[ The Global Food Chain ]

As globalization moves up the food chain, the more people will become nervous about their futures. Some of my associates in both Silicon Valley and the News media disbelieved me and thought my perspective was impossible. (This premonition was in 1997)

@ that time, I thought that the US Labor has gotten fat and lazy. They lost their competitive edge. ... They started to think they can live forever.

If you look at the current trend, the US workers are getting squeezed. ... And they do not know what to do.

My solution is ... if one can be consistently innovative or become a part of a good innovative team, he/she can survive well and thrive. To live in this ever-changing world, one needs a strong alliance of SMART people.

While ["The Strong"] shall prevail over the Weak, it's ["The Smart"] that takes from the Strong. Be ["The Smart"].


http://www.businessweek.com/@@K4aCvYcQpNrKnxgA/magazine/content/04_49/b3911408.htm

DECEMBER 6, 2004

SPECIAL REPORT -- THE CHINA PRICE

Shaking Up Trade Theory
For decades economists have insisted that the U.S.
wins from globalization. Now they're not so sure

Ever since Americans began fretting about
globalization nearly three decades ago, economists
have patiently explained why, on balance, it's a boon
to the U.S. Yes, some Americans lose their jobs,
either to imports or because factories move to
cheap-labor countries such as China or India. But the
bulk of this work is labor-intensive and lower skilled
and can be done more efficiently by countries that
have an abundance of less-educated workers. In return,
those countries buy more of our higher-value goods
made by skilled workers -- for which the U.S. has a
comparative advantage. The lost jobs and lower wages
in the U.S., economists say, are more than offset when
countries specialize like this, leading to more robust
exports and lower prices on imported goods.

Now this long-held consensus is beginning to crack.
True, China is emerging as a global powerhouse,
realigning many economic relationships. But in the
long run a more disruptive trend may be the
fast-rising tide of white-collar jobs shifting to
cheap-labor countries. The fact that programming,
engineering, and other high-skilled jobs are jumping
to places such as China and India seems to conflict
head-on with the 200-year-old doctrine of comparative
advantage. With these countries now graduating more
college students than the U.S. every year, economists
are increasingly uncertain about just where the U.S.
has an advantage anymore -- or whether the standard
framework for understanding globalization still
applies in the face of so-called white-collar
offshoring. "Now we've got trade patterns that
challenge the common view of trade theory, which might
not be so true anymore," says Gary C. Hufbauer, a
senior fellow at the Institute for International
Economics (IIE), a Washington (D.C.) think tank. A
leading advocate of free-trade pacts, he still thinks
white-collar job shifts are good for the U.S.

The great debate percolating among the country's top
trade economists gained new prominence with a recent
article by Nobel laureate Paul A. Samuelson in the
Journal of Economic Perspectives (JEP). In the piece,
the 89-year-old professor emeritus at Massachusetts
Institute of Technology, who largely invented much of
modern-day economics, questions whether rising skills
in China and India necessarily will benefit the U.S.

The reaction was swift. Experts such as Columbia
University trade economist Jagdish N. Bhagwati, who
countered Samuelson in the next JEP issue, resist the
notion that the new offshoring could lower U.S. wages
or slow growth of gross domestic product. After all,
these economists have spent their professional lives
ridiculing such conclusions as so much protectionist
nonsense. Nevertheless, they aren't yet able to
reconcile what's happening on the ground with the
ideas they have so passionately defended. "This is a
whole unexplored question that is very controversial,
and nobody has a clue about what the numbers are,"
says Robert C. Feenstra, a prominent trade economist
at the University of California at Davis.

Global Labor Pool
The central question Samuelson and others raise is
whether unfettered trade is always still as good for
the U.S. as they have long believed. Ever since
British economist David Ricardo spelled out the theory
of comparative advantage in the early 1800s, most
economists have concluded that countries gain more
than they lose when they trade with each other and
specialize in what they do best. Today, however,
advances in telecommunications such as broadband and
the Internet have led to a new type of trade that
doesn't fit neatly into the theory. Now that
brainpower can zip around the world at low cost, a
global labor market for skilled workers seems to be
emerging for the first time -- and has the potential
to upset traditional notions of national
specialization.

