Globalization, Multinationals, U.S. Wages: A Case Study

The Philippines beats out China in a bid for a $1 billion dollar Texas Instrument semi-conductor test and manufacturing plant.

“We have broken the myth of China here,” said Ernie Santiago, executive director of the Semiconductor and Electronics Industry in the Philippines, Inc. (SEIPI).

“It seemed before all roads are going to China, but we have made a point here that the Philippines is also a smart choice for investment.”

The “China myth” is that China is the best export platform for multinationals. Whether it has been broken is still an open question. Other developing countries, such as the Philippines, are doing their best to compete with China as export platforms. India will certainly give China a run for its money.

In the Business Times, Robert Sears, the executive director of American Chamber of Commerce in the Philippines, said:

“What the Texas Instruments deal shows is that the Philippines can compete with the best of them if it wants to.”

By the “best of them,” I am sure Sears meant China.

The choice of the Philippines over was made for number of reasons, a few of which might be of interest to AngryBear readers:

• Philippine corporate income tax is only five per cent of gross income earned compared with the normal rate of 32 per cent. (China competes well in this area.)
• Philippine import of capital equipment and raw materials is duty free.
• China has hidden costs: due diligence on local partners or suppliers and the cost and quality of life for expatriate staff. (This may be China’s problem.)
• China is not yet a consumer market; hence, the choice of the Philippines was made on other factors. (See below how the new plant will affect Philippine exports.)

Texas Instruments has another plant in the Philippines (Baguio) which “accounted for 35 to 40 percent of Texas Instrument’s Revenue, which was US$3.2 billion for the first quarter of the year.”
According to Yahoo News:

The Philippines supplies about 10 percent of the world’s semiconductor manufacturing services, including mobile phone chips and microprocessors. Texas Instruments and Intel Corpare two of the biggest companies with manufacturing plants in the country.

Texas Instruments’ exports from the Philippines last year totalled US$3.5 billion, which could double once the Clark site is operational.

The Philippine minimum wage varies by region but the national daily average wage is around P283. In Metro Manila, the minimum wage is P350 a day. See here.

In terms of U.S. dollars, average wage is $5.98/day; minimum wage in metro Manila is $7.40/day.

What is so interesting about TI’s choice? First, the U.S. was not in the running, for obvious, important business reasons. Second, the choice was between China and the Philippines. Third, TI is an American company. Fourth, even though China was in the running and is an export platform for American companies, the Philippines may be, in this case, a better export platform.

When Krugman laments that “high profits have not led to high [U.S.] investment,” he should look at the portfolios and investment decisions of companies like TI.

When Krugman complains about companies not interested in rewarding labor, he should understand that TI is not interested in rewarding U.S. labor for work done by Philippine labor.

When Krugman thinks U.S. investment is low because U.S. economic outlook is “cloudy,” he does not understand that in the global arena, investment decisions are not based on the economic outlook of a particular country; rather those decisions are based on the global economic outlook.

Too often, our view of the world is U.S.-centric.

Some will say that I am overly generalizing using one U.S. company. I suggest that they read carefully the quotations above. Clearly, Ernie Santigo would agree with me. Furthermore, I suggest they look at Delphi, at Intel, at Apple, at Dell…at a host of other multinationals. China may be the biggest magnet for multinationals, but it is far from the only magnet.

Until we confront this reality, we will continue to do nothing for the American worker or for stagnant wages. Robert Reich understands when he says:

America’s largest corporations have decoupled from the United States.

The answer to this dilemma is not an easy one. Brad Setser sees the answer as revaluation of the yuan. That may handle China, but I am not sure. Others see the answer in “re-training” or education. I do not think that is the answer.
My answer involves four lines of approach:

1. Refashion WTO principles so that the rights of workers to organize and bargain are part of the fundamental groundwork of all participating nations. Workers rights world-wide need protection. Guarantee Chinese workers’ rights; you improve U.S. wages.
2. The U.S. must seriously address its health care issue. The cost to business is excessive.
3. We must think through the tax and other incentives that countries offer. I have no simple solution here. Companies play one country off another in a race to the bottom. Some parameters may be needed. Again, the WTO.
4. Currency manipulation has to be addressed. Again, the answer is not simply “let the yuan float freely.” In order for some countries to “catch-up,” a “loose but rising” peg may be necessary.

Simple protectionist measures may be counterproductive. It is far better to deal with the root of the problem than to treat the symptons.

One thing is for sure, trade and account imbalances pose a serious long-term threat to world economic well-being. Capital is mobile. As the wages and standard of living start to rise in one country, capital will simply trot off to a cheaper place.

I am happy that Mexico decided to send us a tortilla factory.