Globalization and its impact on US manufacturing

GLOBALIZATION and the IMPACT on U.S. MANUFACTURING

Ten years ago, the debate surrounding manufacturing leaving the United States had as its focus the jobs that were being pulled southward into Mexico. Today, this issue is more urgent than previously however, the source of worry is not only focused on south of the border in Mexico. Manufacturing is increasingly relocating to Brazil, China, India, Bulgaria and Malaysia. It has been estimated by the website Economy.com, an economic consulting firm in West Chester, Pennsylvania that 1.3 million manufacturing jobs have been moved abroad since the start of 1992 and that the bulk of this has occurred in the past three years with the majority of jobs moving to Mexico and East Asia. The Trade Resource Center relates that there are 'myths and realities of trade liberalization'. For example, a myth exists which states that "liberalization undermines environmental protection laws and harms the environment" however the truth is as follows:

1) Trade agreements do not dictate U.S. environmental law or undermine U.S. environmental laws. International trade agreements require the United States only to apply the same standards to imported products that it applies to domestic products. Trade agreements do not prevent other countries from applying the same environmental standards to U.S. goods that they apply to their own goods;

2) to achieve environmental sustainability, countries need good environmental laws and effective enforcement of those laws. Liberalized trade produces higher incomes and economic growth that make it possible for countries to improve their environmental laws and law enforcement;

3) the U.S.-Singapore and U.S.-Chile Free Trade Agreements require the governments of the United States, Chile and Singapore to (a) effectively enforce environmental laws, (b) ensure that they do not weaken their environmental laws to encourage trade or investment, and - ensure that violations of their respective environmental laws are subject to sanctions by legal procedure; and 4) Liberalized trade helps improve environmental protection by lowering the barriers to the sale of environmental technologies; enabling new investments in environmental infrastructure; and making it easier for environmental scientists, engineers and technicians to provide services to developing countries. (Trade Resource Center, nd)

The second stated myth by the Trade Resource Center to exist is the myth that posits that liberalization of trade "undermines protection for labor" however, according to the Trade Resource Center, the following statements are actually true:

1) Trade agreements do not require the United States to change its labor laws or undermine U.S. laws protecting labor rights;

2) Trade liberalization does not undermine worker rights. In fact, the opposite is true. In a study of 44 developing countries that engaged in significant trade liberalization, the Organization for Economic Co-operation and Development (OECD) found that "there was notably no case where the trade reforms were followed by a worsening of association rights" and that freedom-of-association rights improved in 32 of the countries after trade liberalization; and 3) the U.S.-Singapore and U.S.-Chile Free Trade Agreements require the governments of the United States, Chile and Singapore to (a) effectively enforce labor laws, (b) work to ensure that International Labor Organization (ILO) principles are protected by their domestic laws, - ensure that they do not weaken their labor laws to encourage trade or investment, and (d) ensure that legal proceedings are available to sanction violations of labor laws. (Trade Resource Center, nd)

The Trade Resource Center states that a third myth is one that holds that trade agreements "undermine U.S. sovereignty by giving international bureaucrats the power to strike down U.S. laws." (nd) the actual truth, according to the Trade Resource Center is as follows:

1) Only the U.S. Congress and the U.S. president can make U.S. law, no international institution or foreign country can change U.S. laws;

2) Decisions by the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA) dispute panels cannot override U.S. law. Those panels can only issue recommendations, and these recommendations have no force in the United States. Only the Congress and the president can decide whether to implement a panel recommendation. They can (a) revise U.S. law, (b) compensate a country harmed by a U.S. law through reductions in tariffs or other trade barriers, or - do nothing -- and accept the risk that the other country may retaliate by raising tariffs or other barriers to U.S. exports; and 3) the United States may withdraw from the WTO, NAFTA, free trade agreements and all other trade agreements at any time. (Trade Resource Center, nd)

The Trade Resource Center states that a myth exists that holds that "trade liberalization increases U.S. trade deficits." (nd) the truth, states the Trade Resource Center is that trade deficits existed for the United States prior to the existence of the WTO. The trade deficit for merchandise can be witnessed to grow as the economy grows and alternatively to shrink when the economy shrinks. The trade deficit is due to the prosperity of Americans and the strength of the economy in the United States evidenced by the ability of consumers to purchase goods that are competitively priced and the access of low-cost inputs available to producers.