There are three ways this new development could
disrupt the U.S. economy. If enough cheap,
high-skilled workers become available around the
world, competition may drive down U.S. wages for a
wide swath of white-collar workers. Even economists
who still see overall net gains agree that this is a
potential problem. "For the first time, high-skilled
U.S. workers are going to be exposed to international
competition, though it's not clear how much it will
hurt their wages," says Bhagwati.

A second concern is how much of the gains from trade
will flow through to U.S. consumers. Until now the
pain of globalization has been borne by less than a
quarter of the workforce, mostly lower-skilled
workers, whose wage cuts outweighed the cheaper-priced
goods globalization brings. But the other
three-quarters of American workers still came out
ahead, since they weren't affected by foreign wage
competition. 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. Then the benefits of increased trade
would go primarily to employers. "It's entirely
possible that all workers will lose and shareholders
will gain; you have to be concerned about that," says
Harvard University trade economist Dani Rodrik.

Even that wouldn't be enough to completely derail
comparative-advantage theory, which holds that higher
profits from trade should more than offset the lower
wages. But again, for the first time, economists see
another factor at play. As skill levels improve in
cheap-labor countries -- for example, the new
engineering class in India -- competition is coming on
in the very products for which the U.S. has had a
global advantage, such as software. If the new
competition drives down prices too much, U.S. export
earnings will suffer, and the entire U.S. economy
could end up worse off.

While experts such as Hufbauer and Bhagwati doubt it
will ever come to this, the fact that they're even
entertaining such concepts is an intellectual sea
change on a subject long considered settled. When
countries such as China can perform tasks in which the
U.S. previously had a clear edge, "comparative
advantage cannot be counted on to create...net gains
greater than the net losses," Samuelson asserts in his
new paper.

The rethinking among economists could soon spill over
into the policy arena. No one is advocating new trade
barriers, which could be a cure that's worse than the
disease. Nonetheless, the shaken views of so many
prominent economists could prove to be critical.
Throughout the 1990s, Washington embraced new trade
deals in large part because of the virtual unanimity
among experts that trade always benefits the U.S. If
they're not so sure anymore, the public consensus that
was unsteady to begin with could start to unravel.

Two tests will come next year when U.S. membership in
the World Trade Organization comes up for review, as
does the President's so-called fast-track authority to
negotiate trade agreements. "I'm worried that rising
anxiety among higher-skilled workers will erode
support for continued globalization in the U.S.," says
Dartmouth University economics professor Matthew J.
Slaughter.

"A Right to Be Scared"
How large might the white-collar offshoring trend
become? The more jobs that go, the greater the impact
on U.S. wages. Consultant Forrester Research Inc.
(FORR ) in Cambridge, Mass., was among the first to
spot the white-collar job shifts and has done the most
detailed projections so far. It sees the pace of U.S.
job flows abroad averaging 300,000 a year through
2015. This is probably conservative since Forrester
has also found that the number of U.S. companies among
the 1,000 largest that engage in some level of
white-collar offshoring will rise sharply -- from 37%
today to 54% by 2008. Already, some 14 million
white-collar jobs involve work that can be shipped
electronically and thus in theory could be moved
offshore, according to a study by economists Ashok D.
Bardhan and Cynthia A. Kroll at the University of
California at Berkeley's Haas School of Business.

The hit to wages could be powerful if that happens.
Forrester analyst John C. McCarthy identified 242
service jobs as likely to be affected among the
500-plus major occupations tracked by the Bureau of
Labor Statistics (BLS). He ranked each by the share of
jobs employers are likely to shift abroad by 2015. His
conclusion: The cumulative job outflow will total 3.4
million over that period. That comes to 6% of the 57
million people who work in these 242 occupations
today.

If that's in the ballpark, U.S. white-collar wages
would get whacked, says Harvard University labor
economist Lawrence F. Katz. Every 1% drop in
employment due to imports or factories gone abroad
shaves 0.5% off pay for remaining workers, he found in
a study with Harvard colleagues Richard B. Freeman and
George J. Borjas. So if job losses rise to 6% of the
white-collar total, these workers' pay could be
depressed by 2% to 3% through 2015, figures Katz.
While a few percentage points over a decade or so may
not sound dire, it's roughly as much as blue-collar
workers lost to globalization in recent decades.
"White-collar workers have a right to be scared," says
Katz.

