Can the United States Compete in a Global Economy?
By Kenneth A. Buchdahl
Author, Dismantling the American Dream
Emerging new evidence and economic trends now suggest that the United States is losing the global trade war and our businesses, government and families are in full retreat.
The 293 million U.S. citizens produce $11 trillion of the world’s $52 trillion of Gross Domestic Product (GDP), which represents the amount of goods and services produced. This means that the United States, with less than 5% of the world’s 6.3 billion population, controls over 20% of the world’s economy. Is America strong? You bet!
Unfortunately, most other countries throughout the world did not prosper as well as the United States. As a consequence, a very large gap was created between what are commonly referred to as developed and underdeveloped countries. Today, 18 countries with less than 13% of the world’s population have a average GDP per person of $30,000, whereas the other 200 or so countries, with 87% of the world’s population, have a meager $4,400 average GDP per person. This is a disappointing fact that needs to be fixed, but a reality of today.
U.S. and other world leaders soon became convinced that a global trade strategy could benefit all countries. They rationalized that businesses within developed countries would win as the doors swung open to new foreign markets. Underdeveloped countries on the other hand, would win as all of this new commerce entered their country. After careful review and analysis, government’s quietly fired the starting pistol to begin a global trade war that is being fought in hand-to-hand combat among millions of businesses scattered throughout the world.
Global trade for the United States began to accelerate quickly in the 1990’s as we entered unilateral trade agreements, NAFTA (1994) and eventually the World Trade Organization (1995). Basically, the doors to the U.S. marketplace were being thrown wide open to anyone who wanted to compete for a piece of the lucrative American economic pie.
American businesses with a mere 147 million workers, whether they wanted to or not, were now expected to compete like gladiators in a complicated world arena filled with a staggering 2,830 million workers, most of which lived in poverty. So what happens when the worlds’ most prosperous economy collides head-on with a much larger world of impoverished nations?
It has now become apparent that our government’s global trade strategy, albeit originally instituted with the best of intentions, has gone dreadfully wrong. This strategy may even be recorded in future history books as one of the greatest blunders of modern times. To illustrate what has happened, we can simply step back and observe the sequence of events that have unfolded since the trade doors were opened.
Foreign companies that once happily provided products for their own countrymen saw the United States as the land of opportunity. These companies started loading boats to overflowing with virtually the same products as produced in the U.S., but at a fraction of the cost. Our high-powered retailing machines (Wal-Mart, Sears, Best Buy, Target, Costco) then took over and mass marketed these products to their customers. Cost conscience American families, unbeknownst to them, started to quickly gobble up these low-cost foreign products and the previous U.S. manufacturers of these products slowly exited from the marketplace.
Inversely, U.S. companies that have tried to expand into foreign countries have found very little or no success. Most countries don’t have a demand for American made products. And where there is a demand, the product or service is already being supplied by a very low cost local supplier.
Many U.S. companies were caught completely off guard by global trade and were severely damaged or went out of business as these foreign products poured into our country. In fact, entire industries have now been uprooted and moved out of the United States (TV’s, DVD’s, cameras, appliances, computers, clothing, furniture). The U.S. companies that did survive soon realized that the only way to compete in a global economy was to use the same tactics employed by their foreign competitors. That is, they have to change their raw material purchases from U.S. suppliers to low cost foreign suppliers, or even move their entire manufacturing plant offshore to fully capture the savings found in low cost countries.
To illustrate the cost disparity, we need only to look towards China. The average Chinese factory worker earns $.40 an hour as compared to $15.50 paid to a U.S. factory worker. This means that the average U.S. worker would have to produce 39 times more output than their Chinese counterpart at same machine or station in an assembly line. And this cost disadvantage is not limited solely to the cost of hourly labor, but extends into the ranks of administrative and managerial employees, facility costs, taxes, local support services and environmental regulations.
The math of foreign trade is so overwhelming that most manufacturing industries within the U.S. that have not already departed will have to leave within the next 10-15 years. Even the powerful U.S. steel and automotive industries, the backbone of our society’s wealth and prosperity, are in trouble. U.S. steel companies that represent over 30% of our steel capacity have gone out of business in the past few years due to foreign trade, and the U.S. automotive industry will soon control less than 50% of the U.S. market.
The manufacturing sector was the first to feel the brunt or full force of global trade, and the exit of our manufacturing businesses is only in the early stages. Fortunately, countries such China and India, which have been absorbing a lion’s share of U.S. business, have run into infrastructure problems associated with the massive growth they are now experiencing (utilities, roads and transportation, facility construction). As these difficulties are overcome, the exit of U.S. business will continue unabated.
Eventually, just about everything you can touch or pick up in a store will be sourced from a foreign country as the migration of our manufacturing businesses is completed. It should be noted that this migration has nothing to do with new products, superior products or advanced technologies being offered by these foreign countries. It is merely due to the tremendous operating cost advantage offered by these foreign countries.
During the last few years, the U.S. manufacturing sector’s workforce has declined from 17 million to 14 million. Please note that American’s should not be surprised if this workforce drops to 3-4 million over the next several years, as billions of capital investment dollars are now being spent in countries such as China and India for new operations. These two impoverished countries, with a combined workforce of 1,150 million people (earning less than $1,000 a year), will inevitably absorb the balance of U.S. manufacturing jobs with less than 1% of their country’s workforce.
