A New Vocabulary for Trade

Metaphors matter. They define how one sees reality, as when the phenomenon of skilled emigration turns into the problem of "brain drain," evoking the image of a leaky faucet that few can regard with equanimity.

The phenomenon of globalization has prompted competing metaphors. The prolific Thomas Friedman talks everywhere, and writes in his latest best seller, of globalization being marked by a "flat world." Writing almost a decade earlier in the New Republic, I advanced an alternative – and less demotic – metaphor, that globalization was characterized by "kaleidoscopic comparative advantage." Let me explain why the two metaphors diverge dramatically and carry startlingly different policy implications – and why Mr. Friedman gets it wrong.

'Geography Is History'

One cannot but be aware that countries face intensified competition in the world economy – a phenomenon that forced itself on our attention long before China and India began to loom large in fevered imaginations. Interest rates are less far apart than earlier: A continual opening and global integration of financial markets has occurred. Multinationals now consider many alternative locations for final assembly and to manufacture components, so their know-how becomes available, in effect, to several likely locations. Access to knowledge is more diffused than ever before: Student enrollments in foreign countries have grown, better educational institutions have opened in some developing countries, and the need for skilled professionals has led to shifts in immigration policies to draw them in to countries that have excess demand for their skills. Producers in distant places can now access markets thanks to the Internet, to the point where many talk melodramatically of the "death of distance," and I say, with tongue partly in cheek, that "geography is history."

Yet it is wrong to infer from this that the world has gone "flat," and that there is no comparative advantage left. The notion of a flat world is as wrong metaphorically now as it was when Copernicus showed it to be literally wrong. To be more precise than his metaphor, Mr. Friedman has on his mind not the world but a large fraction of it – India and China. He believes that the gradient which the citizens of these countries had to climb to get to our shores and out-compete us has now disappeared, giving way to a level playing field that we ignore at our peril.

But he takes too literally his friends in Bangalore. They flex their muscles on IT the way Popeye does on spinach, and tell him that some Indians can now do anything that the Americans can do. But it is a leap to translate this into the proposition that several Indians will now do everything that the Americans do. Then again, we have Intel Chairman Craig Barrett talking about 300 million Indians and Chinese professionals who will hurtle down the flat road. And Clyde Prestowitz, in his latest book, carries the argument to its logical conclusion with the American nightmare that there will be three billion Indians and Chinese capitalists soon down that road.

In truth, the flat road is not flat at all. Take the supply of educated manpower in India. Of the numbers in the age cohort for college education, only about 6% make it to college. Of these, only two-thirds graduate, and just a small fraction can read English. Of these, a further fraction can speak it; and of these, a smaller fraction still can speak it in a way which you and I can understand. The truth of the matter, therefore, is that even for the call-answer and back-office services, the numbers who will compete are only a very small fraction of the numbers being thrown about. India's huge size and the dazzle of the few Institutes of Technology are totally misleading. The road is not flat; the gradient becomes steep as wages rise for those who can manage while others cannot qualify.

Again, just think back on why China has not managed to break into IT the way it has on a range of manufactures, while India has. Surely, that has to do with the fact that India is democratic and hence IT can flourish. By contrast, the CP (the Communist Party) is not compatible with the PC: Authoritarian regimes are fearful of IT – a gigantic pothole in the road!

Such fears of a flat road were rampant when many thought that Japan would be a fearsome Godzilla, trampling over our activities all around. But then it turned out that the Japanese were real klutzes in the financial sector. They still are. And remember that while the Chinese and Indians have lower wages, we have better infrastructure, stronger venture capital markets, an ability to attract talent from around the world, and a culture of inventiveness. Comparative advantage persists; the road is simply not flat.