Fifth and last is the myth which holds that trade liberalization."..cause good U.S. jobs to move overseas." (Trade Resource Center, nd) the facts include the fact that good jobs in the United States are created by trade with ten percent or approximately twelve million jobs in the United States depending upon exports. The Trade Resource Center states that one out of every five factory jobs are dependent upon international grade and that these jobs generally pay approximately 13 to 18% higher than the average wage in the United States. Also stated as truths that make this fifth and final myth null and void are the following:

U.S. plants that export increase employment 2 to 4% faster annually compared to plants that do not export. Exporting plants also are less likely to go out of business;

U.S. firms that are deeply integrated in worldwide markets are more likely to succeed in generating good jobs at home. Such jobs pay an average wage in the United States of $15,000 more than jobs in firms that are less globally integrated, or $50,000 versus $35,000; and Contrary to the predictions of a "giant sucking sound," NAFTA has created good jobs in the United States. In the first eight years of NAFTA, the number of U.S. jobs supported by merchandise exports to Mexico and Canada grew from 914,000 to 2.9 million. Between 1993 and 2000, U.S. employment grew by 20 million. Real hourly compensation in the U.S. manufacturing sector increased by 14.4% in the 10 years following NAFTA implementation, as compared to 6.5% in the 10 years prior to NAFTA. (Trade Resource Center, nd)

This however, is not the reality of the whole picture. The World Trade Organization presents statistics and states that studies which show the findings as follows are "culled to demonstrate that current trade liberalization rules and policies have led to increased poverty and inequality, and have eroded democratic principles, with a disproportionately large negative effect on the poorest countries." The findings spoken of include those as follows:

The numbers of people living on less than $2 per day has risen by almost 50% since 1980, to 2.8 billion -most half the world' population. And this is precisely the period that has been most heavily liberalized. (World Bank, Global Economic Outlook 2000

Recent evidence suggests that the numbers of people living on less than $1 per day is growing in most regions of the world (with the notable exception of China). (World Bank, Global Economic Outlook 2000)

The world' poorest countries share of world trade has declined by more than 40 per cent since 1980 to a mere 0.4 per cent. (UNCTAD), Conference on Least Developed Countries 1999)

The poorest 49 countries make up 10% of the world' population, but account for only 0.4% of world trade. This disparity has been growing. (UNCTAD, Conference on Least Developed Countries 2001)

51 of the 100 largest economies in the world are corporations. The Top 500 multinational corporations account for nearly 70% of the worldwide trade; this percentage has steadily increased over the past twenty years. (CorpWatch)

The U.N. estimates that poor countries lose about U.S.$2 billion per day because of unjust trade rules, many instituted by our organization 14 times the amount they receive in aid. (UNCTAD, Conference on Least Developed Countries 2001)

In 59 countries, average income is lower today than 20 years ago. (United Nations Human Development Report, 1999)

Poor are getting poorer in both relative and absolute terms, as one UNICEF study has commented: 'A new face of 'apartheid' is spreading across the globe. As millions of people live in wretched conditions side-by-side with those who enjoy unprecedented prosperity. (UNICEF figures based on World Bank "World Development Indicators 1997")

In almost all countries that have undertaken rapid trade liberalization, wage inequality has increased 20-30% fall in wages in some Latin American countries. (UNCTAD 1997)

This is by no means an exhaustive list of the negative impacts due to liberalized international trade. For instance the World Trade Organization reports having "allowed First World countries to raise trade barriers protecting their companies, even as we have served as their forum for insisting that Third World countries lower their trade barriers more and more." (WTO,

The truth is that if richer nations were to open their markets to the LDC countries for increase opportunities of export, generated would be approximately $700 billion in additional trade for developing countries. (UNCTAD Trade and Development Report, 1999; in WTO,

The World Trade Organization relates that no known causal link exists between foreign investment and the reduction of poverty as approximately eighty percent of foreign direct investment in "in the form of mergers and acquisitions, little in the form of productive investment that creates jobs and exports."

