries) and moving to China. For the next decade, China’s burgeoning manufacturing prowess firmly established that country as the low-cost manufacturing hub. But sometimes history has a way of repeating itself. As China’s economy boomed, local workers demanded—and received—higher wages. For example, in 2003, Mexican wages were six times higher than comparable wages in China. By 2013, wages in China had escalated to the point where they were almost half of comparable wages in Mexico. Factoring in international shipping costs, manufacturers whose primary markets are in the Western Hemisphere came to see that total costs of producing in Mexico versus China were about the same. Not surprisingly, then, some firms that once abandoned Mexico for China have started to reverse their course. Casabella, for example, makes cleaning supplies and kitchen gadgets. It moved from Mexico to China in 2003 but moved back to Mexico in 2015. Similarly, the Manufacturing Marvel company has long produced toys and novelty items in both China and Mexico. But when the firm’s Chinese contracts expired in 2015, the company closed its Chinese operations altogether and now centers all of its manufacturing in Mexico. Mexico probably won’t be the last stop for these firms, however, because for low-cost manufacturers, it generally pays to be where the lowest labor and materials costs are located. But now, at least, Mexico seems to be rising once again. Interestingly, too, some companies that once moved jobs from the United States to other low-wage countries have also started bringing those jobs back to the United States. Both General Electric and Caterpillar, for example, have recently shut down foreign factories and relocated that work back to the United States. In these cases, however, the impetus was not low wages but the inability of some foreign workers to meet rigid quality standards.1

Think It Over

1. What can these examples tell us about the pros and cons of offshoring?

2. What conditions might cause a country’s labor costs to remain low for an extended period of time?