America’s economy is in the vanguard of one of the most significant advances in the world’s economic history. Economic globalization is integrating national markets through international trade and investment.

We are witnessing unparalleled developments in microelectronics, computers, telecommunications, transportation logistics, and finance. Combined with new global realities, these developments are changing the way we live and work.

The Impact Deepens

Economic globalization emerged in the 1980s. Since then, resources have been moving toward sectors that enjoy competitive advantages. Productivity is hitting new peaks, and innovation is flourishing. In the U.S., production technologies have cycled from brawn power to brain power. Workers no longer rely exclusively on muscles; instead they work in self-directed teams, applying sophisticated skills to operate more-efficient processes.

Although Globalization is Not New, Its Effect is Expanding.

In 2007, U.S. trade in goods and services totaled $4 trillion. That trade supports nearly twenty percent of all American jobs. To their advantage, workers in globally engaged companies earn more than the average. Further, international trade has driven an increase in U.S. annual income to $1 trillion; that translates into approximately $10,000 for each American household, according to the Peterson Institute for International Economics, a Washington, D.C.-based think tank.

In 2007, trade accounted for 29 percent of U.S. gross domestic product growth, up from less than 5.5 percent in 1950, U.S. Census Bureau statistics indicate. As international trade has taken an increasing share of the U.S. economy, it has developed into a highlight on our economic horizon at a time when U.S. growth is confronting challenges.

"Trade is a critical component of our economy," says United States Trade Representative Susan Schwab. "Last year, the growth of exports of U.S. goods and services made up more than 40 percent of our economic growth."

Globalization accounts for large amounts of capital circulating around the world. That benefits the United States, since America has one of the world’s most favorable business climates. Consequently, U.S.-based operations of foreign companies employ 5.1 million Americans, generating annual payroll of $336 billion. This translates into annual average worker compensation of $66,042, well above the national average, according to the Organization for International Investment in Washington, D.C.

Supply chains spanning borders have become an increasingly important factor in the ability of nations and companies to achieve high levels of productivity and growth. Gone are the days when containers simply were filled with finished products destined for foreign retail shelves. Today, containers are filled with components and parts heading for assembly lines, demonstrating deep global economic integration.

But supply chains now involve more than the timely movement of goods and services. "The third leg of a successful supply chain—the efficient movement of money and the squeezing of the cash-to-cash cycle—has become critical in a company's effort to provide excellent customer service and sustain profitability," says Ron Reighter, Vice President of Global Trade Solutions at SunTrust Bank.

Globalization is shaping the 21st century world economy, just as the industrial revolution shaped the 19th and 20th centuries. As the economic base moved from an agrarian society to an industrial economy, workers left farms in search of factory jobs. They were forced to learn new skills. Today, workers are facing the demand for new skills, which they must learn at a faster pace.

The fall of Communism added one-third of humanity to capitalist ranks. That event gave rise to increased numbers of workers worldwide as well as new markets.

Thanks to lower-cost technologies, globalization has led companies to source and sell virtually anything anywhere. This means incomparable new opportunities. Nevertheless, it also has created risks and new challenges as markets become hyper competitive. This is causing anxiety and fear.

For many Americans, globalization is "perceived as a transfer of existing jobs, know-how, and wealth from developed countries to the new and rapidly growing economies, especially China and India," says Jacob Funk Kirkegaard of the Peterson Institute. Policy reforms are therefore required to prevent a self-destructive political backlash against globalization, he says.

"To increase competitiveness, a growing number of American companies are specializing in more complex, technology-driven products. They are taking steps to expand internationally through exporting, joint ventures, and strategic alliances. And they are acquiring operations overseas through direct investment and licensing technology abroad," says Susanne Keough, Managing Director of Global Trade Solutions at SunTrust Bank.

U.S. Manufacturers Are Adapting

According to Jerry Jasinowski, president of the Manufacturing Institute, the educational arm of the National Association of Manufacturers (NAM), "There are two new trends shaping the future of small and medium-size manufacturers. First, large manufacturers are increasing their dependence on suppliers of components as they streamline their operations to increase productivity.

“The second trend—the development of increasingly competitive production in developing countries—cuts the other way and has toughened the landscape for all manufacturers, including small and medium-size manufacturers,” Jasinowski says.

To remain competitive, U.S. manufacturers are concentrating on their core strengths and shedding non-core functions. Those will be outsourced across the country and around the world.

Nevertheless, manufacturers must become even more entrepreneurial in their business models and offer higher value to their customers that low-cost overseas competitors cannot match, Jasinowski says. This includes “proprietary high-technology products, a willingness to customize, extraordinary service and parts support, flexible production runs, and fast turnaround times. These trends make it clear that the performance of all U.S. manufacturing is tied more than ever to the success of small and medium-size manufacturers.”

