U.S. investments in that country, accounting, on the eve of the global crisis, for three-quarters of total China-U.S. trade.
The Mysteries of Outsourcing
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?”43 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.”44 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 pay more—and treat their workers better—than local companies do.”45 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.”46 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.”47 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.48 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.”49 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.”50 Mark Thomas, an investigative journalist, commented that this is
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.51
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.”52
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.”53 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).54
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 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,55 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
