Drivers of manufacturing outsourcing to China

Regulatory arbitrage

This is about worker safety, pollution control, payroll taxes, healthcare, paid time off, product and food safety regulation. All of these things are largely nonexistent in China. I think import restrictions based on meeting certain worker safety and pollution standards wouldn’t be unreasonable. Of course, most Chinese products would likely fail to meet such standards.

Currency arbitrage

The currency peg prevents exchange rate adjustment which would eliminate currency distortions and increase prices of Chinese goods to the US consumer.

Labor arbitrage

Of course, wages are significantly lower in China than in the US, and with the large population of China there is potentially a large pool of additional workers waiting to enter the labor pool.


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