WORLD ECONOMY in the LAST TWO DECADES

The work entitled: "The North American Integration Regime and Its Implications for the World Trading System" states that the General Agreement on Tariffs and Trade of 1947 "was part of the Bretton Woods complex of international economic institutions to reconstitute the international economy following the Second World War." (Abbott, 1999) Embodied in the GATT were "server awl foundational principles of international trade relations. The most important of these was the unconditional and most favored national (MFN) principle embodied in Article I."Under the MFN rule, all member of GATT were obligated to extend "any tariff (or related) concession granted to one GATT member to all GATT members." (Abbott, 1999) the purpose of the MFN was that of acceleration of the process of trade barrier elimination because " it requires a wide dispersion of concessions among GATT members." (Abbott, 1999) the problem it seems was the lack of a "core political motive for adoption of an unconditional MFN rule." (Abbott, 1999)

This work goes on to relate that the legal relationship existing between the NAFTA and the WTO Agreement is one which is determined through an examination of the text of each of these treaties as well as the context of the treaties and the rules of international law governing the relationship between treaties in relation to the same and similar subject matter. It is important to note that the WTO and the NAFTA are agreements entered into between states and governed by international law therefore falling within the definition set out by the Vienna Convention on the Law of Treaties (VCLT). Abbott relates that risk are inherent in regional integration to the WTO system and the EU "has become such an important political and economic force that this exercise in regionalism may have diminished the importance of maintaining an open multilateral trading system from a European standpoint." (Abbott, 1999) Abbott holds that while economic security has resulted from NAFTA in the North American region, simultaneously this has also potentially undermined the WTO roles and multilateralism. (paraphrased, 1999)

III. TECHNOLOGY: GLOBALIZATION of MARKETS and PRODUCTION

The work of Dani Rodrik (1988) entitled: "Closing the Technology Gap: Does Trade Liberalization Really Help? States that the "relationship between trade policy and technical efficiency is an old theme in economics..." (1988) the evidence that is available, according to Rodrik appears to suggest that "increases in productivity have played an important role in the economic growth of the developing countries." However, the "contribution of productivity change relative to the growth of factor inputs has been typically not as high as in developed countries. On average, the increase in total factor productivity (TFP) accounts for about half of the growth in value added in developed economies: the comparable figure for developing countries is around a third." (Rodrik, 2003)

The work of Sporleder and Martin entitled: "Economic Perspectives on Competitiveness Under WTO, NAFTA, and FTAA" states that policy relating to agriculture has been particularly "dynamic in most developed countries for the past several years. Key economic factors influencing trade in the past ten years are stated to be "...technological progress, globalization of the food trade and rather rapid evolution of strategic partnering and vertical integration within certain commodity subsectors." (Sporleder and Martin, nd) Unification of the world is stated to be based upon the "leading factor..." Of "technological progress" and most particularly information technology, which is "responsible for everything from instantaneous news from all parts of the world to detailed information on grocery store product movement in a timely fashion through the use of universal product codes and front-end product scanning." (Sporleder, and Martin, nd) There are clearly incentives economically speaking for transnational vertical integration by business "which possess proprietary rights to commercial biotechnological products or processes." (Sporleder and Martin, nd)

Sporleder and Martin further relate that the North American Free Trade Agreement (NAFTA) served to bolster the Western Hemisphere free trade through a reduction and elimination of barriers to trade. The Free Trade of the Americas (FTAA) negotiations started in 2005 and soon thereafter NAFTA was passed and the Uruguay Round under the General Agreement on Tariffs and Trade (GATT) was ratified by 125 member nations. The GATT is a "world agreement that reduces trade barriers..." while the NAFTA is a "free trade agreement that seeks to remove barriers to trade among the United States, Mexico and Canada over a 15-year time frame." (Sporleder and Martin, nd) Sporleder and Martin state that thirty-two countries in the Western Hemisphere have been established and include the following:

Latin American Integration Association (ALADI) Central American Common Market;