Another way economists gauge the potential wage impact
is to look at examples of how people fare when they
lose a job and extrapolate for those who might get
displaced by offshoring. Turns out that just 30% of
laid-off workers earn the same or more after three
years, according to a study of 22 years of BLS data by
economics professor Lori G. Kletzer of the University
of California at Santa Cruz. Only 68% even hold a job
at that point, while the rest are unemployed, retired,
or perhaps at home with children. On average, those
reemployed earn 10% less than before, Kletzer found.
"Clearly, offshoring will be bad for U.S. wages, given
what the job displacement numbers tell us," says
Princeton University economics professor Henry S.
Farber, who has written extensively about displaced
workers.

But even if the incomes of more U.S. workers fall,
won't the rest of American consumers benefit from the
lower-priced goods and services globalization brings?
Not necessarily, some economists now believe. Most
studies of trade's impact on pay, including Katz's,
assume that factory-job losses simply shift the demand
for labor from one kind of worker to another higher up
the value chain. So higher-educated workers gained
much of what the less-schooled lost.

But if white-collar offshoring swells enough, the
resulting job losses could undercut a large swath of
U.S. consumers. In part, this is a question of scale.
There's little doubt that globalization is likely to
continue to cut into the country's 14.5 million
factory hands. Add in 57 million white-collar workers
suddenly facing global competition, too, and more than
half the U.S. workforce of 130 million could feel the
impact. Then, economists conclude, the benefits of
globalization would flow mostly to companies and
shareholders who profit from the cheaper labor, with
little pass-through to workers and consumers. "If a
majority of Americans have lower wages from
outsourcing, then capital would be the prime
beneficiary, even if U.S. GDP goes up," says Harvard's
Freeman.

Domestic Disturbance
Could the offshore phenomenon even dent America's
overall GDP? Standard theory suggests not, but it's
now another question nagging economists. Ricardo's
insight that all countries come out ahead when they
trade more with each other was updated in the early
1900s by two Swedish economists, Eli F. Hecksher and
Bertil Olin. They showed that Ricardo's idea holds
even if high-skilled countries such as the U.S. trade
more with low-skilled ones such as India, with each
country specializing in products in which they have a
relative advantage. Thus, it's more efficient for the
U.S., where about 60% of the workforce has some
college education, to export products that use their
skills and import low-end ones from cheap-labor
countries. Conversely, India, where just a fraction of
its 400 million-plus workers have gone to college,
should grab the low-skilled work and leave higher-end
products to the U.S.

This theory doesn't square with today's outflows of
programming and other higher-skilled jobs. "According
to the Heck-sher-Olin model, we shouldn't be sending
these jobs to countries with [so few skilled
workers]," says University of California at Los
Angeles trade economist Edward E. Leamer. But U.S.
companies are doing just that because labor is cheaper
and the Net makes it feasible to transport work done
abroad back to the U.S.

Still, most economists think the new offshoring is an
overall plus. For one thing, they say, employers' cost
savings should more than compensate for any wage
damage. And by slashing the price of software and
other goods, offshoring could power a new wave of U.S.
productivity gains similar to those triggered by
falling computer-hardware prices in the '90s, says a
study by Hufbauer's colleague, IIE senior fellow
Catherine L. Mann.

She and others argue that countries will continue to
specialize in what they do best. Sure, India or China
are taking high-skilled jobs in programming, but the
U.S. will still outperform them in, perhaps, drug
research or nanotechnology. Instead of thinking about
comparative advantage in broad strokes such as
high-skilled and low-skilled, they say, it makes more
sense to make finer distinctions and look at areas in
which countries have industry- or occupation-specific
advantages. "There will be specialization within
industries, [which will bring] a lot of demand from
India for our higher skills," says Bhagwati.

Other economists, however, such as Leamer and Rodrik,
believe that in the new global economy, advantages
from these kind of micro-level specialties will be
fleeting. After all, if the U.S. is better at
aerospace research, there's no reason why China
couldn't quickly ramp up college grads in that area,
too. It's already doing that in telecom and servers.

Leamer and other trade experts say the resulting price
competition from rising stars such as China and India
could overpower any economywide gains companies get
from global sourcing. They point to a famous 1968
paper by, of all people, Bhagwati, who argued that a
country can be made worse off if trade lowers the
price of products in which it has a comparative
advantage. Bhagwati called it the "immiserating"
effects of trade. In discussing the idea with
BusinessWeek, Leamer wrote a short proof showing how a
downward spiral of lower labor costs leads to lower
export prices, causing immiseration. Even Bhagwati
concedes that his insight could apply to the U.S.
today, though he thinks the chances are slim that it
will. "Bhagwati showed back then that a country can
grow and get poorer, which might be this story, though
I doubt it," says Hufbauer.

