11.4.1: Explain reasons for the emergence of new concentration of industries.

Emerging Industrial Regions

In 1970, nearly one-half of world industry was in Europe and nearly one-third was in North America; now these two regions account for only one-fourth each. Industry’s share of total economic output has steadily declined in developed countries since the 1970s (Figure 11-75). The share of world industry in other regions has increased from one-sixth in 1970 to one-half in 2010 (Figure 11-76).

Manufacturing Value Added as Percentage of GNI

Manufacturing has accounted for a higher share of GNI in developing countries than in developed countries since the 1980s.

Auto Assembly Plant, Tianjin, China

China is by far the world’s leading producer of motor vehicles.

New International Division of Labor

Transnational corporations have been especially aggressive in using low-cost labor in developing countries. To remain competitive in the global economy, they carefully review their production processes to identify steps that can be performed by low-paid, low-skilled workers in developing countries.

Despite the greater transportation cost, transnational corporations can profitably transfer some work to developing countries, given their substantially lower wages compared to those in developed countries. At the same time, operations that require highly skilled workers remain in factories in developed countries. This selective transfer of some jobs to developing countries is known as the new international division of labor.

Outsourcing

Transnational corporations allocate production to low-wage countries through outsourcing, which is turning over much of the responsibility for production to independent suppliers. Outsourcing has had a major impact on the distribution of manufacturing because each step in the production process is now scrutinized closely in order to determine the optimal location.

Outsourcing contrasts with the approach typical of traditional mass production, called vertical integration, in which a company controls all phases of a highly complex production process. Vertical integration was traditionally regarded as a source of strength for manufacturers because it gave them the ability to do and control everything. Carmakers once made nearly all their own parts, for example, but now most of this operation is outsourced to other companies that are able to make the parts cheaper and better.

Outsourcing is especially important in the electronics industry. The world’s largest electronics contractor is Foxconn, a major supplier of chips and other electronics components for such companies as Apple and Intel. Foxconn employs around 1 million people in China, including several hundred thousand at its Foxconn City complex in Shenzhen. Working conditions at Foxconn have been scrutinized by Chinese and international organizations. A large percentage of Foxconn’s employees live in dormitories near the factories, and they work long hours for low wages and limited benefits. More controversial is an internship program employing young people during the summers that critics charge is a way for the company to get free child labor.

Mexico & Trade with Neighbors

Manufacturing has been increasing in Mexico. Several trade agreements have eliminated most barriers to moving goods among Mexico, the United States, and Canada. Because it is the nearest low-wage country to the United States, Mexico attracts industries concerned with both a site factor (low-cost labor) and a situation factor (proximity to U.S. markets).

Nearly all the growth of motor vehicle production in North America, for example, has been located in Mexico rather than the United States or Canada. Plants in Mexico near the U.S. border are known as maquiladoras. The term originally applied to a tax when Mexico was a Spanish colony. Under U.S. and Mexican laws, companies receive tax breaks if they ship materials from the United States, assemble components at a maquiladora plant in Mexico, and export the finished product back to the United States. More than 1 million Mexicans are employed at more than 3,000 maquiladoras.

Vehicle Production Mexico

U.S.-Mexico Trade in Vehicles

Integration of North American industry has generated fear in the United States and Canada. Labor leaders fear that more manufacturers will relocate production to Mexico to take advantage of lower wage rates. Labor-intensive industries such as food processing, electronics, and textile manufacturing are especially attracted to regions where prevailing wage rates are lower.

Environmentalists argue that trade agreements have encouraged firms to move production to Mexico because laws there governing air- and water-quality standards are less stringent than in the United States and Canada. Mexico has adopted regulations to reduce air pollution in Mexico City, but environmentalists charge that environmental protection laws are still not strictly enforced in Mexico.

Mexico faces its own challenges. Although much lower than in the United States, Mexican wages are higher than in China. Despite the higher site costs, however, Mexico still competes effectively with China because it has much lower shipping costs to the United States and Europe than does China. Mexico has also signed free trade agreements with many other countries in addition to the United States.

Pause & Reflect 11.4.1

Take a close look at an iPhone (yours or a friend’s or relation’s). Can you find any evidence that it was made at Foxconn in China?

BRICS Countries

Much of the world’s future growth in manufacturing is expected to cluster in a handful of countries known as BRICS, which is an acronym coined by the investment banking firm Goldman Sachs for Brazil, Russia, India, China, and South Africa. The foreign ministers of these five countries started meeting in 2006.

The five BRICS countries together encompass 26 percent of the world’s land area and 42 percent of the world’s inhabitants, but account for only 23 percent of world GDP. The International Monetary Fund ranks their economies second (China), seventh (India), ninth (Brazil), eleventh (Russia), and thirty-fourth (South Africa). China is expected to pass the United States as the world’s largest economy in the 2020s, and India is expected to become second around 2050.

Gdp for Brics Countries, Mexico, and the United States

China is expected to have the world’s largest GDP during the 2020s, and India is expected to be second in the 2050s. South Africa’s GDP of around $350 billion is too low to appear on the graph.

China and India have the two largest labor forces, whereas Russia and Brazil are especially rich in inputs critical for industry. China, India, and Russia could form a contiguous industrial region, but long-standing animosity among them has limited their economic interaction so far. Brazil, is of course, not contiguous to the other three. Still, the BRICS concept is that if the five giants work together, they can be the world’s dominant industrial bloc in the twenty-first century.