Bolivia, Columbia, Ecuador, Peru, Venezuela); Caribbean Community and Common Market (CARICOM);

Group of Three (Colombia, Mexico, Venezuela); and Southern Cone Common Market (MERCOSUR -Argentina, Brazil, Paraguay, and Uruguay). (Sporleder and Martin, nd)

Sporleder and Martin relate that Chile was in the midst of negotiation in the middle of 1995 for an inclusion into NAFTA however, "incorporating established trading blocs into NAFTA is considered simpler than adding some 35 independent countries individually." (Sporleder and Martin, nd)

The influence of NAFTA on trade has been the source of much debate as those opposed to NAFTA state the argument "that an expansion of freer trade to developing countries, such as Mexico" will result in the United States losing jobs. However, it is posited by others that "NAFTA is a boon and actually increases U.S. employment through increased trade and investment opportunities." (Sporleder and Martin, nd) Stated to be an issue that has empirical importance is "the changes in the trade patterns caused by lessening trade barriers, which is the primary mechanism through which number of jobs and living standards are influenced." (Sporleder and Martin, nd)

The World Trade Organization states that a key factor "in the industrial take-off of FW and industrializing countries was easy access to new technology" such as the United States copying British and Japan copying the United States and in turn, Korea copying Japan. According to the World Trade Organization, that which is "technological diffusion to the country developing is piracy to the country leading." (2008)

IV. U.S. MANUFACTURING COMPANIES MOVING FACILITIES to CHINA, MEXICO, and OTHER DEVELOPING COUNTRIES

The work entitled: "Of Course WTO Talks Are Stalled" relates that conclusive data exists to show that "a decade of WTO implementation has left the majority in worse conditions n poor and rich countries alike." (Public Citizen, nd) Additionally stated is that the $700 billion trade deficit in the United States "threatens global economic stability as imports boom amidst three million U.S. manufacturing job loss and stagnant real wages in WTO decade." (Public Citizen, nd) it is related that during the WTO era the trade deficit for the United States "has risen to historic levels and approaches six percent of national income - a figure widely agreed to be unsustainable, putting the U.S. And global economy at risk. Soaring U.S. imports during the WTO decade have contributed to the loss of nearly one in six U.S. manufacturing jobs." (Public Citizen, nd) Finally the median wages in the U.S. have risen only "scarcely above their 1970 level, while productivity has soared 82% over the same period, resulting in declining or stagnant standards of living for the nearly 70% of the U.S. population that does not have a college degree." (Public Citizen, nd)

The work entitled: "Policy Matters Ohio: International Trade and Job Loss in Ohio" (2004) states Total nonagricultural employment in Ohio declined by 244,000 jobs between November 1999 and November 2003. The vast majority of this decline was due to the loss of 191,000 jobs in Ohio's high-paying manufacturing sector. There are many causes for job losses in manufacturing, including relocation of production facilities to other states or foreign countries, rising imports of foreign goods, fluctuations in the business cycle, and changes in productivity levels." (Honeck, 2004) Honeck states findings include the following:

1) TAA and NAFTA-TAA program data identified 45,734 jobs that were lost in Ohio between 1995 and October, 2003, directly due to international trade. Three-fourths (76.1%) of the job losses occurred in the 1999 to 2003 time period. The year with the highest total was 2002, during which 13,093 jobs were lost;

2) Job losses identified under these programs accounted for more than one in six of the manufacturing jobs lost in Ohio over the 1999 to 2003 time period;

3) of the total 45,734 lost jobs identified under the two programs, 14,653 were directly due to NAFTA-related reasons. Nearly two-thirds of the NAFTA-related job losses were caused by U.S. companies relocating production facilities to Mexico;

4) According to TAA and NAFTA-TAA data, Cuyahoga County lost over 5,000 jobs due to international trade, the highest number of job losses of any county. Twelve other counties had over 1,000 jobs lost due to international trade. In all, the two programs certified workers in 75 Ohio counties as having lost their jobs for trade-related reasons; and 5) the industrial sectors with the greatest numbers of trade-related job losses were in electronics and electronic equipment, primary metals, and industrial machinery and equipment (SIC-based). These three sectors together accounted for 24,981 job losses, more than half of the total identified by the trade adjustment programs from 1995 to 2003. (Honeck, 2004)

