Really Big Business

Gereffi: "Wal-Mart has taken giantism to a new level" Photo:Jim Wallace

With the start of 2005 and the phasing-out of decades-old quotas, the landscape of global commerce is set to change in dramatic fashion. China is poised to dominate manufacturing, India to absorb more white-collar jobs, and Wal-Mart to continue unbridled as the king of retail.

Gary Gereffi, professor of sociology, talks about how it all happened, and what it all might mean.

When did global outsourcing begin?

We began to see it in the 1960s with U.S. offshore-assembly programs in Mexico, the so-called "twin-plant programs." A company making transistor radios or auto parts would send parts to an export-processing zone somewhere in Mexico, have the parts assembled by cheaper labor, and then re-exported back into the U.S. as a completed product.

The idea was that U.S. firms could keep their high, value-added core competencies of design and marketing, and they could send the production abroad where labor was cheaper. And we've been in this outsourcing mode for so long now that we've assumed we don't need production anymore. But these other countries that have the manufacturing base are beginning to reintegrate. Our companies are downsizing. Well, if you do the manufacturing and you develop a design capability to create new products and you can brand them, then you've got the whole package. You're in a much tougher competitive position in many ways than the U.S. companies that still need to look for somebody to make their products.

What's the U.S. reaction to this new competition?

One standard reaction is protectionism: Keep foreign products out of the U.S. economy. But that flies in the face of the fact that ever since the 1950s and the end of World War II, the U.S., as the predominant postwar power, has favored an open economy. We've wanted our markets open to direct foreign investment, and we've wanted to have countries recognize intellectual property rights, because we've assumed, rightly for the most part, that as the strongest economy in the world, we gain more from open international economic conditions than our rivals do. So, generally speaking, the U.S. has been the champion of a free-trade economy.

What about NAFTA? Is that promoting free trade?

It's not. Free trade is just a theoretical ideal. Most of the trade agreements are conditional. And we have lots of regional trade agreements. But the fact that the U.S. passes NAFTA and adds Mexico and Canada to the U.S. as a big regional economy doesn't mean that internationally, through the W.T.O. [World Trade Organization], we weren't also favoring global trade openness.

What would Adam Smith say about this?

I'm not sure that Adam Smith's own work got into all of the political complexities of making these things work. That's a commonly mistaken assumption; we somehow think that free trade means that governments don't play a role. In fact, we need very sophisticated political institutions to provide some kind of infrastructure for these economic exchanges to work.

The quota system is part of this infrastructure?

Yes, the quota system allowed us to do two things: It placed a ceiling on some of the countries that we thought were the most powerful exporters. But it also gave a share of the U.S. market to everybody. And that philosophy dates back to the 1960s. The U.S. said, We don't want countries to be continually reliant on us for foreign economic aid. We prefer to promote private enterprise, and we encourage them to export into the global economy. That's been the mantra of the World Bank since the mid-1980s, also called "neoliberalism," also called "the Washington Consensus." I think all of the U.S. administrations have been in favor of trying to keep the playing field level--with a few big exceptions.

Like what?

Agriculture has been a big exception. Developed countries have basically continued to subsidize our farmers in ways that make it much harder for developing countries to export agricultural products to the United States. And it makes it a lot easier for us to export our agricultural products to them at lower prices that they can't match.

And the big winner is Wal-Mart?

Wal-Mart has taken giantism to a new level. It's the largest employer after the federal government and the main channel for imports into the U.S. market. And it's an incredibly important force in maintaining free trade because it will challenge manufacturers if they try to impose any restriction on imports or exports.

But with Wal-Mart, we've moved far away from the "Ford model." Henry Ford wanted to pay his workers enough that they could afford the products they were making. Now people say, sort of tongue in cheek, Wal-Mart is paying its workers so little that they have to go to Wal-Mart to shop. So, where government has to step in is where you have this huge loss of manufacturing jobs. We have to find some way to make sure that globalization doesn't mean an erosion of our productive base. We have to somehow keep building our workforce up, and I think a key to it has been educational institutions where we have been a world leader. But we can't rely on that indefinitely without countering some of the restrictions on immigration.

So, when you look at a phenomenon like Wal-Mart, Wal-Mart has helped keep the U.S. inflation rate down three or four percentage points over the last decade by bringing in the lowest-cost products and forcing lots of other suppliers to meet these low prices. I think now what people are starting to worry about is the fact that it's not just these blue-collar jobs that are moving offshore but it's also professional jobs like the ones in the information-technology industry, and so you start getting new competitors like India.

Why India?

Supposedly, India's edge in some of this programming started with the Y2K problem. The U.S. was concerned that we didn't have enough programmers to rewrite all of this code, so we created a new category of visas that allowed lots of programmers from India to work here. From about 2000 to the present, India has gotten more and more involved in supplying information-tech services that U.S. companies need. Now they've set up companies in India, like Wipro and Infosys, that are saying, Look, we can take advantage of the fact that we're about twelve hours ahead of the U.S. We could have a twenty-four-hour work cycle. We get U.S. companies to shift some of the more routine activities here. But what's happening is their own wage rates are going up. Cheaper countries are going to come online. And India is going to have to do some of its own outsourcing. It's just a perpetual-motion machine.

Is the U.S. in trouble?

I think we could be. We're still ahead of the game. But all of the long-term trends are favoring other countries that are investing much more heavily in their infrastructure. And if you talk to people in industry after industry in the U.S., we're losing skills. I think we really do run this risk of relying so heavily on other countries that, without incredible innovation, there's going to be a real shift in global bargaining power.