Karl P. Sauvant, PhD
Resident Senior Fellow

Columbia Center on Sustainable Investment
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
p(212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask]
wwww.ccsi.columbia.edu | t: @CCSI_Columbia

"China Moves the G20 toward an International Investment Framework and Investment Facilitation", "China Moves the G20 on Investment", "The Rise of Self-judging Essential Security Interest Clauses in IIAs", "Can Host Countries have Legitimate Expectations?", "The Next Step in Governance: The Need for Global Micro-regulatory Frameworks", "How International Investment Agreements can Protect Free Media", "The Evolving International Investment Law and Policy Regime: Ways Forward", "China's Outward FDI and International Investment Law", and  "Policy Options for Promoting FDI in the LDCs" are available at http://papers.ssrn.com/sol3/results.cfm and http://www.works.bepress.com/karl_sauvant/.

View this email in your browser


Columbia FDI Perspectives

Perspectives on topical foreign direct investment issues
No. 198  April 24, 2017

Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Matthew Schroth ([log in to unmask])
Contrary to trade theory, emerging markets’ comparative advantages in labor-intensive manufacturing are seldom exploitable immediately.  They usually need support in such areas as financing, marketing and labor training. In this age of globalization, help comes from multinational enterprises (MNEs) that eagerly exploit existing and potential comparative advantages in search of low-cost locations for their supply chains.  They can provide those missing elements in one package. They both supplement comparative advantages fully and amplify their strength through their superior capabilities. This makes low-wage manufactures even more competitive and reinforces an export-driven catch-up.

The flipside of all this, however, is that labor-intensive manufacturing of MNEs’ home countries necessarily suffers even more job losses, further damaging the affected communities. Replaced capital is relatively footloose and reusable across borders (as MNEs’ operations illustrate).  However, replaced labor is not, due to a variety of mobility constraints. Undoubtedly, consumers benefit from low-cost imports—but unemployed consumers share little in this benefit.  The faster the pace of MNE-assisted catch-up in emerging markets, the greater is the drawback for home-country workers and their communities. MNEs’ low-wage-seeking drive helps maximize profits but diminishes social welfare in home countries—to an extent of stirring a political backlash.

Factory jobs, once the backbone of the US middle class, have decreased due to a shift largely to China and Mexico, mostly at the hands of MNEs. To be sure, automation has played a role as well, and will even more so in the future. But US factories are increasingly relying more on foreign robotics,[1] thereby missing an opportunity to create high-skilled jobs at home. Besides, robotics operators and related workers are in short supply in the US, calling for more focused skill-training. Europe, too, frets about job losses, as does Japan.  Yet, job-offshoring damages the US most. As the world's richest, most open market, it is flooded with imports (many outsourced by MNEs) from emerging markets. Hoping that their catch-up would create new export markets, advanced economies have assisted emerging markets through aid and tolerated the ever-rising costs of trade adjustment.

MNEs’ job-offshoring and employment of foreign high-tech workers are the easiest way-out to tackle high US wages and skilled-labor shortages. Other avenues include efficiency-raising strategies (e.g., cutting-edge robotics and skill retraining), but these take more time and efforts. Also, MNEs may retort that overregulation and high corporate taxes at home hamper these home-based solutions.

Resource-rich countries extract concessions from access-seeking MNEs.  Similarly, catching-up economies (still semi-open) impose a slew of measures (e.g., joint ventures, tech-transfers, local procurement) on market-seeking MNEs. China uses its market most effectively in this regard.  Analogously, advanced countries’ rich markets should serve equally as a bargaining tool in trade negotiations.

Past European and US experiences suggest how to encourage job-onshoring. First, import tariffs induce “tariff-jumping factories.” For instance, the European Common Market (benefitting insiders)—and later, the European Union (further disadvantaging outsiders)—lured MNEs' factories as new insiders in such an expansive market.  The North American Free Trade Area likewise attracted investment. Second, diplomatically smart “voluntary export restraints”/“orderly marketing agreements” (characterized by “voluntarism” and devoid of retaliation-risk) have brought factories to both regions. Tariffs, attractive markets and voluntarism are three key job onshoring inducers.

