I can see them now, the smoke filled room, the world map, the evil laughter bwahahahaha.
China: India, you can have services and we will take manufacturing, we will teach these barbarians their rightful place. We will bring back the glorious days of the Ming dynasty or the Raj in India. Same old romantic garbage.
Nope. Welcome to the whirlwind. The forces unleashed mean there is no going back.
I wrote the following on a comment to a blog article about IT outsourcing and the hollowing out of Australia's capital structure.
Most reserve banks have been very easy in providing liquidity. That has distorted the structure in both Western and Eastern economies. All countries do engage in currency devaluation. The reason being that running a trade deficit is seen as a sin. Everyone wants to be a net exporter which is crazy. It is the pie is only so big fallacy.
I am looking at some 2003-2004 company tax stats, total income was $1.5 trillion. It makes the trade deficit of a couple of billion seem 1000 times smaller and a storm in a tea cup.
http://www.ato.gov.au/content/downloads/70906_2004COM4A.pdf
As for capital goods (a depreciating asset) purchased, it has gone from $35 billion in 1995 to $59 billion in 2004.
http://www.ato.gov.au/content/downloads/70906_2004COM7.pdf
Of course this is not the same rate as China or India but it shows an increase not a decrease.
The picture formed from the article is that China and India will move up the value chain taking all manufacturing and services, growing their capital structure and increasing productivity (capital replacing labour). I want that to happen. I want Chinese and Indians developing new products and services, increasing production and making things better, cheaper, more available.
Again I stress that idea that the pie is only so big is flawed, it leads to people fighting over resources.
Oil is in fact a classic example. Before there was a good use for it, oil seeping on land reduced it value!
All China/India (and Africa) have had traditionally was their labour to sell. Past governments have not be kind to capital accumulation, so real wages are low.
The figures from both tax stats (ATO) and real numbers from trade (ABS) suggest that there is no hollowing out, industries which were subsidized and have a high labour input are gone. Capital good imports in Australia have been strong.
Does IT have a high labour input, yes and no. Bits which IT which do will go offshore as long as it makes sense. I know already some parts of India, office space per metre is more expensive than Sydney and Melbourne. Salaries are rapidly catching up and the idea of a huge resource of skilled capable labour is not true. If you don't care about IT and see it as a cost it will be outsourced.
If you see it as an enabler, a tool you will keep it in-house. You bring in experts to help you plug the gaps. Your core enabling technology does not leave the company.
The actual easiest thing that the government could do would be to scrap capital gains tax. It is a tax on investment and entrepeneurship.
