BUSINESSWEEK ONLINE : APRIL 24, 2000 ISSUE
Backlash: Behind the Anxiety over Globalization
Many fear that free trade harms wages, jobs, and the environment
Ask David K. Hayes about the impact of globalization on his life and you'll hear the story of a painful roller-coaster ride. The Goodyear Tire & Rubber Co. (GT) factory in Gadsden, Ala., where he has worked for 24 years, decided to shift most of its tiremaking to low-wage Mexico and Brazil early last year. The plant slashed its workforce from 1,850 to 628. The 44-year-old father of two was lucky and landed a job paying the same $36,000 salary at another Goodyear plant 300 miles away. Hayes's wife didn't want to quit her $30,000-a-year nursing job, so Hayes rented a small apartment in Union City, Tenn., seeing his family on weekends. Then in October, Goodyear reversed course and rehired nearly 700 people in Gadsden, including Hayes. It's good to be home, he says, but he is constantly fearful that the company will switch again. ''It has been nerve-wracking,'' he says. ''We try to be cautious on spending, because I don't know if I'll have a job in six months.''
Such stories of anxiety are part of what's fueling a second wave of protests against globalization that kicked off in Washington, D.C., on Apr. 9. Echoing the demonstrations that erupted late last year at the World Trade Organization (WTO) meeting in Seattle, the AFL-CIO brought some 15,000 members to Capitol Hill on Apr. 12 to lobby against granting Normal Trade Relations Status to China. Environmental and human-rights protesters planned to disrupt meetings of the World Bank and the International Monetary Fund (IMF) four days later.
The outpouring once again raises the question: Why are so many people so angry about globalization--a term that has come to encompass everything from expanded trade and factories shifting work around the world to the international bodies that set the rules for the global economy? Political and business leaders across the spectrum were caught off guard by the strong feelings expressed in Seattle last fall. Although they're better prepared this time, they remain perplexed.
After all, the U.S. economy is in the midst of a heady boom that's being fueled in no small part by globalization. Open borders have allowed new ideas and technology to flow freely around the globe, fueling productivity growth and helping U.S. companies to become more competitive than they have been in decades. Expanded trade has helped to keep a tight lid on U.S. consumer prices, too. As a result, many U.S. families are doing better than ever. What's more, polls have shown for years that a solid majority of Americans believe that open borders and free trade are good for the economy.
So is the hostility aired in Seattle and now in Washington just the raving of fringe groups? Or does it express a more widespread anxiety that decision-makers have ignored until now? Fringe groups do play a role, but there is mounting evidence for the second conclusion, as well. The protesters have tapped into growing fears that U.S. policies benefit big companies instead of average citizens--of America or any other country. Environmentalists argue that elitist trade and economic bodies make undemocratic decisions that undermine national sovereignty on environmental regulation. Unions charge that unfettered trade allows unfair competition from countries that lack labor standards. Human rights and student groups say the IMF and the World Bank prop up regimes that condone sweatshops and pursue policies that bail out foreign leaders at the expense of local economies. ''Are you allowed to make your own rules, or is someone else going to do it? Those are fighting words to a lot of people,'' says Robert C. Feenstra, a trade economist at the University of California at Davis.
DIVIDED. A BUSINESS WEEK/Harris poll released on Apr. 12 finds that while Americans agree in principle that globalization is good, they disagree with policies for carrying it out. Just 10% describe themselves as free traders, while 51% say they are fair traders. Some 74% to 80% say their priorities are to prevent unfair competition, environmental damage, and job loss. The goals of the Clinton and prior Administrations, including boosting exports and keeping consumer prices low, rank lower (page 44).
At the same time, 68% of Americans believe globalization drags down U.S. wages. Respondents split fairly evenly on whether global integration is good for creating jobs and the environment. The result: a gnawing sense of unfairness and frustration that could boil over in the future. ''A strong majority [of the U.S. public] feels that trade policies haven't adequately addressed the concerns of American workers, international labor standards, or the environment,'' says Steven Kull, director of the University of Maryland's Center on Policy Attitudes, which on Mar. 28 released an extensive poll entitled ''Americans on Globalization.''
Americans' divided views have broad implications for U.S. policies and companies. Ever since the North American Free Trade Agreement (NAFTA) squeaked through Congress in 1993, its opponents have blocked most major trade initiatives, including President Clinton's request for fast-track authority to negotiate new trade pacts. Now protesters hope to thwart the Administration's pledge to extend Normal Trade Relations to China as part of its entry into the WTO. Some 79% of Americans don't want to give China normal trading privileges, according to the BUSINESS WEEK/Harris poll. After the Apr. 12 rally, the AFL-CIO plans to mount a grass-roots effort to defeat the measure when Congress takes it up in late May.
And there's more to come. College students around the country are holding weekly sit-ins to pressure companies to agree to sweatshop monitoring, and they're scoring surprising victories with Reebok, Nike (NKE), and other apparel makers. Unions plan to keep pressing for labor standards that can be incorporated into the world trading system--a battle that could drag on for years. Meanwhile, the Washington demonstrations are likely to spur reform at the World Bank and the IMF (page 46). Of course, global integration is a juggernaut that's not easily stopped, but all the political turbulence could make the free-trade agenda more difficult to achieve.
