US President Donald Trump’s speech at the World Economic Forum, threatening the global business leaders to either shift their manufacturing to the United States or face stiff tariffs, displays America’s crude economic muscle power. His warning is based on the presumption that corporations make business decisions such as setting up of manufacturing or service facilities based on emotions. Mr Trump, who himself is a successful businessman, knows that capitalism survives on profit maximisation by optimising costs.
Under this model, American businessmen have been outsourcing low-level manufacturing to other countries which can offer cheap labour. The average monthly wage in the US is $5,677 (Rs 4,88,222), which is nearly 25 times higher than India’s average monthly wage of $232 (Rs 20,000). If Mr Trump wants to deny cost advantage to an Indian product, he has to levy an import duty of 2,500 per cent. Similarly, the average salary in China is four times less than that in the US, Indonesia 20 times less, eastern Europe and Brazil 11 times less.
The hard facts of the business show that America has lost competitive advantage to other developing nations. Until imports are banned, Mr Trump cannot make companies shift their manufacturing by merely increasing tariffs. His threats could make his supporter base happy but cannot drastically alter the economic landscape.
Since its inception, America scripted its success benefiting from slaves and indentured labour, consisting mainly of American natives or Africans. When the native labour cost shot up, the United States used cheaper labour from Asian countries to fuel its economy.
America is also enjoying unparalleled advantage of having its local currency being used as the global reserve currency. If it enjoys disproportionate benefits, it is but natural to share the disproportionate cost of keeping this system running. The optics of Mr Trump signing hundreds of executive orders, mostly against immigrants, could make his supporters happy, but they will force the world to switch to a new order.
