Magazine | March 14, 2016, Issue

Better Days for Globalization

Technology should make it more of a win-win

Has globalization peaked? The U.S. commitment to free trade has been essential to globalization, and this commitment is waning. While there are many factors behind the rises of Donald Trump and Bernie Sanders, both candidates have profited by making appeals to economic nationalism. Ted Cruz and Hillary Clinton insist that they are as committed to free trade as ever, yet they are united in their opposition to the Trans-Pacific Partnership, a twelve-nation trade accord that is explicitly designed to facilitate the flow of goods and services across borders. There are perfectly good reasons to oppose the Trans-Pacific Partnership, and Cruz in particular has raised the uncomfortable possibility that it could lead to undesirable changes in immigration law. Nevertheless, it seems clear that what once was a bipartisan consensus in favor of free trade is being challenged by an equally potent bipartisan coalition opposed to it.

And it is easy to see why. Outsourcing is not popular with American voters, to put it mildly. In 2014, the Alliance for American Manufacturing, a pressure group that lobbies for protectionist measures, commissioned the Mellman Group and North Star Opinion Research to conduct a survey on the obstacles to the creation of manufacturing jobs. Not surprisingly, given the Alliance’s protectionist bent, the survey found that voters are troubled by the rise of offshore outsourcing, a phenomenon the Princeton economist Alan Blinder has usefully defined as “the migration of jobs, but not the people who perform them, from rich countries to poor ones.”

When asked why there aren’t more U.S. manufacturing jobs, 65 percent blamed outsourcing, including 70 percent of Democrats and 65 percent of Republicans. Was the Alliance for American Manufacturing exaggerating the extent of public opposition to outsourcing? It certainly doesn’t seem so; other surveys have reported broadly similar results. Back in 2010, for example, a Wall Street Journal/NBC News poll found that 86 percent of Americans blamed outsourcing as one of the chief causes of America’s economic problems.

Even if we assume that public opinion on outsourcing has softened somewhat between then and now, there is no question that politicians have had great success railing against it. During the 2012 election, President Obama and his super-PAC allies saturated the airwaves with attacks accusing Mitt Romney of outsourcing jobs in large numbers, and many believe that these attacks did a great deal to suppress the turnout of working-class whites who might have otherwise voted Republican. More recently, Donald Trump has coupled his attacks on immigration with attacks on outsourcing, including calls for steep tariffs on U.S. multinationals to deter them from exporting jobs overseas.

To date, we’ve mainly been thinking of outsourcing in the context of manufacturing, and for good reason. In 2013, David Autor, David Dorn, and Gordon Hanson found that between 1990 and 2007, regions housing manufacturers that competed with Chinese imports saw higher unemployment, lower labor-force participation, and reduced wages. Not surprisingly, transfer payments to households in these regions soared. One could argue that some dislocation is inevitable as we move towards freer trade and that the costs associated with a more closed economy might have been higher still. Moreover, the impact of outsourcing on manufacturing employment has been dwarfed by the impact of automation, and not just in the U.S. But the severity of the decline in manufacturing employment has proven traumatic for many Americans, particularly in the Rust Belt, and it helps explain why outsourcing is so politically toxic.

But this understandable focus on outsourcing obscures the deeper nature of globalization. When we talk about “globalization,” we usually have in mind an intensification of trade and competition between companies and between countries. According to this line of thinking, what’s new and different about globalization is that whereas America used to “win” on the economic battlefield, these days (to quote Trump) “China’s eating our lunch.” While this makes an effective slogan, it reflects a profound misunderstanding of how the global economic integration we’ve seen in recent decades differs from what came before it.

The truly novel thing about today’s globalization is not that different parts of the world are trading with each other, or even that different parts of the world are trading with each other more than ever. Rather, as the Brown University political scientist Edward Steinfeld observes in Playing Our Game, it is that globalization involves production networks that can extend across dozens of different countries. Steinfeld observes that “in the networked world of global production, there inevitably arise lead firms and follower firms, rule makers and rule takers.” There is a reason that U.S.-based Apple reaps the majority of the profits from sales of the iPhone while most of the hard work of assembling the device is done in East Asia. By controlling the highest-value components of the global supply chain — the branding, the creation of new intellectual property — it occupies the most privileged position in this new, more dispersed hierarchy of production.