Honeck relates that the Institute for International Economics in Washington, D.C. examined the reemployment experiences of workers who were laid-off manufacturing jobs in the United States in the 1980s and 1990s and states findings that "the demographic characteristics of manufacturing workers who had lost their jobs differed significantly from workers who had lost their jobs in other economic sectors." (2004) Specifically stated is hat the manufacturing workers were found to be "slightly older, notably less educated, with longer job tenures, somewhat more likely to be a minority, and far more likely to be production oriented." (Honeck, 2004) the following two table show the 'change in total nonagricultural employment in Ohio from November 1999 to November 2003 (NCAICS basis, in thousands)

Change in Total Non-Agricultural Employment in Ohio

November 1999 to November 2003 (NCAICS basis, in thousands)

Source: Honeck (2004)

Change in Total Non-agricultural employment in Ohio November 1999 to November 2003 (NAICS basis)

Source: Honeck (2004)

The following table shows the 'change in manufacturing employment in major Ohio metropolitan areas November 1999 to November 2003 (NAICS basis in thousands)

Change in Manufacturing Employment in major Ohio Metropolitan Areas

November 1999 to November 2003 (NAICS basis in thousands)

Source: Honeck (2004)

The above table shows that there were substantial losses of manufacturing jobs in all major metropolitan areas in Ohio. Honeck relates that the drop in income resulting from manufacturing job losses that are so "severe and sudden" in nature not only impacts the workers who are laid-off as well as their families but impacts the entire community as well.

V. SOLUTIONS to MENDING MANUFACTURING in the U.S.

Ohio is not the only state that has lost a substantial number of jobs because of foreign trade and associated NAFTA and other trade agreements involved in trade liberalization. In fact, there were 1,614 establishments involving 232,898 workers and during the same period of time "the U.S. manufacturing sector shed 697,000 jobs on a SIC basis." (Honeck, 2004) Honeck relates that part of the problem was due to the "additional tariff duties because foreign producers were subsidized or simply sold products below cost" which is a practice known as dumping.

According to the Economic Policy Institute (EPI) the estimated trade-related job loss is arrived at through use of a methodology that makes identification of net employment gains or losses in 192 SIC-based sectors of the national economy." Addressed is the 'double-counting' difficulty occurring in trade statistics when the components from the U.S. are exported to a plant for foreign assembly and then shipped back to the United States as part of a product that has been completed. Honeck states: "Thus, the positive employment effects of an increase in exports may be overwhelmed by imports increasing at a faster rate. The model does not produce a cumulative total of year-to-year job losses or gains. Instead, it measures jobs and job opportunities - in other words, what employment in the manufacturing sector and closely related sectors would have been in a given year if the trade deficit had remained constant. Because the model estimates job opportunities using a hypothetical scenario in which the trade deficit remains constant, it is not equivalent to the trade adjustment assistance data, which measures only actual job losses due to imports or production relocations. The model estimates the effects of trade balances on a national level. Employment gains or losses are allocated to each state based the state's share of employment in a specific industry." (2004)

EPI estimates state that "...increase in the trade deficit cost a total of 3 million jobs and job opportunities in the U.S. Because the U.S. economy was close to full employment in 2000, these job losses represent a massive transfer of employment out of the manufacturing sector." (2004) Ohio lost 135,000 jobs with more than 100,000 of these being in the manufacturing sector while in excess of 100,000 hobs were lost in California, Texas, New York, Michigan, Pennsylvania, Illinois, North Carolina, Indiana and Florida. Hardest hit was the transportation sector." (Honeck, 2004) it is stated that there is a heated debate currently taking place concerning the "meaning of the decline in manufacturing employment." (Honeck, 2004) Some individuals blame the trade deficit, which "shows not signs of abating." (Honeck, 2004) the following tables lists the U.S. Trade Balance in selected manufacturing sectors between 1997 and 2002.

