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Why businesses move their business....

In light of the nearing US election I thought I'd say something about a constantly stated misnomer regarding the reasons that American businesses are engaging in increasing levels of international business.

It has nothing to do with trying to avoid supposedly high tax rates levied against businesses in the U.S. The proponents of this idea miss a critical aspect of taxation of the goods and services provided by business when comparing business tax rates between companies in the U.S. and companies in other countries.

Businesses that produce products that are sold in countries with VAT (value added tax) are virtually being taxed since the product price that is paid by the consumer is significantly beyond the production + profit markup that the company itself places on its products. Thus businesses in these countries are subject to getting less sales on their products due to the true price that those products are sold for once they hit the consumer. Quantifying the exact impact of the VAT tax on business sales could easily account for any perceived advantage that the base tax rate for those businesses seems to have over American businesses when compared together. However doing this is not easy, some companies may choose to eat the VAT addition in order to gain some market share, others which have no option to foreign markets may chose to reduce the scope and quality of their goods and services to reduce prices and entice customer purchases. The tactics taken by individual companies will vary the impact of VAT. Thus the childish comparison of base corporate tax rates between two companies is beyond naive and is akin to an apples and oranges comparison.

That said, we now have some reasons why a business in a saturating market (meaning their market segment growth is near flat due to steady competition) would want to move to another location. For businesses that must sell products in VAT markets a good tactic would be to move production to places where VAT does not apply OR and even better tactic is to move to where the production costs are so low that even after adding in VAT and profit markup competitive pricing can be achieved to competing products in the VAT applied markets OR finally, they can just move to open up new growth potential in areas that lack either VAT or the high labor costs of production. Ideally, these new markets would be in countries that have lower standards of living compared to the source country, the reason is that physical products are usually assembled by people and the prices people charge for their labor is inversely proportional to the market of labor available in their local region. If VAT tax is absent even better, if there competitors have not yet discovered the market better still. This is what businesses realized in the western countries over the last 40 years as they watched the standard of living in other western countries continue to rise. It rose to the point that production costs for various products inside the countries were dwarfed by the labor costs of individuals required to produce the products. Examples range from the textile industry, the automotive industry and the consumer electronics industry in the U.S. In short products that are produced in high volume but require a great input of human labor tend to be shipped to where *the cost of labor* is cheapest, as labor costs form the majority of production costs for such products. It is only a shrewd business manager who sees the option for externalizing production to reduce labor costs and therefore reduce manufacturing costs and be able to return a higher profit even in markets with VAT, as the obvious choice.

So don't buy the nonsense that politicians spew about taxation, businesses will always seek to reduce their costs and the fact that other nations have different labor and tax laws is only something to facilitate potential cost reductions for operating businesses. American businesses don't write into their charters a requirement to be patriotic to the origin country , nor should they, by doing so they would restrict themselves from critical business opportunity by chaining themselves to higher production costs and lower profit margins. As the rest of the world builds up its infrastructure and expertise in banking, manufacturing and technology to match that of the west the parity of labor costs will necessitate that people increase their value relative to the market in the only way they can, by increasing their knowledge. Those with increased levels of knowledge will be relatively scarce compared to the masses of competing labor (in this case both physical and intellectual labor) and their talents will be reciprocally valued. It is the only way for individuals in developing and developed societies to maintain the standards of living that more of the world will be seeking in the decades to come.

In 20 years the people in China and India will be gnashing their teeth at the fact that outsourcing is increasing to countries in Africa and Latin America as they become the next hot spots of cheaper labor for manufacturing. Past and present is prologue.


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