The flat road metaphor is, therefore, both inapt and mistakenly alarming. The real problem in the increasingly globalized economy is rather that most producers in traded activities – an expanding set because services have become steadily more tradeable – face intensified competition. A specific producer here will find rival suppliers stealing up on him from somewhere, whether Portugal, Brazil or Malaysia, indeed from sources which may not include India and China. In consequence, almost no producer is truly relaxed. I was at a Parents' Day at my daughter's camp in 1991 in Vermont and talked to a father producing chips in Silicon Valley. He lamented, as did Bill Clinton soon after, that competition from Japan and South Korea was fierce (and wicked). So I turned to another dad listening in on us and asked him what he did. "I grow mushrooms," he said. "Ah, you must be happier," I remarked. He replied, tearing at his hair: "Oh no, Taiwan is killing me!"

* * *

Gone are Adam Smith's days, when no one in Haifa lost sleep because Edinburgh could grow oranges in greenhouses: The cost differences would be substantial. Comparative advantage was "thick," shielded by big buffers. This is no longer so: not predictably from India and China, but almost certainly from somewhere. Hence I use the metaphor: "kaleidoscopic comparative advantage." Today, you have it; but in our state of knife-edge equilibrium, you may lose it tomorrow and regain it the day after. Boeing might win today, Airbus tomorrow, and then Boeing may be back in play again. It is as if the design of trade patterns that you see now gives way to another, as if a kaleidoscope had turned.

In this situation of flux and change, we see the Friedman metaphor turned on its head. Faced with fierce competition, firms and unions often seek to iron out whatever differences they can so that the cost conditions for foreign rivals are brought closer to what they are for oneself. Producer interests, including labor, lobby to narrow (if not equalize) as far as politically possible the cost advantages that accrue to rivals from differences in all sorts of domestic policies and institutions. They try, through political agitation, to shield themselves.

Hence the massive demand for "fair trade," a seductive phrase that has become a principal ally of protectionism. So you see demands for enhanced labor and environmental standards in trade treaties, not as altruism but as a way to reduce the competitiveness of rivals. This game cannot be played in the multilateral trade negotiations because countries like India and Brazil see through it. But it can be played when smaller fry are involved in bilateral Free Trade Agreements: A hegemonic power like the US, captured in turn by fearful lobbies seeking to flatten the world, can get the minnows to do almost anything that it wants.

The real answer cannot be to seek to flatten the world, as this flies in the face of commonsense and good economic sense as well. Except for a few universal principles, diversity of labor and environmental standards is legitimate. Forcing convergence with our standards is simply an act of high-handedness by a "selfish hegemon" pretending to be an "altruistic hegemon."

But even if plans to flatten the world thus were to succeed, they cannot but leave out the vast numbers of bumps and gradients that cannot be steamrolled: The world cannot be flattened, frankly. And so the proper response to flux is to manage it. What does this imply? Evidently, we must strengthen the Adjustment Assistance Programs, which we have done from 1962 when they were introduced at the time of the Kennedy Round of Multilateral Trade Negotiations. They must be rapidly enlarged, especially to include service workers.

A Facelift for Clint Eastwood?

But that is not enough. We also need to ensure that when a radiologist in Boston loses his work to one in Bombay, he is able to retrain for the new skilled medical jobs that arise daily as new problems arrive: e.g. the obesity epidemic and the associated diabetes outbreak. In fact, new medical employment will multiply in cosmetic surgery with an aging population as nose jobs, silicon transplants and chin tucks capture the female half and spread to the male half as well. (I have a bet that even Clint Eastwood's wrinkles will be erased some day by a facelift!) The radiologist may be able to find for himself the training to get new jobs closest to his skills; but it is clear that more aged radiologists will need more assistance, and that professional societies such as the American Medical Association could assist in this task by defining optimal transition paths from the old to the new jobs.

Yet it is not enough to say that we must educate our people to stay ahead of the curve. Yes, that is important: But it is also necessary to look at the content of the education. In a world of kaleidoscopic flux, an American aeronautical engineer at Boeing may well find that the industry has suddenly lost to Airbus, and that he must move into automobile engineering, where the Honda and Toyota transplants may be expanding. It is important that his training provide a larger share of general engineering skills and less of specialized ones. And thus, instead of succumbing to the panic of the "flat world" metaphor, we need to embrace the kaleidoscopic metaphor of flux, and redefine our institutional and policy responses to make the best use of the opportunities today in the globalized world.