General Motors and Ford have both recently announced plans to restructure their parts supply arrangements, the result of which will be the loss of thousands of middle-class manufacturing jobs. These plans involve slimming down the number of suppliers, as well as forcing domestic suppliers to match the lowest global price (the “China priceâ€) if they wish to retain business.
Every day factories close across the United States, but only occasionally do we get a clear look into the brutal logic of corporate globalization. Geologists learn the most from extreme events such as earthquakes. Likewise, events such as the Ford and GM announcements give us a window into the economics of global out-sourcing. And what we see is that U.S. manufacturing is now converging rapidly on the Wal-Mart model, a model that drives the “race to the bottom.â€
Understanding the Wal-Mart model requires understanding the “big box†discount store revolution in American retailing. These discounters are epitomized by Wal-Mart, which is the most efficient at squeezing workers globally (as well as the most efficient at squeezing American workers). Their business model rests on scouring the globe for the lowest price, putting firms and workers in global competition with each other.
This process started forty years ago, when the newly established discount retailers (Wal-Mart was founded in 1962) started putting California suppliers in competition with New York suppliers. Since all operated in the United States under U.S rules and labor laws, the process was not unfair. However, even then there were flaws because U.S. law permitted different labor laws across the states, thereby creating incentives and pressures for manufacturing to move south to non-union, so-called “right-to-work†states.
Since then Wal-Mart has gone global with its buying strategy, and it now puts Chinese suppliers in competition with suppliers from Mexico, Indonesia, Sri Lanka, as well as the United States. This global buying strategy would have posed little threat thirty years ago. But that was an era of classical free trade, and the rules of classical free trade no longer apply. Globalization has changed everything by making technology and methods of production mobile, and by lowering business coordination costs. These techniques were developed in America, and American multi-national companies took them global. The Wal-Mart global buying strategy plugs into this new economic order and moves it into hyper-drive. In effect, the big box discount retailers have changed the nature of global competition, and have become an even more important mechanism of global labor arbitrage than foot-loose production by multi-national corporations.
The Wal-Mart global buying strategy is now being adopted by the automobile industry and manufacturing. Having pioneered multi-national production, the producers are starting to supply themselves using the Wal-Mart business model. It is in this sense that manufacturing has met Wal-Mart. The Big 3 auto producers – GM, Ford and Chrysler – used to be vertically integrated companies that significantly supplied their own parts. The first stage of the game involved Ford and GM spinning-off Visteon and Delphi, who were then put in competition with other U.S. auto parts suppliers. Now, the game is going global, and U.S. suppliers (including Visteon and Delphi) are being made to match the “China price.†This is the logic embodied in the Ford and GM announcements.
Moreover, the process is also happening in the aerospace industry, though there it has been slower to get going owing to greater national security and quality control constraints. However, Boeing’s new 787 will be built using the Wal-Mart model, and the implication is that Boeing supplier workers have a rendezvous with Wal-Mart in their future.
If “Manufacturing meets Wal-Mart†is Act I, there may yet be a second act that can be labeled “Manufacturing meets The Gap†The Wal-Mart strategy has auto manufacturers outsourcing parts supply but retaining most of their assembly operations in the United States. However, it is easy to imagine a future in which assembly is also shipped offshore, and GM and Ford just slap a badge on cars and then sell them through their domestic distribution networks. This is The Gap model of globalization. The Gap does not own factories, but instead sub-contracts production, brands the product, and then charges for the brand in its stores. This has already happened for appliances and tools: think of Black & Decker. The auto producers can also clearly go this way. However, for reasons of quality control, in the immediate future they will either own the factories (as in Mexico) or enter into joint-ventures (as in China). Making cars remains more difficult than branding T-shirts and compels greater involvement for the time being.
The Wal-Mart – Gap business model reveals the inexorable and cruel competitive logic of globalization. No company can avoid it since any company that does not go that route will be competed into extinction by others that do. This reveals that the problem of globalization cannot be addressed at the individual company level. The problem is systemic, and must therefore be addressed systemically (I’ll be writing about “how to†in future blogs).
However, while it is true that the market’s economic logic compels individual companies to pursue this path, it is not the case that companies are innocent. American manufacturing, as represented by the National Association of Manufacturers, has collectively worked hard to create the current system. Manufacturers supported NAFTA, PNTR with China, and most recently CAFTA, and they opposed the inclusion of labor standards in all of these agreements. The commercial logic of the system they helped create is now coming home to roost, and they bear some responsibility for the system’s creation.
