Global Economy
US, China and the rickety state of conventional globalization
By Michael Hennigan, Founder and Editor of Finfacts
Sep 28, 2010 - 4:48 AM

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In 1998, the Bureau of Labor Statistics forecast that manufacturing jobs in 2008 would be almost unchanged at 18.6m. The reality was almost 7m less. It had noted that manufacturing had accounted for 30% of GDP for 3 decades. It now accounts for 11% of GDP. Pay levels tend to be lower in many other sectors.

A number of developments last week linking the US, China and Japan point to the rickety state of conventional globalization.

An assertive China claimed sovereignty over Japan in a dispute about uninhabited islets in the East China Sea. China was reported to have blocked exports to Japan of 'rare earth' minerals used in many contemporary electronics-based products. The move happened at a time when the US is concerned about China's 90% control of this key sector.  The US was once the leading producer and because of environmental concerns and lower production costs in China, its last US mine closed in 2002

Rare earths are 17 chemically similar metallic elements - - such as europium, yttrium and lanthanum - -  which have unique magnetic, optical and other properties essential for miniaturisation, lasers and energy efficiency.

''We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs, and how many migrant workers will return to the countryside,'' should China agree to demands for a 20 to 40% revaluation of the renminbi, China's premier, Wen Jiabao, said in a speech in New York. ''China would suffer major social upheaval.''

The problem is that the United States has similar concerns.

We wrote earlier this year that the conventional globalization model of high paid knowledge workers in advanced countries and workers in developing countries producing manufactured products at a low cost, was becoming increasingly outdated (SEE: Globalization and Asia’s return to economic supremacy).

Intel co-founder, Andy Grove, asked in a recent article:"...what kind of a society are we going to have if it consists of highly paid people doing high-value-added work - - and masses of unemployed?"

Grove said manufacturing employment in the US computer industry is about 166,000, lower than it was before the first PC, the MITS Altair 2800, was assembled in 1975 (figure-B). Meanwhile, a very effective computer manufacturing industry has emerged in Asia, employing about 1.5m workers - - factory employees, engineers, and managers. The largest of these companies is Hon Hai Precision Industry, also known as Foxconn. Grove said the company has grown at an astounding rate, first in Taiwan and later in China. Its revenues last year were $62bn, larger than Apple, Microsoft, Dell, or Intel. Foxconn employs over 800,000 people, more than the combined worldwide head count of Apple, Dell, Microsoft, Hewlett-Packard, Intel, and Sony (figure-C).

Apple with its compelling designs has been able the capture the lion's share of the profits from the products its sells, by manufacturing them in China.

That may not be much solace for the mass of Americans on stagnant incomes, however crucially for the US economy, the more common pattern is that US companies innovate and design but they struggle to retain control of the technology overseas and often see their work copied by rivals who can produce at lower cost.

Insight on how to keep America number one with outlooks that China will surpass the U.S. in manufacturing next year, with Fred Smith, FedEx chairman/CEO:

Andy Grove says in his article that a new industry needs an effective ecosystem in which technology know-how accumulates, experience builds on experience, and close relationships develop between supplier and customer. The US lost its lead in batteries 30 years ago when it stopped making consumer electronics devices.

He says scaling isn't easy. The investments required are much higher than in the invention phase. And funds need to be committed early, when not much is known about the potential market.

"I believe the answer has to do with a general undervaluing of manufacturing - - the idea that as long as 'knowledge work' stays in the US, it doesn't matter what happens to factory jobs," he says.

"When products are designed and manufactured side by side in America, businesses can discover new efficiencies and develop second-, third- and fourth-generation upgrades that simply would never occur in a cloistered research lab," US Commerce Secretary Gary Locke said in a speech early this year. "When they are not, we allow other countries to develop new businesses and new jobs," he added.

The additional risk is that the R&D also moves overseas and Applied Materials, one of the world's biggest supplier of machines that make solar panels and computer chips, whose headquarters is in Santa Clara, in Silicon Valley, along with Intel's, has transferred its chief technology officer to China. Applied Materials has opened a research facility in Xi’an - - a city about 600 miles southwest of Beijing known for the discovery nearby of 2,200-year-old terra cotta warriors - -  which has 47 universities and other institutions of higher learning, churning out engineers with master’s degrees who can be hired for $730 a month, according to the New York Times. 

According to the Bureau of Labor Statistics data, US employment in manufacturing has been the lowest since March 1941, before the US entered World War II. The August total was 11.67m workers, down 19% in just the past five years. Productivity improvements are just one factor: Manufacturing's share of GDP shrank from 25% in the 1960s to 15% in 2000 and just 11% in 2008, according to data from the Commerce Department's Bureau of Economic Analysis.

Male blue-collar employment has been particularly hit and wages in replacement jobs in other sectors tend to be lower.

The federal government's Trade Adjustment Assistance program, run by the Department of Labor, approved generous severance, training and health benefits to 201,053 workers in 2009 impacted by trade, a 59% increase over 2008 when 126,633 workers were certified for the special unemployment benefits. These workers, notes Secretary of Labor Hilda Solis, "lost a job through no fault of their own and need and deserve our support." The TAA program was created in 1974 to help US workers who lost jobs due to US trade policy.

The Senate will vote on a bill today aimed at discouraging US businesses from outsourcing jobs overseas, a plan that Democrats describe as an effort to fight unemployment but which Republicans dismiss as a pre-election political gimmick.

According to Brookings Institution economists, US multinational companies have long been among America's strongest firms. Although they comprise far less than 1% of US companies, they account for about 19% of all private jobs, 25% of all private wages, 48% of total exports of goods, and a remarkable 74% of nonpublic R&D spending. For decades, US multinationals have driven an outsized share of US productivity growth, the foundation of rising standards of living for everyone. They are responsible for 41% of the increase in private labor productivity since 1990.

The economists say despite the common allegation that multinationals simply "export jobs" out of the US, research shows that expansion abroad by these firms has tended to complement -- not substitute for -- their U.S. operations. More investment and employment abroad have tended to create more American investment and jobs as well. From 1988 to 2007, employment in foreign affiliates rose to 10m from 4.8m. During that same period, employment in US parent companies rose to 22m from 17.7m.

In an op-ed article in the New York Times on Monday, London-based economist, Anatole Kaletsky, said  Japan’s recent action in forcing down the value of the yen suggests that, in the aftermath of the recent financial crisis, the dominance of free-market thinking in international economic management is over. Washington must understand this, or find itself constantly outmaneuvered in dealings with the rest of the world. He said instead of obsessing over China’s currency manipulation as if it were a unique exception in a world of untrammeled market forces, the United States must adapt to an environment where exchange rates and trade imbalances are managed consciously and have become a legitimate subject for debate in international forums like the Group of 20.

Kaletsky says the new model of capitalism evolving in Asia and parts of Europe generally requires government to be smaller, but more effective.

China and Brazil

Another story in the past week highlights that economic relations between the big emerging economies are not all plain sailing either 

China is now Brazil's top trading partner, surpassing the United States for the first time last year. Brazilian imports from China jumped 12-fold from 2000 to 2009, and exports went up 18 times. China consumed almost 14% of Brazil's exports in 2009 -- and sent back almost 13% of Brazilian imports.

China is a big importer of raw soybeans from Brazil and  according to Reuters, China has devastated Brazilian shoemakers and its factory workers, building an Asian industry that is now the world's top shoe exporter, shipping out around 8bn pairs last year alone.

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