Economy and Education & Workforce Development and Manufacturing & Technology and Technology and Transportation, Distribution & Logistics

Relax, you better get used to it-it's only globalization: VOICES FROM THE INDUSTRY

April 16, 2007

Globalization, like all sweeping economic trends, provokes a widespread disquiet. Specifically, we fear that somehow, if it continues unchecked, people in the United States will lose their high-paying jobs and we will devolve into a lowwage service economy. As China gains, we lose.

To borrow a phrase from Thomas Friedman, they're frightened that the flattening of the world economy will flatten us.

It is true that traditional manufacturing jobs are fewer now than before. And, lots of things are made in China. But, globalization is not "at fault," and the straightline analysis that predicts the hollowing out of American manufacturing is simply wrong. Other factors are at play. The story is more complicated and more hopeful.

Change is inevitable

There are three truisms that ought to ground our understanding-strong forces that affect everything in the economy: demographics, productivity advances, and the march of technological progress.

The law of comparative advantage that governs who should produce what has not been repealed.

Globalization is a playing out of the law of comparative advantage under the strong influences of powerful economic forces and the constraints that resources impose on us. Moreover, globalization will only proceed if it makes the world richer. Knowing this, we can sketch out the broad outlines of how globalization can proceed, and how it won't.

For example, China will not end up making everything. China's low labor costs provide an advantage, that much is sure. But, it does not have all the resources needed to produce all that we consume, and it has a comparative advantage for only certain goods. We have a comparative advantage for other goods. There will be a continual geographic re-alignment of manufacturing and service products as production is shifted here and there to make best use of countries' comparative advantages.

However, the United States will not cease to be a manufacturer. Indeed, the dollar value of our manufactured products continues to rise even as manufacturing jobs shrink. Here in Indiana, for example, even as manufacturing job growth slowed, output per worker has grown 51.8 percent since 1990. Lower-skill jobs are lost, but productivity grows, along with wages for the positions that remain.

We are losing manufacturing jobs, but so is China. Productivity advances mean that fewer can do the work that many did before. It does not make anyone a "dinosaur."

That Indiana has held onto our manufacturing employment base simply means we retain some comparative advantage in manufacturing greater than many other places in the US. China will hold onto manufacturing jobs for a long time; it's not a dinosaur either.

As China gets richer, its wages will rise. They already are rising. It has already started to lose its comparative advantage. Companies, such as toy and apparel makers, have begun to search out lower-cost places in which to build factories. There is continual movement "deeper into the woods," into Vietnam, for example. This jockeying for position will proceed in the future just as it has in the past.

Even as the Far East produces more and more items, we will be hard-pressed to bring them all here. Our logistics systems represent a bottleneck. It is true that real transportation costs have become lower over the decades, but there are constraints to what we can ship or fly into the U.S.

Little to fear

Economic forces are powerful. We cannot wall ourselves off with lots of social protections and rigidities. Capitalism will bowl us over eventually, and we will be forced to play catch-up. China built its Great Wall and let the Industrial Revolution pass it by-and has taken centuries to recover. Over the last few decades, Western Europe has been tempted down a similar path. Germany sputtered, but after years of stagnant wages, it is pressing ahead again. Italy has avoided modernity for years, and it will soon suffer the consequences. We don't want to follow the Europeans.

Globalization is nothing to fear. It will press us hard, and individuals will suffer. But if our response is investment-education, entrepreneurship, technology-and not avoidance and protectionism, we will do just fine.



Schmenner is associate dean of the Indiana University Kelley School of Business Indianapolis and the Buskirk Professor of Manufacturing Management.Views expressed here are the writer's.
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