These producers represent more than 99 percent of America’s manufacturers and account for 40 percent of the value of U.S. production, NAM reports. Their success in the global business environment will depend upon performance.

Improving the Services of Manufacturers

In developed markets, global pricing pressures have turned a wide range of products into commodities. Consequently, American producers must focus on and deliver greater value. They enjoy remarkable opportunity to offer top-quality services that are unlikely to be reproduced abroad any time soon.

According to a Deloitte Research report, “Too often manufacturers view their service operations as ancillary businesses separate from and by no means equal in strategic or operational importance to the ‘core’ product business. This mindset is as risky as it is outdated.”

During economic declines, service and parts sales often have compensated for lost manufacturing business. Today, however, service contracts are contributing to growing corporate profits.

More manufacturers are including services into their corporate strategies, tailoring the service business around customer requirements. They are working to improve customer satisfaction, loyalty, and overall business performance.

More International Engagement Needed

NAM President and CEO John Engler says, “Manufacturers must collaborate closely with new domestic and overseas partners to survive and thrive in the global supply chain. In today’s economy, small and medium manufacturers are more than just suppliers. They are helping to create the new technologies, products, services, and business models that are vital for success, both here and abroad. By connecting with outside resources—customers, government, and academia—small and medium manufacturers can swiftly expand their core competencies and gain economies of scale.”

Such partnerships also will empower small and medium-size producers to assume new responsibilities. Rather than simply producing to large manufacturers’ specifications, small and medium-size companies will innovate on behalf of their customers. According to NAM, this new global manufacturing supply chain has created a new environment that carries new risks. Those risks will intensify as goods move around the world in unprecedented ways.

As the value of the dollar has declined, U.S. export volumes have increased. In many cases, manufacturers’ exports have risen exponentially. This is especially important as U.S. domestic growth slows.

According to SunTrust Bank, about 30 percent of U.S. companies with $250 million or less in annual sales are engaged in international trade. As reported by NAM, more than 60 percent of U.S. small and medium-size manufacturers surveyed reported less than 10 percent of their sales or components originated abroad.

Globalization means stiffer competition. Small and medium-size producers must offer products with service and support levels at prices that customers can’t obtain from manufacturers in low-cost countries, Deloitte Research notes. Furthermore, U.S. manufacturers must compete less on price and more on product design, branding strategies, productivity, and flexibility.

Fewer Workers Produce More

In 2006, the total value of U.S. manufacturers’ shipments—for domestic or international consumption — exceeded $5 trillion, while manufacturers’ value-added reached $2.3 trillion. Since 1987, these numbers have doubled, demonstrating that the U.S. manufacturing sector is steadily growing.

As manufacturing has risen, however, employment rolls have fallen: from 21 million in 1979 to 13.6 million in April 2008. Stated by Christopher Padilla, Undersecretary of Commerce for International Trade, "Most jobs are lost due to changes in technology and productivity, not trade." In fact, Padilla continues, "Fewer than three percent of mass layoffs have been due to trade."

Advances in technology and productivity mean that fewer workers can turn out more product in less time. Thus, from 2000 through 2007, non-farm productivity rose by an annual average rate of 2.5 percent. During the same period, manufacturing productivity increased by an average of 3.7 percent annually, according to the U.S. Department of Labor.

Nevertheless, the manufacturing share of U.S. gross domestic product is declining, from 22 percent in 1979 to 11.7 percent in 2007, according to the Bureau of Economic Analysis. That is due to such factors as growing sophistication and rapidly expanding service sector.

A decline in the number of workers in a sector is not a new phenomenon. In 1940, there were 9.5 million U.S. workers on farms; by 2007, there were approximately 2.1 million. Yet, U.S. agricultural output skyrocketed in that time frame.

Small and medium-size manufacturers have adjusted to developments and have made necessary changes. In the future, they will confront greater challenges and will probably contribute a greater percentage of overall output. Nevertheless, in a fast-changing global environment, they will need to take on new challenges not yet identified.

The Changing Labor Component

The pace of globalization trends is accelerating. Just as product cycles have shortened, skills cycles have tightened. For example, “A skill cycle that once ran for three years now lasts just nine months,” according to Manpower Inc., a leader in the employment services industry. Moreover, finding the right employees with the appropriate skills is proving increasingly difficult for many firms.

The U.S. Bureau of Labor Statistics (BLS) reports that between 2006 and 2016, “Growth in the labor force is projected to slow significantly for two reasons: the baby boom generation is aging and retiring, and the labor force participation rates of women have peaked.”

As a result, “The labor force is expected to grow at an annual rate of 0.8 percent during 2006-2016, compared with a rate of 1.2 percent from 1996-2006.” Although BLS does not foresee outright labor shortages, several other organizations have expressed concern, especially among highly skilled workers.

