The Challenges of Globalization
Remarks to the Economic Policy Institute
by Robert J. Shapiro, Director NDN Globalization Initiative
January 11, 2007
Jeff and I may not see eye to eye about how trade deficits affect jobs; but we do agree that globalization is real, its effects are enormous, and it’s creating increasing costs and burdens for American workers.
Over just the last 15 years, the share of everything produced in the world that’s traded across borders has risen from 18 percent to 30 percent, to the highest levels and largest increases ever recorded. And while trade accounts for less of our economy than any major European country, nevertheless, we are the world’s most globalized advanced country. Some 44 percent of our exports go to developing nations, and 50 percent of our imports come from developing nations – roughly twice the shares for the EU, which mainly trades with itself. The same holds for our foreign direct investment – about 28 percent of our FDI is now in developing nations, compared to about 12 percent of Europe’s FDI.
So far, globalization’s effects are most clear in those countries – China, Taiwan, the Czech Republic, Korea and some others -- that opened themselves not only to that foreign investment, but also increased domestic competition and upgraded their transportation, communication, education and public health systems. And the greatest beneficiaries have been the people in many of the world’s poorest countries. In China and India, average incomes more than doubled over the last decade – and that includes hundreds of millions of desperately poor Chinese and Indians living in rural areas untouched by all these changes.
Globalization also changes the basic needs of modern corporations. For centuries, large national and international companies used their heft to get sweet deals on their most basic resources, capital and labor. Modern globalization makes labor and capital much more easily and cheaply available, so their business strategies no longer focus there. Instead, their most critical resource has become the intellectual capital of their patents, brands, business methods and the knowledge and relationships of their professionals and managers.
This “idea-based” economy has been a metaphor for a while, but globalization has made it real. Since the mid-1990s, U.S. companies invested as much in intangibles -- mainly the intellectual property of patents and trademarks, but also databases, branding, organizational changes and the training to use these ideas – as in all physical assets, from equipment to land and buildings. This shift towards intellectual capital is also clear in the way investors value public companies. Twenty years ago, the market value of the physical assets of the top 150 U.S. companies accounted for 75 percent of the total value of their stocks. A firm was roughly worth what its plant, equipment and real estate could be sold for. Today, the book value of the top 150 U.S. corporations accounts for just 35 percent of the total value of their shares. Today, nearly two-thirds of the value of a large company comes from what it knows and the ideas and relationships that it owns.
This is America’s great advantage in globalization, because we remain the world’s largest and most powerful idea-factory. In effect, we represent the other pole of globalization from China – they’re becoming the world’s largest production platform while we produce the ideas that give value to what they produce. If there’s any doubt about that, consider that half of our imports from China come from the Chinese subsidiaries of U.S. companies.
This is great for American companies. The potential market for what they do best – developing new products, materials, technologies, coming up with new ways of financing, marketing and distributing goods and services, as well as new ways of doing business generally – has become global. And to a large extent, they now have the entire world to pick the cheapest and most reliable sources of materials, parts, labor and everything else. Revenues, productivity and profits are all high, and the U.S. economy has grown at very healthy rates.
But globalization has also produced a nasty surprise for working Americans. As overall growth has expanded smartly, the relationship between how fast the economy grows and how many jobs it creates has weakened badly. Take jobs. The 2001 recession cost us about one-half percent of GDP – by historical standards, that should have cost us 500,000 jobs. Instead, we lost 3 million. After the 1991 recession, it took us 18 months to get back to pre-recession job levels; this time, it took 52 months. And even today, we’re creating jobs at half the rate we did at the comparable point in the 1990s expansion.
The same thing is happening in the link between productivity and wages. Over the last four years, productivity has grown 3 percent a year – the best record since the 1960s – yet both real wages and total real compensation have virtually stagnated.
The problem is not the overall economy, which is doing quite fine. The problem lies in the transmission mechanisms between that macroeconomy and the lives of most working people. And globalization is what’s changing those transmission mechanisms.
It begins with China, traveling a long and complicated path to reach the United States. Let’s start with some numbers. China’s merchandise exports went from $62 billion in 1990 to $750 billion in 2005, and they’re still growing 25 percent a year. At those levels, China’s exports now swamp those of its rivals in other developing nations – almost two-thirds more exports than all the rest of East Asia, for example, and almost 30 percent greater than all of Latin America.
Here are some examples of what happens. Zhejiang Forging Company, a Chinese manufacturer of forged metal parts, expands its production of motorcycle parts, at prices that undercut producers in Thailand; while Sunpower Enterprises, a large Chinese producer of hotel furniture, undercut rival producers in the Dominican Republic. As customers around the world learn of it, some of the less productive producers of metal parts and hotel furniture in Thailand and the Dominican Republic are squeezed out of business – so on the margin, capital and expertise in those countries shift to other industries, such as basic electronics or more sophisticated equipment. The new capital and expertise makes those industries a little more competitive -- and that puts new pressures on their rivals in, say, Korea and Brazil. This process repeats itself, and on the margin capital and expertise in those economies shifts again to, say, LCD makers in Korea and auto producers in Brazil. This time, the new competitive pressures may begin to squeeze LCD producers and auto makers in the United States.
China’s manufacturing sector is so big and diversified that these dynamics intensify competition across scores of industries in scores of countries, ratcheting up competitive pressures across the world. When these competitive pressures reach us, there’s no other place to transmit them, so here the result is just that companies find it harder to raise their prices, even when their costs increase. Now, U.S. health insurance and energy costs have risen more than 60 percent since 2001, and for many companies pension costs are up sharply as well.
On top of that, globalization has another effect: It expands the pool of workers much more than it expands the pool of capital. The consequence is that the return on capital goes up. So even as companies feel; squeezed between more intense competition and rising costs, financial markets tell them that they have to show higher profits. So businesses have taken what’s probably the easiest way out: They’ve found other costs to cut, starting with jobs and wages.
This is what’s happening in the United States, and it’s the great political challenge posed by globalization. If we don’t step up to plate with serious answers to reduce the rapid increases in health care, pension and energy costs – three areas in which the current administration has been missing in action for six years – the U.S. job creating machine will stall out, and the incomes of a majority of Americans will slowly fall for the next generation. If we don’t step up to the plate with a serious training and education strategies that can ensure that Americans can do their jobs more efficiently than anyone in any developing country –another area where this administration has checked out – offshore outsourcing, especially in the new areas of services, will hollow out part of the American middle class.
We couldn’t roll back globalization, even if we wanted to. I also suspect that we can’t much affect the pace of global trade. Markets and global companies can make the mincemeat of trade provisions as they do of tax provisions. What we must do is restore the links between growth and jobs and between productivity and wages, so American workers can benefit from globalization as much as the companies they work for.
Some Rights Reserved 2008 - Present, NDN. 