Indeed, it's possible that the U.S. already has
suffered immiseration. Mann's study found that the
offshore exodus of U.S. chip factories accounted for
10% to 30% of the decline in the prices of personal
computers and memory chips in the early 1990s. These
savings boosted U.S. multinationals' net exports of
these products, and by 2000 the companies saw a $10
billion trade surplus in them.

But did the U.S. as a whole come out ahead? Mann's
study also shows that the country's overall trade
deficit in these products plunged into negative
territory in 1992 and has remained there ever since.
So while large U.S. companies gained from moving chip
factories abroad, the overall U.S. economy may have
lost. "This looks like immiseration to me," says
Leamer.

Globalization, say most trade economists, ultimately
should benefit the U.S. more than it hurts. But they
can't yet show that to be true. Until someone comes up
with a convincing explanation for what happens when
the highest-skilled jobs move offshore, battles over
globalization are likely to rage even hotter.

By Aaron Bernstein

###
/// ***
Ever since Americans began fretting about
globalization nearly three decades ago, economists
have patiently explained why, on balance, it�s a boon
to the U.S. Yes, some Americans lose their jobs,
either to imports or because factories move to
cheap-labor countries such as China or India. But the
bulk of this work is labor-intensive and lower skilled
and can be done more efficiently by countries that
have an abundance of less-educated workers. In return,
those countries buy more of our higher-value goods
made by skilled workers � for which the U.S. has a
comparative advantage. The lost jobs and lower wages
in the U.S., economists say, are more than offset when
countries specialize like this, leading to more robust
exports and lower prices on imported goods�.

Nobel laureate Paul A. Samuelson in the Journal of
Economic Perspectives (JEP). In the piece, the
89-year-old professor emeritus at Massachusetts
Institute of Technology, who largely invented much of
modern-day economics, questions whether rising skills
in China and India necessarily will benefit the U.S�.

Already, some 14 million white-collar jobs involve
work that can be shipped electronically and thus in
theory could be moved offshore, according to a study
by economists Ashok D. Bardhan and Cynthia A. Kroll at
the University of California at Berkeley�s Haas School
of Business.

The hit to wages could be powerful if that
happens.

he case for free trade is based on David Ricardo�s
principle of comparative advantage. Ricardo addressed
the question how trade could take place between
country A and country B (England and Portugal in his
example) if country B was more efficient in the
production of tradable goods (cloth and wine in his
example) than A.

In other words, if Portugal could produce both cloth
and wine at lower cost than England, how could trade
between the countries benefit each?

Ricardo found the answer in relative or comparative
advantage�

If factors of production are as mobile as traded
goods, the case for free trade�that it benefits all
countries�collapses. There is no known case for free
trade if factors of production are as mobile as traded
goods.

For some time I have been pointing out that the
collapse of world socialism and the advent of the
Internet have made factors of production as mobile as
traded goods. Indeed, factors of production are more
mobile. Capital, technology, and ideas can move today
with the speed of light, whereas goods have to be
shipped.

A battle royale has just been initiated in the
rarefied world of economic theory, although the
rumblings have not yet reached these shores. The first
salvo has been fired by no less a person than Paul
Samuelson, and the targets he has chosen include some
of his most prominent acolytes and disciples.

The MIT professor, winner of the Nobel Prize in
1970 and research mentor of countless economists, who
later became major scholars in their own right, has
re-assessed his entire stand on globalisation and the
benefits that accrue from the process. In doing so,
Samuelson has been scathing in his critique of some of
his students, including Jagdish Bhagwati, once a
member of his innermost circle.

In an article in the Journal of Economic
Perspectives, Samuelson has postulated that free
trade, far from being an unqualified blessing, may
prove to be a major drawback under certain
circumstances. The major cult figures who are sought
to be chastised by the guru on this issue are Gregory
Mankiw, Bhagwati and countless other globalists. The
first two have been mentioned by name in the articles
opening paragraphs as purveyors of polemical untruth.
In the corridors of theoretical economics, you cannot get more direct than this.
*** ///