As early as 2004, Deloitte Research noted, “Despite millions of unemployed workers, there is an acute shortage of talent: science educators to teach the next generation of chemists, health care professionals of all stripes, design engineers with deep technical and interpersonal skills, and seasoned marketers who understand the Chinese marketplace.”

In 2005, the National Association of Manufacturers observed that 81 percent of survey recipients faced a moderate or severe shortage of qualified workers. And more than half of all manufacturers in a survey reported that they were unable to fill 10 percent or more of their positions, owing to lack of qualified candidates. The shortfall was reported greatest in skilled trades.

In December 2007, the Peterson Institute reported, “America rose to economic prominence on the shoulders of the most highly skilled workforce in the world. However, during the last 30 years, skill levels in the U.S. workforce have stagnated. In the coming decade, America could face broad and substantial skill shortages.”

Although there are several reasons accounting for the problem, educational shortfalls may be the most significant. According to Federal Reserve Chairman Ben Bernanke, “Education fundamentally supports advances in productivity, upon which our ability to generate continuing improvement in our standard of living depends.” He also has indicated that the supply of educated workers has not kept pace with demand.

If they are to remain competitive, U.S. employers must invest more heavily in employee training programs, and refresh and upgrade employee skills. They should coordinate with local universities and community colleges to ensure that courses are geared toward satisfying market demands. Concomitantly, employers should take advantage of technology to reduce the number of jobs where talent is limited. They can call on previously unidentified human resource potential, and create more attractive working conditions to entice and retain workers.

These steps can appeal to older workers, the largest untapped workforce segment in the country. Americans are living longer, healthier lives and are able to contribute well after their first retirement.

New Factors Change Old Dollar Assumptions

Much of America’s export gains are traceable to the declining value of the U.S. dollar. From 2002 through late 2007, the U.S. dollar declined 39 percent against the Canadian dollar, 38 percent against the euro, and 30 percent against the British pound, according to Deloitte Research. Nevertheless, due to globalization and currency complexities, the effect is different than it would have been years earlier.

In March 1973, the Federal Reserve’s Nominal Major Currencies Dollar Index was set at 100. Since then, it reached a high of 143.91 in March 1985 and fell to an all-time low of 70.32 in March 2008. In June, it rose slightly to 70.97.

Traditionally, a weakening dollar led to lower priced American exports that stimulated sales abroad. Meanwhile, prices of foreign goods and services rose, thus reducing U.S. demand. That combination effectively lowered the trade deficit.

Today, U.S. producers increasingly rely on imported raw materials, capital machinery and parts, industrial supplies, and other intermediate inputs used in their manufacturing processes. As the value of the dollar weakens, those imports become more expensive. When these same producers’ finished products are exported, the advantages of a weak dollar can be neutralized by the higher cost of inputs.

The surging cost of imported oil, partly tied to a weaker dollar, also has significantly contributed to increased U.S. manufacturing costs. Nevertheless, U.S. goods and services exports reached $1.62 trillion in 2007, shrinking the trade deficit by $46.9 billion from a year earlier.

That development was largely the result of productivity improvements and creative cost reductions. Additionally, "We are seeing a greater number of small and medium-size American firms becoming active exporters at a time when import demand is growing in many key markets such as India and China, and evidence suggests this is partly driven by the emerging economic power of the middle classes in these markets," says Keough.

Changing Pass-through Rates

In today's global economy, some imports, especially consumer goods, typically have not become more expensive as the value of the dollar has dropped. In many cases, exporters to the United States are absorbing the dollar losses versus their own currencies. They are reducing their prices and accepting smaller profit margins in a move to retain U.S. market share.

In turn, this affects the pass-through rate, the percentage of a price increase that is passed onto buyers. For instance, if a currency falls by 10 percent and the cost of imports rises by 10 percent, the pass-through rate would be 100 percent. The weaker currency would diminish import demand, thus improving the trade balance. From the mid-1970s through the 1990s, the pass-through rate was as high as 50 percent, according to The Wall Street Journal. This meant that a 10 percent drop in the value of the dollar would boost import prices by 5 percent.

According to recent studies, however, only one-tenth to one-quarter of currency depreciation now is passed through as higher prices for imported merchandise. This keeps inflation down, as well as the prices of such consumer goods as clothes, which tend to be produced overseas and consumed in large quantities in the United States.

The dollar is involved in 86 percent of the world’s 3.2 trillion daily currency transactions and comprises 64 percent of total global reserves, based upon an article in The Wall Street Journal. As a result, the dollar remains the world’s dominant currency and is unlikely to lose its position in the near term.

Although export volumes have increased considerably because of the falling dollar, a steep decline years ago would have propelled exports to a greater extent. Today, globalization, more efficient offshoring, advances in finance, and international supply chain strategies are increasingly turning previous black and white assumptions grey.

This article appeared in June 2008. (ST)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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