So it is wrong to say that the U.S. has “lost” from globalization. Many Americans have lost from it, as Autor, Dorn, and Hanson have documented. But most Americans have won from it, whether as consumers, as workers who occupy the more privileged rungs of these complex production hierarchies, or as shareholders who profit when multinational business enterprises grow more valuable. The political challenge facing free-traders is not just that the effects of global economic integration have been highly uneven, but also that the human suffering deindustrialization has caused in U.S. communities once built around goods-producing industries has been far greater than advocates of free trade expected in the 1980s and 1990s. This has engendered deep distrust of the partisans of free trade, and it is this distrust that has contributed to the twin insurgencies of Trump and Sanders.

The irony of this new anti-trade mood is that the worst is most likely behind us. As automation accelerates, labor costs will represent a declining consideration for manufacturers when choosing where to locate their facilities. China is experiencing a wave of deindustrialization not unlike that experienced by the U.S. Rust Belt, as many of its labor-intensive manufacturers embrace labor-saving technologies. Some hope that this trend will result in “insourcing,” or a return of manufacturing jobs to U.S. shores. The trouble is that even if the U.S. does attract new manufacturing facilities in large numbers, the number of jobs they create will likely be modest, owing to automation. The current manufacturing sector, having survived Chinese competition, is leaner and meaner than what came before it, and this will protect it from further job losses; but the real frontier of global economic integration will be in services — and that is where Americans stand to benefit most.

The gravest economic challenge the U.S. faces is sluggish productivity growth in the service sector. This is a reflection of government’s outsized role in the delivery of medical care and education. Though both sectors feature high levels of private spending, they’re also rife with regulation, tax subsidies, and other measures that stymie innovation. While the outsourcing of services will present economic challenges for Americans, it will also create economic opportunities.

Consider, for example, the business model of Udacity, a for-profit education start-up. Udacity offers highly focused courses created in partnership with leading business enterprises such as Google and AT&T. Those who complete these courses are awarded “nanodegrees” as proof of their mastery of the skills in question. Students are charged $200 per month and take their courses on an all-you-can-eat basis. If you devote yourself full time to acquiring a nanodegree, you can, in theory, complete your course in a few weeks. Most enrollees, however, balance their studies with other pursuits. On completing a nanodegree within a year, students are refunded half of their tuition. This is a strong incentive to actually finish these quite challenging courses.

How can Udacity afford to offer valuable skills at such low prices? To drive down the cost of their instructional model, the start-up relies heavily on outsourcing. Specifically, Udacity employs paid graders around the world, who do the labor-intensive work of evaluating the projects submitted by students.

If Udacity could hire only Americans to do this work, it would be crippled. The U.S. is a high-productivity, high-wage society by global standards, and people with the skills to evaluate these projects have many other lucrative employment opportunities, so Udacity would have to pay them handsomely. But when Udacity hires Indians with the same skills, it can exploit this “place discount,” the flip side of the “place premium” that makes high-wage, high-productivity societies magnets for migrants. Moreover, Indians who work for Udacity and remain in India find that wages that are low by U.S. standards can provide them with very high incomes by local standards.

What if unionized teachers faced competition from skilled professionals residing in low-cost, low-wage countries? As fanciful as this prospect might seem at first glance, it is being made more plausible by advances in virtual-reality (VR) technology. VR headsets have long been a staple of science fiction, but the collapsing cost of processing power and 3-D cameras are bringing immersive VR experiences closer and closer to reality. Intel has developed a new technology it calls RealSense, which will allow cheap laptops and smartphones to create realistic three-dimensional images. Oblong Industries has developed a videoconferencing technology that makes in-person and remote collaborators seem to inhabit the same physical space. Assuming that the most advanced VR technologies will grow cheaper and more sophisticated in years to come, as we have every reason to expect, we are looking at a future in which it will be no handicap for programmers in Silicon Valley to work with programmers in Utah Valley, or for that matter Hyderabad or Minsk. The same will apply to teachers, primary-care physicians, and other providers of expensive services.

Immigration advocates emphasize the benefits created by immigrant labor, yet they rarely acknowledge the costs. Though some immigrants pay far more in taxes than they receive in benefits, many others do the reverse, a subject that Steven Camarota of the Center for Immigration Studies has addressed in National Review (“Open Borders, Open Coffers,” October 19, 2015). Essentially, the outsourcing of services can let Americans enjoy the benefits of low-cost services without bearing the costs of providing for the needs of workers and their families. And then, of course, there is the fact that workers who remain in their native countries while “virtually commuting” to jobs in the U.S. will have a far more muted cultural and political impact on U.S. society. To conservatives concerned about the potentially disruptive impact of mass migration, the next phase of outsourcing could have much to recommend it.

Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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