Tom, your blogs are so clear and persuasive. Have you ever considered trying to get a link with Move-on?
Tom, I don’t agree with a possible reading of your statement that the ‘rules’ of classical free trade no longer apply. If you mean that the 19th century gold standard and finance ministry ‘rules of the game’ no longer exist, then that’s true of course.
But many may interpret you to mean that dramatically lower telecommunications and transport costs have rendered classical free trade models irrelavant. On the contrary, those simple models assumed away transactions costs, so the reduction of such costs brings them much closer to reality.
Basic forces like Comparative Advantage and its basis in the relative endowments of productive factors (which can change) are more in the saddle than ever. This includes the important implication that more trade will increase income inequality in countries with a comparative advantage in highly skilled labor, like the US.
I think he is saying that the factor price equalization model, HOS and all that geometry of trade, don’t apply when capital and iinformation can flow freely but workers cannot or when you have an acquired and legally enforced comparative advantage. And of course the workers in those countries cannot buy the goods both because they do not have the money and they are often not allowed to.
Jim, thanks for your comment (and thanks also for your very interesting response to my piece on “Keynesianism”). Paul Heise’s response is exactly right. Classical free trade assumes immobile capital, Mind you, I also think there are huge problems with other assumptions of classical trade theory, but that’s an additional critique to be saved for another occassion.
I think one point that is missing from this post, and comments, is that the fact that free trade is pareto-improving is not an artifact of the special assupmtions of Ricardian or H-O trade models, but is buried deeply in most economic models in the First Welfare Theorem.
I find that putting the blame solely on the companies is wrong, as it is the
typical consumer who is also at fault.
A typical consumer will usually buy a product at the lowest price possible and best quality(not always).
Companies are compelled to meet these demands, and thus whether through globalization or finding
ways to cut cost domestically. It is ultimately driven by the consumer’s wants and needs.
In some ways, this is the same for outsourcing. As a typical stock-holder, I want to see profits $$$, and quarterly growth.
In all honesty, how many of you, when you see your stock value triple, do you really care to say hmm…
“well one of the reasons is that they’ve outsourced the IT/engineering jobs over to india, and shut a few plants down in the US. I think I
will send a letter to my company and complain because we’ve reduced costs and therefore increase my share value.”
I find it highly unlikely anybody would except mabye for a few.
As it is, for too long, we’ve enjoyed a higher standard quality of life off the backs of the poor.
I find it ironic that we’ve had no problem for the longest time, buying cheap cheap products
from china and other countries who pay their workers 50 cents an hour etc over american manufactured goods.
Now that they are also taking the jobs that help us afford that lifestyle do we complain and cry that life is unfair.
This is a very general comment and in the end,
ultimately, it’s us, the consumer who drive the actions of these companies.
We want cheap prices and decent quality products, and companies will do whatever it takes. Your article
essentially describes the steps they are are willing to do to acheive this.
This is capitalism at it’s best.
P.S. I really enjoy reading your articles as it really makes you think. I am currently a junior in college and find it
adds valuable insight to my econ classes!
I think John is right when he says that consumers drive the decisions of MNCs. The idea is that you can’t have your cake and eat it too, which means cheap goods in the grocery store that were made in China and extremely well paid jobs with decent job security are no longer compatible in a global economy. It is very sad indeed that we can’t stabilize wages in a capitalist economy in order to fuel effective demand and boost employment as well as purchasing power. I think the ‘opening all the doors’ game has started and that only coordinated policies at the international level will help us come up with and implement solutions that are realistic at a political level…
PS: I am familiar with Tom’s works in Economics and I think that he is really doing a good job…
A quick riposte to John and Marc
One of the greatest myths of the modern age is that we live in a consumer driven economy. And from that guys, we do not drive the decisions of TNCs. I had to live in the US to understand just how this economy, more than any other is driven by producer interests, especially big business. And to that I would add the political system as well.
I want to emphasize that this piece is not intended as a critique of the U.S. auto industry. It is intended to spotlight globalization’s impact on the nature of “competition.” That is what we all need to understand if we are going to be able to come up with solutions that make globalization work for all.
Sincerely,
Tom Palley
Coomenting on your article re: Globalization snares auto industry: I enjoyed your
commentary and agreed with the facts. However, as a 76 year old woman, not any
economist experience I just wonder how the scenario you show can possibly succeed
in the end when we are a consumerism driven economy, the last timeI looked. Where
are the buyers of the autos and even the cheap Walmart junk going to find the money
to buy the articles on sale to us when jobs are lost by the thousands, wages cut to
the bone, copays on health insusrance go up, gas and energy costs keep rising, etc.?
