This week's visit from Chinese President Hu Jintao will inflame two kinds of economic pessimism. The first holds that China is forcing a race to the bottom: Its legions of poor workers are driving down U.S. wages. The second claims that China is racing to the top: It's spending ever more on science and engineering. Both sorts of pessimism are only half right. Both miss the real source of U.S. economic dynamism.
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Likewise, it's true that China is striving to catch up in science, hiring Western professors and pressing its researchers to publish in international journals. But there is no straight-line connection between scientific progress and economic advance. What matters is how companies deploy technology. Americans are good at that.
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For one reason or another, American business excels at this. Our much-maligned education system seems to encourage people to think across categories and take risks. Our freewheeling and undeferential culture is good for interdisciplinary cooperation. And then there is the role played by U.S. business schools, which increasingly focus on the skills that make this teamwork possible.
I agree with Mallaby that China's ability to have scientific breakthroughs is not only a good thing for China, but a good thing for the US. Our comparative advantage lies in being able to implement systems to benefit from scientific advancement. Part of that knowledge comes from the free market and part comes from our entrepreneurial spirit, which in large part comes from immigrants.
Unfortunately, not everyone feels that immigrants are good for our economy, especially "illegal" immigrants. But, the illegal part is the problem. If we just made it easy and imposed no restrictions on immigration, many of the underlying social issues (health care for illegals, underground economy, no labor protections for illegals) would go away. This is an issue that cuts support for both parties, some liberals are against immigration because it allegedly lowers wages (read the commenters) for unskilled American workers and some conservatives have a problem with the illegality of illegal immigration as well as some racist tendencies. I agree with Drum's assertion and most economists that immigration benefits our economy, but not by much. The real gains are seen in future generations. In the early 1900's, the incoming Irish were seen as bad for America, but now the Irish have assimilated and greatly benefitted this country (see Ronald Reagan or if you like, the Kennedy clan). The same will be true of the Mexicans and Africans that are coming in this wave of immigration.
When we hear this continuous drumbeat of trade with China doesn't benefit us and we must stop immigrants from entering this country, it's just the natural tendency of people to be protecionist. Let's keep it straight, mercantilism is a disaster for the countries that practice it, tariffs (such as the old Hawley-Smoot tariff) drive economies into depression (as we would know if we watched Ferris Bueller). Restricting immigration is nothing different from a tariff and paying a higher price for "buying American" is nothing but a subsidy for American workers and only hurts our economy in the long run.
Let's not just take my word for it that protectionism is bad, take Jim Owens, CEO of Caterpillar, writing in today's WSJ;
Caterpillar is one of America's major manufacturers; last year alone we exported more than $9 billion in products. But we've also become a major British manufacturer, a major Brazilian manufacturer and a major Chinese manufacturer -- just to name three of the 40 countries where we have a presence. By expanding globally, we have maintained our ability to grow. We refused to concede markets to competitors and thus kept them from gaining undue strength to block our entry. When it made sense to invest for local access, we did so.
In fact, wherever Caterpillar invests, we find that our U.S. exports to these countries increase as well. Take China. Over the last few years, we have more than doubled our Chinese workforce and significantly expanded our sales there. At the same time, we have increased our U.S. exports to China by 40% -- helping to create some 5,000 new production jobs here in the U.S.
Our global footprint also gives us a natural hedge position. History shows that the world's major currencies -- dollar, euro, yen -- can move anywhere from 15% to 40% against one another in a two-year period. In our business, a good margin is five to 10 cents on the dollar. Having a fully integrated manufacturing presence in each currency zone helps protect us from these movements.
None of this is to say that operating a global business -- particularly with a U.S. manufacturing base -- is easy. There are, however, four important strategies that American manufacturers must take to compete with the world's best.
First, manufacturers must focus on designing and producing the highest-quality products incorporating the most up-to-date technology. We have to stay aggressive with our product development programs -- and ensure the goods we manufacture are desired the world over.
Second, we must continue to embrace lean manufacturing principles, increase the use of robotics and automation, and focus on just-in-time delivery. These tools will enable us to keep costs low and productivity high.
Third, manufacturers must invest in people -- providing the education and workforce training they need to help us succeed. Our international competitors will work to produce better products and adopt world-class processes -- but they cannot replicate our market size and proximity. The ideas and competitive spirit that our people bring to the workplace must be nurtured.
Fourth, manufacturing companies must believe they can compete on the world stage. We must look at globalization and international competition as an opportunity to make ourselves stronger and more efficient -- and not, as some are proposing, as a reason to turn inward.
Personally, I can think of no faster path to a worldwide recession than for the multiple engines of the global economy to turn against one another. In recent years, commodity prices have risen, and over the last two years global economic growth is as strong as most people can ever remember. Millions have been lifted out of poverty. These gains have come with the rapid rise of China and India and the recovery in Southeast Asia.
But the gains of the Asian economy have not prevented the rapid economic growth and job creation in the U.S. Inflation and interest rates are low -- business confidence is high -- and unemployment is very low. Put another way, our economy is hitting on all cylinders. And all this could easily be endangered if our policymakers implement wrongheaded protectionism -- or if American companies refuse to engage constructively with the world. The stakes have never been higher -- and the benefits of globalization have never been clearer. Trade liberalization, in the end, is a "win-win-win" proposition. It's good for U.S. manufacturers, it's good for the U.S., and it's good for the world.
The equation, needless to say, also runs in reverse. What's good for the world is good for the U.S. and for U.S. manufacturers. Look at it this way: The U.S. has only 5% of the world's population. That means 95% of potential customers are located abroad. Trade liberalization brings more and more of these people into the global economy. As their quality of life improves, they become potential consumers of the products we provide.
American manufacturing can win on the world stage. If we embrace globalization with the spirit of optimism and fierce competitiveness that has made American manufacturing great, we will ensure we stay on top of the world economy for years to come.
Caterpillar is, of course, a model of how to survive in a global world. A lesson can be learned from their innovations and from the failure of Detroit's automakers to adapt to the global market.
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