International Factor Payments and the Pandemic
(Dan here…Joseph Joyce writes for Econbrowser)
International Factor Payments and the Pandemic
I have written a piece on international factor payments (migrants’ remittances, FDI income) and the pandemic for Econbrowser, the widely followed blog of Menzie Chinn of the University of Wisconsin and James Hamilton of the University of California-San Diego.
You can find it here:
Thanks for the article Dan, and excellent article Joseph.
JJ- “International labor and capital income, therefore, flow in different directions. The wages that are remitted to the home countries of the migrant laborers move from advanced economies to developing economies. The flows of investment income follow the opposite path, from developing nations to the advanced economies. The declines in both forms of payments will generate adjustments in the current account, with the net effect for a particular country depending on the relative sizes of the declines in both forms of income.”
IZ- Question: Is there a way to understand how vital those forms of income declines are to the current accounts and how vital the current accounts are to the countries’ economies? I would imagine, there would be vast differences due to the upcoming changes in policy and it is much easier for capital from advanced economies to move and much more difficult for the movement of labor/migrants because of COVID restrictions.
I also like the reframing posed by the OECD-library in The Future of Global Value Chains: “Business as Usual” or a New Normal, because it dovetails with PGL’s discussions on closing tax loopholes:
“But since wages and productivity often diverge – among others because of frictions in the labour market, an alternative modelling approach has been used to directly impute an increase in production costs (mimicked by increasing production taxes).”
JJ- “However, the capital account is also affected by FDI income. This income can be repatriated by its multinational parent or reinvested in the host country. Reinvested earnings are an important source of FDI inflows, accounting for up to 50% of such expenditures. These earnings will drop as a consequence of lower profits, but also because FDI flows are’ expected to fall.”
IZ- So, how would this affect our policy decisions; I initially like the potential for this to be used with Brad Setser’s idea of connecting a country’s labor/haven status and our taxes connected the GVCs. “Countries witnessing an increase in their production costs will become less attractive in GVCs for the sourcing of intermediates. The increases in production costs result in global trade to fall both in absolute terms and in percentage of GDP in 2030. Higher prices as a result of rising wage costs discourage demand on domestic and international markets.”
This would be seem to necessitate a broader tax base for the future expenditures that will be needed. What is troubling is anticipating effects of a prolonged downturn for emerging economies with GVC’s seemingly puttered out from 2011 until 2030. But, “The fact that some emerging economies become more expensive makes offshoring from developed economies a less attractive option; instead domestic sourcing of intermediates increase relatively more in developed economies.”
JJ- “Global labor and capital income will not soon revert to their former levels. Beyond the impact of the pandemic are U.S.-China tensions which will reduce the scope of investment no matter who wins the next Presidential election. In the long-term, advances in information technology will reduce the incentive to locate production where there is cheap labor (see here). In addition, some migrant laborers may find their old positions eliminated. The falls in the flows of labor and FDI income are further demonstrations of the new limits on globalization.”
IZ- So these are some really important limits, what do you feel are the most important priorities and objectives for crafting policy with these limits in mind?
Idriss:
When I was gainfully employed, I was in charge of a $200 million warehouse for a $12 Bn corporation which today is double in size. My warehouse turn 22 times per year based upon the ground rules I established for the planners and the buyers. every couple of weeks, I talked to them to see what they were doing and asked for their issues with plants (30 of them) they were shipping to and the 200 hundred suppliers we dealt with in the US to supply parts to us to ship by ocean container to multiple countries overseas. In return, our plants in those countries shipped back product to our warehouse housing finished product. The Global Supply Chain was ~ three weeks on the ocean and one week in port on both ends. Five weeks of inventory on the ocean each way. This has always been a factor in the Cost of Manufacturing overseas.
Cost of Labor, direct Labor or burdened Labor? If we are only talking about direct Labor cost in the US the costs are < 10% of the Cost of Manufacturing. If we are talking burdened Labor costs which includes the Overhead associated with Labor (legislated, benefits, etc., the cost of Labor magnifies. Most of the burden on Labor which exists in the US does not exist in China, Philippines, Malaysia, Thailand, etc. the countries I would travel too. If we solely consider the direct Labor cost, it is not worth manufacturing in Asia as the saving is not significant enough. Direct Labor is a much smaller issue than what it is being made out to be in the US. The company would move production lines out of one country to another even with the end customer being in the US. There were timnes we would go to 747s move inventory and avoid shutdowns of a line in the US. The cost of transportation including the inventory build both ways takes from the profitability of manufacturing overseas. In the end business does not want to pay for operational costs in the US, Did you read through this? https://read.oecd-ilibrary.org/science-and-technology/the-future-of-global-value-chains_d8da8760-en#page6 I found Table 1 to be interesting. My$.02
So, the cost of capital has gone up?
Run,
I did read the paper, I was referring to the cost of movement being increased indefinitely due to Covid. If there are major direct investment and manufacturing moves, and the cost of relocating remains temporarily higher enough then the companies can sink their resources and influence into developing economies desperate for economic stimulus and change their laws/regulations/power structure to accommodate multinationals, more solidly entrenching us in a low tax base for our consumer goods and international diplomacy depending on the balance sheets of hyper-speculative financiers.
“The company would move production lines out of one country to another even with the end customer being in the US. There were times we would go to 747s to move inventory and avoid shutdowns of a line in the US. The cost of transportation including the inventory build both ways takes from the profitability of manufacturing overseas. In the end business does not want to pay for operational costs in the US”
Exactly, defeating the defense of the GILTI amendments given by the Senator proposing it-somehow both manufacturing will return to the US and the profits will be reinvested into the US’s communities rather than redirected to cover the fact Ken brilliantly pointed out: “the cost of capital has gone up”.