The Asians with their pitiful wages will not be able to buy cars on the volume the
manufacturers have needed from USA buyers, nor will the houses and other big ticket
items be sold enough to keep our workers busy even at peon wages. So what happens
then. Even the credit cards won’t help us to stay in the business of buy, buy, buy
when the bankrupcy laaws soon change and we findout we will have topay for what goods we buy. Can you explain how this will all eventually play out? Are there going
to be any real winners amongst the thousands of loseers, aside fromthe politicians
and the real big shots who are able to clamber above the fray?
I don’t like the products that are made in china. I just hope that I can buy products from other places, because china’s products suck. cheap maybe the only factor when selling, but it is not when buying something. no matter how cheap it is I get tired of going to the dump to throw something away, only to pick up a new one, just like the one that I threw away, because I have no other product but cheap ones from china
dr. palley, i think you are right on target. i have beenteaching your views in my race. class /gender clases at nku. let me aqsk do you feel that we could porosecute a major world war with our current industrial status,how do we help small businesses which are being swolled by multinationals, how do we bring about international cooperation in organizing unions in 3rd world and other developing nation states.
Chad Ward,
If you are working at NKU you better stop spending your time online reading blogs. LOL
I too am at NKU- but I read blogs during my lunch time.
A good topic for pensive thought and overt discussion. First, the science of economics is not a science; at least the 19th Century paradigm of political economy is now in vogue and returns the variable of human relations. Second, what the heck is capitalism, or what kind of capitalism do we have today? Theories of efficiency, scarce resources, supply/demand, productivity, free trade/free market, blah, blah, are not working practically. What kind of capitalism do we have when the model actually induces the hording of capital?
And, I agree almost with all the sentiments above, from the shift in production to consumption; less buying power; less choice; decline in quality of goods and services; whether technology drives down cost or the labor (apply common sense here); but, most importantly, the underlying thoughts throughout this blog/comment question whether globalization is sustainable in its present form. The inference points to “no”, and there’s a hidden assumption that the natives will get restless and delegitimize the whole thing.
This situation sucks. But what good is complaining if you don’t propose solutions? Here are some possibilities. What do you think?:
**We need China to revalue the Yuan, but all we’ve been doing is asking pretty please. We are fighting a war in Iraq at the same time as we are cutting taxes. To finance this, we have been borrowing money. China has lent lots of the money, which artificially lowers the value of the Yuan, and makes Chinese products cheaper than they should be for Americans. Simply paying back our debt to China would make Chinese goods more expensive for us, so manufacturers here would be more competitive. And we can set standards for our manufacturers.
Unfortunately, the ideologues at the Bush administration love their war in Iraq and their tax cuts to much that they are unlikely to ever pay down the national deficit.
**OPPOSE ANY NEW FREE TRADE DEALS. CAFTA won Senate approval recently with almost no opposition or even public debate, yet it will exascerbate the outsourcing. We need to be more vigilant when the business community suggests these things.
**Stop shopping Wal-Mart, start dumpster diving.
Dr. Palley,
I was recently flipping through Thomas Friedman’s, “The World is Flat,” in which he praises Walmart’s supply-chaining invention. Although a fascinating mechanism to increase efficiency in the market, such added-value is in fact at the cost of workers from all over the world. Short-term and long-term scale and subsitution effects let us know how one’s marginal productivity of labor is effected by such increases in technological efficiency and decreases in manufacturing and transaction costs. Ultimately, employers want to higher the cheapest labor for the highest productivity and efficiency. Outsourcing workers in India and China are clear exaples of this. The other end of the spectrum, however, tells us that globalization also has diminishing effects even to the U.S., when white-collar workers in China are subsituted for those in the US. In the end, shareholders gain at the cost of U.S. domestic unemployment. I like what Alec said, and would like to hear some suggestions of yours on how to remedy this.
Thanks,
Diego.
Dr. Palley
I’m all for free trade and competition but I wonder what the late Sam Walton would think on Walmart going global. Buy American was Sam’s model during his beginning years of running the company and I originally thought he’d reject his company going global. But when I think about it, I believe VALUE to the customer in terms of price and service was always Sam’s main concern. Frankly, I’m glad to see manufacturers understand the concept and what it means to global competition.