President Trump's jawboning (“produce if you sell here, or else tariffs”) is based on these inducers as a short-run expediency. His long-term growth strategy (tax-cuts, deregulation, infrastructure building), if successful, will make the US economy stronger, encouraging even more onshoring.  In fact, his approach has already made MNEs “voluntarily” pledge more new jobs, though Martin Wolf argued that this “will not bring back [old] jobs.”[2] Nevertheless, a better expedient (without tariff threats and retaliation) may be ad hoc compacts that make MNEs “voluntarily” restrain job-offshoring and/or expand domestic production under case-specific conditionalities. This gives more time for adjustment, and may be more congenial to MNEs (including fast market-capturing Chinese MNEs in advanced economies). Also, advocacy of corporate social responsibility helps home-country workers. For example, letting them train foreign workers before being themselves replaced by those same workers is unconscionable—unless new jobs are guaranteed. Given a growing shortage of skilled workers in the US, enterprises should be mandated to participate in developing a pool of skilled local workers.
Presently, trade-adjustment-assistance programs (skill-retraining, community revival) are the only long-lasting measures in the US and Europe.  However, they have proved unsatisfactory—despite repeated tweaking over the past 50 years in the US—although Wolf still considered them “the best response.” Exonerated from the social costs, MNEs may have been encouraged to offshore even more.

It is time to rethink how best to handle the job-offshoring backlash, now that multilateralism is declining and a new era of bilateral pacts, including between nationalistic states and globalist MNEs, is dawning.        
* The Columbia FDI Perspectives are a forum for public debate. The views expressed by the author(s) do not reflect the opinions of CCSI or Columbia University or our partners and supporters.
** Terutomo Ozawa ([log in to unmask]) is an Emeritus Professor of Economics, Colorado State University, and a Research Associate, Center on Japanese Economy and Business, Columbia Business School. This Perspective is based partly on Terutomo Ozawa, The Evolution of the World Economy: the Flying-Geese Theory of Multinational Corporations and Structural Transformation (Northampton, MA: Elgar, 2016). The author is grateful to Yair Aharoni, Stephen Kobrin and Manuel Montes for their helpful peer reviews. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
[1] "Driving U.S. factories:  foreign robotics," Wall Street Journal, Mar. 27, 2017.
[2] "Tough talks will not bring back jobs," Financial Times, Jan. 31, 2017.

The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Terutomo Ozawa, ‘How to handle the job-offshoring backlash?’, Columbia FDI Perspectives, No. 198, April 24, 2017. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [log in to unmask].

For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Matthew Schroth, [log in to unmask].
  • No. 197, Ana Arias Urones and Ashraf Ali Mahate, “FDI sectorial diversification: the trade-transport-tourism nexus,” April 10, 2017.
  • No. 196, John Gaffney, “The Equal Representation in Arbitration Pledge: two comments on its scope of application,” March 27, 2017.
  • No. 195, Laza Kekic, “FDI to the UK will remain robust post-Brexit,” March 13, 2017.
All previous FDI Perspectives are available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/

Other relevant CCSI news and announcements
  • In March 2017, CCSI submitted comments to the ICSID Secretariat regarding proposed revisions to ICSID's arbitration rules. CCSI's submission provided illustrative suggestions for amendments to the ICSID arbitration rules regarding a range of issues, including: recognizing and safeguarding of the rights and interests of non-parties; improving transparency of the dispute resolution process; preventing actual and apparent conflicts of interest; addressing concerns raised by third-party funding; and ensuring legitimacy of settlement agreements.
  • CCSI, in partnership with the Danish Institute for Human Rights and the Sciences Po Law School Clinic recently published a discussion paper on a Collaborative Approach to Human Rights Impact Assessments (HRIAs) of private sector investment projects. This discussion paper sets out a robust model for a collaborative approach to HRIAs that involves project-affected people and the company, and potentially other stakeholders, in jointly undertaking an HRIA that is considered credible by all sides and can help to address the power imbalances that often exist between companies and communities. The paper is the result of a two-year long project, supported by The Tiffany & Co. Foundation, and is based on extensive desktop research, interviews with 49 people with relevant experience, as well as a roundtable that brought together over a dozen stakeholders and HRIA experts to provide feedback on the research findings and recommendations. The discussion paper is also summarized in this briefing note.
  • In April 2017, CCSI launched a series of short videos from the authors of Rethinking Investment Incentives: Trends and Policy Options (published by Columbia University Press in July 2016), summarizing the important messages from each chapter. New videos will be posted weekly.
Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
(212) 854-0689
Fax: (212) 854-7946
Copyright © 2017 Columbia Center on Sustainable Investment (CCSI), All rights reserved.
[log in to unmask]

Our mailing address is:
Columbia Center on Sustainable Investment (CCSI)
Columbia Law School - Earth Institute, Columbia University
435 West 116th Street
New York, NY 10027

Add us to your address book

unsubscribe from this list    update subscription preferences 

Email Marketing Powered by MailChimp

AIB-L is brought to you by the Academy of International Business.
For information: http://aib.msu.edu/community/aib-l.asp
To post message: [log in to unmask]
For assistance: [log in to unmask]
AIB-L is a moderated list.