Imperialism in the Twenty-First Century. John Smith
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nations. We saw in chapter 1 that this surplus value is shared among many capitals in the imperialist economies, and a large chunk of it is captured by their states. And leaving aside firms’ concealment of their actual profits, profit as such is what remains of surplus value after the subtraction of many unproductive yet necessary activities (necessary from the perspective of capitalists seeking to crystallize their profits, if not from the perspective of society as a whole), all of which consume surplus value extracted from exploited workers. Zero profits, or even large losses, are therefore quite compatible with major flows of surplus value and high rates of exploitation. The profits that are so imperfectly and partially described in statistics therefore suffer from much more fundamental problems than poor coverage and technical deficiencies, considerable as they are.
ARM’S-LENGTH OUTSOURCING
In contrast to FDI, where the production process and associated revevues are offshored but kept in-house, an outsourcing firm may choose to contract out some or all of production to an independent supplier while retaining effective control over both the final product and the process of its production. According to Gene Grossman and fellow Princeton economists, “It does not matter much whether the firm opens a subsidiary in a foreign country and employs workers there to undertake certain tasks within its corporate boundaries, or whether it contracts with a foreign purveyor under an outsourcing arrangement…. In either case the effects on production, wages and prices will be roughly the same.”37 The Princeton professors neglect to mention the effect of outsourcing on profits—which is odd, since the maximization of profits is the whole point of the exercise. But what’s really odd is that, despite the fact that FDI generates a flow of repatriated profits while an arm’s-length relation does not, multinational corporations increasingly favor arm’s-length relationships over FDI. As Gary Gereffi points out, “While companies regularly decide whether they wish to produce goods and services ‘inhouse’ or buy them from outside vendors, the tendency in recent years has shifted in the direction of ‘buy.’”38 Timothy Sturgeon, another leading researcher into global value chains, also “detect[s] a shift in the organization of global production toward external networks.”39 William Milberg concurs: “Despite the stunning increase in the transnational activity of large firms … such firms find it increasingly desirable to outsource internationally in an arm’s length rather than non-arm’s length (intra-firm) relation.”40
China provides an eloquent illustration of this. Grossman and Rossi-Hansberg report that intra-firm trade, as a proportion of total U.S. imports from China, rose from 11 percent in 1992 to 26 percent in 2005.41 But in 1992, following the relaxation of restrictions on inward FDI in 1991, the doors were only beginning to open to U.S. TNCs; since then they have built a giant exporting platform almost from scratch, resulting in annual imports into the United States from U.S.-owned TNC subsidiaries in China leaping from $3bn to $63bn, a thirty-fold increase that is exaggerated by the exceedingly low initial level. On the other hand, imports from independent suppliers in China increased “only” ninefold, from $22bn to $180bn.42 Thus, while China-U.S. intra-firm trade increased its share from a tiny base, arm’s-length outsourcing by U.S. companies in China greatly increased its absolute lead over direct 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