Globalization

These calipers, which measure to one thousandth of an inch and a hundredth of a millimetre have been one of the most useful tools I have. This kind of accuracy was unheard of when I was beginning to use tools like this 45 years ago. As importantly, a set of vernier calipers, yesteryear's equivalent,  could have cost at least $30 to $50. These I think were $15, and of course, were made in China. So about 10 times more accurate and at least half as expensive; that kind of 20X gain in value is seldom noted when we discuss globalization, where the focus has generally been on the hollowing out of middle class American manufacturing. But it begs the question how is China able to deliver this kind of order-of-magnitude increase in value creation?

That increase in value creation may be attributed to lower Chinese labor costs; if labor costs are a quarter US labor costs^[1], and direct labor is half the costs of the product, the saving would be about 37%; so a $30 item might cost only $19. If labor costs in China were a tenth of those in the US^[2], it might bring the cost down to about $16. The comparison is difficult because many of the products that purport to be made in the USA may only be assembled in the USA with parts sourced from China.

However this doesn't take into consideration innovation. The dominant design today seems to have settled on something pretty similar (if not identical) to the calipers in the picture.  Where that innovation occurred is an interesting question. China could have developed the technology in this product itself or it could have reverse-engineered an existing American tool; the second is more likely. And if elements of that technology were protected by US and international patents, whether Chinese manufacturers respected them is a second question (and the answer is probably not). So one reason these calipers were so cheap might be that China didn't have to invest as much in R&D as the original inventors.

This presents a real problem for US manufacturers. If they invested in R&D and if patent laws were enforced they, could charge a premium price for their product to recoup their R&D costs. But if patents are not enforced, and their product is copied and priced much lower they cannot compete and so they have no incentive to innovate; indeed to do so would put them at a cooperative disadvantage.

Equally problematic is the decision to enter the Chinese market. Often doing so would require the sharing of IP and thus puts them in the same position as if their products had been copied illegally. But the alternative is to cede the market to Chinese firms who would likely reverse engineer their products, flout patent protections and capture the entire Chinese market. So until China enforces patent protections, it's a catch-22 problem for US firms. And the Chinese government has absolutely no incentive to enforce international patents, since to do so would impede both its acquisition of IP and its economic growth.       

[1] https://countryeconomy.com/countries/compare/china/usa?sc=XE0H

[2] https://www.huffpost.com/entry/average-cost-factory-worker_n_1327413