The adverse effects of global trade are starting to show up throughout our economy. The U.S. foreign trade deficit has grown exponentially in the last few years and may surpass $600 billion this year. Simultaneously, during this same period, the U.S. entered into a very disturbing recession as:
· 3 million workers have become unemployed. Many other workers have become frustrated and left the workforce, or have become underemployed as they have had to accept jobs significantly below their capabilities and prior wage rates (just to put food on the table).
· Median income for the average family has dropped by $1,500 per year (3.4% decline). If you factor in employer pension and healthcare takeaways, the average family has lost upwards of 8-10% in purchasing power.
· Consumer credit has also gotten out of control as the average family now has to use credit cards just to buy the same basic stuff they were buying a few years ago to support their family.
· Personal bankruptcies are steadily increasing as 1.6 million people filed bankruptcy last year.
· Poverty within the U.S. has grown from 32 million to a staggering 36 million people.
Some political pundits and economic experts will point out that the recession may have ended sometime during the past 12 months as a number of companies have returned to profitability and some new jobs have been created (although most are low paid service and retailing jobs – remember, selling foreign produced goods). However, if you carefully analyze this recovery, you will find that it truly isn’t a recovery, but only the result of a massive infusion of cash into our economy caused by federal government overspending and tax reductions.
The Administration realized going into the 2004 elections that the U.S. economy was quickly faltering and instituted a massive tax cut to stimulate growth. In addition, the Afghanistan and Iraq war and reconstruction efforts have required the spending of tens of billions of dollars. The net effect is our government artificially moved the economy with $400 billion of overspending, while amassing a federal debt in excess of $7 trillion. A debt that our children and grandchildren will eventually need to be pay.
It can very easily be argued that the U.S. has not at all pulled out of the recession that started in the late 1990’s due to foreign trade, but that government overspending only stalled or interrupted the recession in progress. This recession should begin to heat up again in 2005 as the foreign trade deficit continues to grow. However, the next wave of economic decline may be much worse because our federal government has now added a federal budget deficit problem to our pre-existing foreign trade deficit problem.
Phase 1 of foreign trade is well underway as manufacturing throughout the U.S. exits to low-cost foreign countries. However, there is a much larger Phase 2 that is only now beginning to take off. Astute U.S. executives know that America’s cost disadvantage extends far beyond the manufacturing sector. It also applies to just about every job function performed within the United States.
Corporations are living entities with a powerful will to survive and they are beginning to understand that their high cost U.S. corporate offices and development centers must also start to move offshore for long-term survival in a global market. The same logic or intuitive reasoning behind the move of manufacturing jobs to foreign countries also applies to any business function. Thus, the exit of IT, purchasing, research and development, finance and other administrative functions has already begun.
Eventually, corporation headquarter facilities will need to physically move offshore. The facts and math are simple. As the intensity of foreign competition continues to increase, foreign corporations paying $3,000-25,000 to administrative, staff and executive employees, will need to displace U.S. corporate employees being paid $30,000 – millions of dollars, who work in high cost corporate offices located in the United States.
A very fundamental law of “equilibrium” is beginning to take hold of the world’s businesses, workers and economy. What we are witnessing is the blending of .8 billion people from highly prosperous countries with the much larger world of 5.5 billion people living in impoverished countries. At some point in the next 20-30 years, we will reach an equalized state as the world’s businesses and workforce re-aligns to achieve parity.
However, workers and families from the less populated developed countries such as the United States, have a long way to fall before we reach this equalized state. During the past few years the average family has already lost 8-10% of their purchasing power as we have started to transition towards this equalized state. The only questions that remain are how far must U.S. prosperity fall before we reach parity, and at what cost to the American family.
In summary, government leaders with high expectations took a measured risk when they entered the arena of global trade. Unfortunately, when our trade doors opened, a beast was let in that is devouring our nation. The U.S. economy, with its 293 million people and $11 trillion of GDP, was no match for the billions of hungry and impoverished people living throughout the world. Instead of the U.S. being able to reach out and gently pull the world’s people to our level of prosperity, the weight of world has grabbed us and is slowly pulling us to their side of the world. The impoverished of the world are staying impoverished, while developed nations are slowly being pulled into poverty.
The “American Dream” that has taken us hundreds of years to create, is now on the verge of being dismantled and shipped to foreign countries. Unless changes are made relatively soon, we may be the first generation of Americans to turn a less prosperous and deteriorating country over to our children.
The United States has become successful because we are risk takers, and we need to continue to take risks in order to achieve new levels of success and prosperity. However, there is also a point where we need to step back and re-evaluate our decisions to determine if our strategies are achieving their intended goals. It is clear we have reached this point with respect our global trade initiatives.
Most American’s also recognize that it is time to help citizens throughout the world that have not prospered. However, our future strategies should not involve the emersions of their society into ours, but by helping these countries create their own American Dream. Someday parity will be reached among all nations, but it must be created by lifting other countries up to our level of prosperity, and not by eroding our prosperity to the level of impoverished countries.
It is time to turn off the global trade switch and let America families begin to heal from the damage created and start to rebuild our American Dream.