As we wrote nearly two years ago (“The Globalization of Well-Being,” Qrowth Strategies #949, January 2003), the debate over globalization – whether, when and where increasing levels of international trade, investment and cultural communication have positive or negative effects – is more than just a hot contemporary issue. According to historian John Steele Gordon, contentiousness over globalization is nothing less than the fourth great intellectual and political divide in American society. [Previous great divides were over the size of government (18th century), North vs. South (19th century), and between capital and labor (20th century).]

We have elucidated and supported the arguments in favor of globalization many times in these pages over the years. And indeed, the evidence supporting the beneficial effects of free trade and globalization continue to accumulate. Two of the strongest books appearing this year on the subject have included WTry Globalization Works, by Martin Wolf, and in Defuse of Gfobalizacion, by Jagdish Bhagwati. We also recommend A Ftttwre Perfect; The Challenge and Promise of Giobolization (2003) by John Micklethwait and Adrian Wooldridge; “Three Cheers for Global Capitalism,” by Johan Norberg in The American Enterprise (June 2004); and “10 Truths About Trade,” by Brink Lindsey in Reason (July 2004).

But as Aaron Bernstein writes in Business Week (6 December 2004), the long-held consensus among trade theory economists that globalization is always a good thing for all parties is starting to break down. What is causing this reevaluation is the rapid growth of white-collar outsourcing. Most economists see no problem in low-skill work moving to low-wage countries, but what has them questioning the theory of comparative advantage is when high-skill work starts to follow in great amounts.

A global labor market for skilled workers seems to be emerging for the first time in history, representing a seismic shift in the world economy brought on by three major developments. First, new political stability is allowing capital and technology to flow far more freely around the world. second, strong educational systems are producing tens of millions of intelligent, motivated workers in the developing world, particularly in India and China, who are available for high-value work at low cost. Last, inexpensive, high-band-width communications make it feasible for labor to be located and effectively managed anywhere.

When brainpower can zip around the world at low cost, do the fundamental assumptions underlying national economic specialization still apply? Some economists are speculating that they don’t. A prominent example would be Paul Craig Roberts, a former Assistant Treasury secretary (and former proponent of globalization). His argument may be paraphrased thusly:

For comparative advantage to work, a country’s labor, capital, and technology must not move offshore. If these factors move abroad to where cheap labor makes them more productive, absolute advantage takes over from comparative advantage. Absolute advantage means there is no limit to the flow of jobs and production to low-wage countries, and nothing high-wage countries can produce (for very long) to balance things out. If the US chooses this path, it is choosing permanent decline in national wealth, income, standard of living and quality of life.

Economists such as Roberts say there are three ways the outsourcing of high-skill jobs could undercut the assumed benefits of specialization, and have deleterious effects on American workers, American consumers, and eventually, even the US economy as a whole:

1. If enough cheap, high-skilled workers become available around the world, competition may drive down US wages for a wide swath of white-collar workers.

2. If blue- and white-collar employees alike are thrown into the global labor pool, a majority of workers could end up losing more than they gain in lower prices.

3. If this new global labor competition drives down even the prices of products for which the US has a global advantage, US export earnings will suffer, and the entire US economy could end up worse off.

UCLA trade economist Edward Eeamer maintains that the US has already experienced these “immiserating” effects of globalization, where a national economy can grow even while becoming poorer. He uses the example of US microchip factories, which poured offshore in the early 1990s. This macie those companies more profitable, and allowed consumers to buy cheaper PCs, but the country’s trade deficit in these products turned dramatically and permanently negative. Thus, a loss for the economy overall.

Most economists, to he sure, still consider comparative advantage to be operational, and outsourcing to be an overall plus. Employers save on costs, and consumers save on prices. Offshoring creates new jobs and boosts economic growth, they maintain. Even in the example cited – computers and memory chips – lower prices from offshoring encouraged the rapid spread of computer use and thereby added some $230 billion in cumulative additional GDP.

Additionally, such activity increases productivity, which pushes up profits, which translate to wage gains, in this view, countries should continue to specialize, and the US should continue to move up the value-added chain of production (if no longer competitive in chips and software, for example, then perhaps in drug research, nanotechnology, or in fields yet to be discovered and invented).

Growth Strategies Implications

No wonder the issue of globalization is so contentious: the stakes couldn’t be higher. Our own view is that globalization is inevitable, and that the way to insure its effects are beneficial to the US economy and for Americans is to keep the United States an attractive place to invest and do business. That means low taxes, tariffs and barriers to operation; an educational system that supplies talented and skilled workers; deep capital markets; sound fiscal and monetary policies; the rule of law (not the rule of lawyers); a physical and transportation infrastructure that’s up to the task; and a business-savvy culture that supports innovation and risk-taking. The extent to which the United States is not providing these environmental factors is the real caitse for worry.

Copyright FutureScan Dec 2004

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