U.S. Trade Balance in Selected Mfg. Sectors 1997 to 2002 (in billion $, not adjusted for inflation)

Source: Honeck (2004)

Honeck states that studies have reported findings: "...that higher levels of import penetration are associated with increased likelihood of worker displacements." (Honeck, 2004) the study of Addison et al. states findings of a "statically significant positive association between trade sensitivity and the likelihood of job loss" and state: 'Displacements appear to be more frequent in industries with high imports and average trade penetration rates. Interestingly, displacements are fairly uncommon in industries with rapid export growth." (Addison, et al., nd; as cited in: Honeck, 2004)

The level of import penetration as well as the country of origin are held to be important and stated is that in trade between the U.S. And developed countries intra-industry specialization is involved with companies competing on various product characteristics other than price which results in comparative advantage being created by research and development activities as well as product design, worker skills and production techniques. (Honeck, 2004; paraphrased) There is an entirely different set of dynamics when trade is occurring with countries that are less developed and as noted by Andrew Bernard and other economists of the National Bureau of Economic Research who have examined import impacts of 'low-wage' countries on employment at the plant-level and in relation to the product mix and output, "plants that operate in sectors with higher share of imports from low-wage countries are less likely to survive and exhibit lower rates of output and employment growth than establishments in sectors that faced less competition from low-wage countries." (Honeck, 2004)

Additionally for those plants that face "low-wage country imports" the likelihood increases that they will change "their product mix to industries that are more capital -intensive and skill-intensive." (Honeck, 2004) in fact Bernard et al. state finding that suggest that "important competition from low-wage countries reduces U.S. employment in three ways: (1) plant shutdowns; (2) slower growth in surviving plants that remain in the industry; and (3) a reduction in the labor-intensity of plants that switch to a new product." (Honeck, 2004)

The conclusion of Honeck (2004) state that reconsideration to past trade agreement should be given and structure agreement analyzed insofar as the protection provided to the well-being of workers in both the United States and those countries to whom the U.S. is losing jobs because of the attraction of much cheaper labor. Trade policies are resulting in loss of jobs therefore steps needed toward minimization of the negative impacts to both workers and communities should be inclusive of:

Investment in job training and placement services for displaced workers. The Workforce Alliance argues that the federal government's investments in workforce development programs - particularly those targeting low-income adults and youth - have seen significant cuts in recent years. Their recent report found a near 30% reduction in annual funding (inflation-adjusted) for U.S. Department of International Trade and Job Loss in Ohio;

Labor job training programs since the mid-1980s. Changes to welfare policy have often resulted in being more focused on short-term "work first" activities than on preparing people for high-wage or stable jobs;

Ensure that an intact safety net is preserved for the many workers who have lost their jobs and may not find adequate replacement employment. Fiscal constraints at the federal, state and local levels threaten many parts of Ohio's safety net;

Recognition that communities dominated by manufacturing employment will lose a substantial share of their income from trade agreements. Take steps at the state and federal level to assist these communities in maintaining strong local economies and school systems. Currently Ohio's system for funding K-12 education has been ruled unconstitutional for relying too heavily on local property tax funding;

Expansion of access to higher education for young people, who will increasingly be unable to find decent-wage employment without higher education. Ohio is ranked 41st among the states in its support for higher education and the portion of our state budget devoted to higher education has dropped from 17% in the late 1970s and early 1980s to 12.6% in FY 2002.52 Perhaps as a result, in the year 2000, only nine states ranked worse than Ohio in percentage of residents who had earned a BA. Better support of education, training, human services and displaced worker services may ease the transition to other economic sectors, but they will not resolve the fundamental issue of whether our trade policies should encourage such transitions in the first place. The manufacturing sector sustained Ohio's economy for generations, and enabled millions of our citizens to enter the middle class. As yet, we have no replacement model of economic development that will create hundreds of thousands of high-paying jobs for non-college educated workers. It is vital that we reexamine our trade policies and acknowledge their true costs to Ohio and the nation. And it is imperative that we take steps to relieve those who have suffered most from these policies." (Honeck, 2004)