Finally, not only does the arm’s-length relationship not generate any S-N flows of repatriated profits, it does not involve any N-S capital flows, enabling Northern firms to divert investment funds into what Silver et al. call “financial intermediation and speculation.”53 In other words, the increased profits delivered by outsourcing are not invested in production either at home or as FDI, and can be entirely devoted to leveraging asset values, through share buyback schemes and generous dividend payments, or invested in financial markets in order to reap speculative profits, thereby feeding the financialization of the imperialist economies.
In sum, it is possible to identify four major reasons why outsourcing firms might favor an arm’s-length relationship with their low-wage suppliers: 1) foreign investors find it necessary to pay higher wages than domestic employers, limiting the desired reduction in costs; 2) arm’s-length means hands clean; 3) transference of risk; 4) avoidance of FDI in favor of what UNCTAD calls a “non-equity mode” releases funds for investment in financial markets or to finance acquisitions and share buy-backs (two ways in which the fragmentation of production can accelerate the concentration of capital).54
The puzzle posed by Milberg’s insight that a large portion of the profits of firms in imperialist countries (he does not call them this) is accrued in distant production processes can be restated as follows. The foreign direct investments of northern TNCs generate a gigantic S-N flow of repatriated profits, but in complete contrast, between Southern firms and Northern lead firms there is, in the data on financial flows, neither sign nor shadow of any S-N profit flows or value transfers. Furthermore, the various subterfuges indulged in by transnational corporations to conceal part of this flow from tax authorities (transfer pricing, under-invoicing, etc.) are not available in arm’s-length relationships. These are large benefits to forgo—yet TNCs increasingly find the arm’s-length relationship to be more profitable than in-house FDI. Does the fact that the S-N flow of value and profit is invisible mean that this flow doesn’t exist? If not, what becomes of the profit-flows that are visible in the case of an in-house relationship but completely disappear when this is replaced by an outsourcing relationship?
This is the question left unanswered by Milberg, Gereffi, etc., a conundrum that cannot be resolved without breaking free of the neoclassical framework, which presumes markets to be the “ultimate arbiter of value” and price to be its ideal measure,55 precluding the possibility of hidden flows or transfers of values between capitals prior to their condensation as prices. This calls to mind the physical phenomenon known as sublimation—when the application of heat to a visible solid turns it into a flow of invisible vapor, only for it to rematerialize as a visible solid at a different relocation. Similarly, the flow of value from Southern producers to Northern capitalists is invisible—that is, there’s no sign of it in standard data on global capital and commodity flows. According to the bourgeois economists, if it’s not visible it doesn’t exist; and since value can only appear in the form of price, this, to positivist economics, is its measure.56 This, the central premise of neoclassical economics, crassly precludes the possibility that value is transferred or redistributed between capitals in order to achieve equilibrium prices that equalize profits. Conversely, to recognize the existence of such flows is to dislodge the keystone of the ruling economic theory, causing the entire edifice to collapse. Renaming “profit’ as “rent,” as do Milberg, Kaplinsky, Gereffi, and others studying this phenomenon, does not clarify this question. In fact, it blurs the important distinction between profit and rent.57 Milberg’s notion of “rents accruing abroad” implies that the South-North flow continues; and simply calling it rent says nothing about a really interesting implication of this. These “rents accruing abroad” appear in the GDP—the gross domestic product—of the importing nation—even though they were “accrued abroad.” The solution of this paradox, which we have been hinting at so far, will be presented in chapter 9, “The GDP Illusion.”
THE STRUCTURE OF WORLD TRADE
A most striking feature of the imperialist world economy is that, as we have seen, Northern firms do not compete with Southern firms, they compete with other Northern firms, including to see who can most rapidly and effectively outsource production to low-wage countries. Meanwhile, Southern nations fiercely compete with one another to pimp their cheap labor to Northern “lead firms.” We therefore have N-N competition, and we have cutthroat S-S competition, but no N-S competition—that is, between firms, if not between workers. Of course, important exceptions can be identified and qualifications can be made, but the overall pattern is clear: Apple competes with Samsung and Nokia, but not with FoxConn, Taiwan Semiconductor Manufacturing Company (TSMC), and its other suppliers. Similarly, British Home Stores (BHS) and Marks & Spencer (M&S) compete with each other but not with their Bangladeshi suppliers, and the same goes for Tesco, General Motors, or any other TNC sourcing its final goods or intermediate inputs from suppliers in low-wage countries. The lead firms’ relationship with their suppliers is therefore complementary, not competitive, even if it is highly unequal. This important point was underlined by Richard Herd, head of the China division at the Organisation for Economic Co-operation and Development (OECD), who noted that “at the moment, China is not a threat to Japan’s core industries”; on the contrary, outsourcing laborintensive production tasks to China has given many Japanese firms “a new lease on life … if you look at Chinese exports and Japanese exports they are not competing, they are complementary.”58
The complementary relation between Japanese and Chinese firms can be applied to relations between firms in imperialist and oppressed nations in general. China’s manufacturing industry is no more a threat to the supremacy of U.S. TNCs than are the maquiladoras along the U.S.-Mexican border. Not only do the headline figures that show a huge deficit in trade with China actually reflect the importation of intermediate inputs produced in Japan, Malaysia, South Korea, and elsewhere, a great deal of it results directly from the decision of U.S. firms to move their production to take advantage of low Chinese wages. There cannot be anything more absurd nor more disingenuous than the nationalist-protectionist hoopla over the U.S. trade deficit with China!
The same is true of Europe’s TNCs. As Ari Van Assche, Chang Hong, and Veerle Slootmaekers explain in a study of EU-Chinese trade, “Europe’s importers and retailers … increasingly rely on cheap inputs and goods from Asia…. EU companies are now also producing in low-cost countries, and not simply importing inputs.”59 Far from being locked in competition with China, “the possibility of offshoring the more labor-intensive production and assembly activities to China provides an opportunity to our own companies to survive and grow in an increasingly competitive environment,”60 and they conclude, “Our direct competitors in the tasks in which we have a comparative advantage are not located in China, but continue to be the usual suspects: the United States, Western Europe and a handful of High-Income East Asian economies.”61
Competition between firms in imperialist and developing countries does exist. Even in the garment sector, where the global shift of production to low-wage countries is most advanced, low-end producers have not entirely disappeared from imperialist countries and residual competition with firms in low-wage countries persists. Competition between firms on both sides of the global divide is much more intense in branches and sectors where the global shift is still under way, as in the automobile industry. Finally, great significance must be attached to rising competition between imperialist firms and firms in China, South Korea, and Taiwan and elsewhere that are beginning to directly compete with them in strategic and/or higher value-added products. A prime example of the latter is China’s rapid rise to dominance of solar panel and wind turbine production; another is the rise of Chinese civil engineering behemoths now regularly undercutting their European and North American rivals in tenders for railway, port, and power station construction; companies such as HTC, Samsung, and Xiaomi are challenging Apple’s supremacy in smartphone production. The pharmaceutical industry is another important terrain of competition, with firms based in imperialist countries with Indian firms like Cipla and Ranbaxy challenging the supremacy of the West’s “big pharma.” This is an important trend, a real exception to the dominant pattern of trade established during the era of neoliberal globalization,