Finding common ground among competing constituents will be a nightmare for policymakers and politicians. While it may be possible to redesign procedures at the lending agencies, for example, it's far more complex and controversial to set labor and other standards worldwide. Already, China's WTO entry has become a flash point for Vice-President Al Gore, who's depending heavily on union support in his Presidential quest. Somehow, the Administration must balance all this while maintaining friendly relations with trading partners around the globe. The task is all the more difficult because to some degree, helping U.S. workers could hurt those in low-wage countries, since shifting U.S. factories and technology abroad helps to lift living standards there.
It's a paradox that while globalization brings big gains at the macroeconomic level, those pluses are often eclipsed in the public eye by all the personal stories of pain felt by the losers. But that pain remains mostly hidden, as economists and politicians emphasize the upside while downplaying or omitting altogether the drawbacks (table). The Economic Report of the President, for example, released in February, barely mentions trade-related job losses, yet Commerce Dept. statistics imply that something like 1 million workers lose their jobs every year as a result of imports or job shifts abroad.
THREATS. Indeed, there are millions like David Hayes who live in fear of a layoff and whose families share the emotional and financial disruption. Even in today's red-hot job market, workers who lose a job earn 6% less on average in the new one they land. Others face pressure to take skimpy raises or pay cuts from employers that threaten to move offshore.
Even service and white-collar workers are no longer exempt. True, many professionals are hitting it big on the Internet and thriving in export-oriented companies. But as global integration advances, engineers, software writers, and other white-collar employees are seeing jobs migrate overseas. ''Workers used to feel safe when the economy was doing well, but today they always feel they can be laid off, and globalization is part and parcel of that,'' says Allan I. Mendelowitz, executive director of the U.S. Trade Deficit Review Commission, set up by Congress in 1998.
The point isn't that globalization creates more losers than winners. After all, free trade is a net gain for the country. What worries many is that the U.S. does little to help those who lose out. ''You want to make sure that the benefits of trade are fairly shared,'' says William R. Cline, a trade expert at the Institute of International Finance Inc.
Of course, with jobs plentiful today, losing one is less disastrous than it was back in 1992. But it's still a traumatic experience. About 25% of all job-losers still aren't working three years afterward, according to Princeton University economist Henry S. Farber, who analyzed government survey data through 1997, the latest year available. Some simply retire early. The 75% who do get another job still face that 6% gap, plus the income lost if they're unemployed until they find new work.
What was once seen as a blue-collar phenomenon is now spreading to the service sector. U.S. data-processing companies are using high-speed data lines to ship document images to low-wage countries such as India and Mexico. Some 45,000 people work in these and other service jobs in maquiladoras, twice the number in 1994, when NAFTA took effect. They do everything from processing used tickets for America West Airlines Inc. (AWA) to screening U.S. credit-card applications for fraud. And the work is getting more advanced. As U.S. companies tap bilingual Mexicans, ''we have people getting on the phone and calling customers'' in the U.S., says Ray Chiarello, CFO of 2,800-employee Electronic Data Management International in Cuidad Juarez.
SWEATSHOPS? Global competition is also battering the theory of comparative advantage, which holds that free trade will prompt the U.S. to import goods made by low-wage, low-skilled labor and export those made by the highly skilled. But companies are undermining that construct by shifting even the most skilled jobs and technologies to low-wage countries.
At General Electric Co. (GE), for example, CEO John F. Welch has for years been pushing his operating units to drive down costs by globalizing production. At first that meant moving appliance factories to low-wage countries such as Mexico, where GE now employs 30,000. Then last year, GE's Aircraft Engines (AE) unit set up a global engineering project that already has increased the number of engineers abroad tenfold, to 300, with sites in Brazil, India, Mexico, and Turkey. ''We just can't compete globally with a primarily domestic cost base,'' says AE commercial engines General Manager Chuck Chadwell in a recent AE internal newsletter. An AE spokesman agrees that GE is shifting low-end engineering jobs offshore but says high-end design work is staying in the U.S.
Brian and Mary Best are on the losing end of GE's globalization drive. Both have worked for 25 years as planners at GE's jet-engine plant in Lynn, Mass. But the unit has been shedding planners, who design and help build tools used to make engines, leaving 140 in Lynn, down from 350 a decade ago and 200 in 1999. In February, Brian was laid off from his $50,000-a-year job, and Mary hopes she's not next. ''Our jobs are going to places like Mexico and Poland, where labor is cheaper,'' says Mary, who has a BA in business administration. Says Brian: ''GE's only allegiance is to its shareholders.''
Globalization also helps push down U.S. wages. Trade accounts for roughly one-quarter of the rise in U.S. income inequality since the 1970s, studies show. Imports shift demand from low-skilled workers to educated ones. Yet economists have never found a way to measure direct wage pressures from globalization.
Mike Spaulding knows about that pressure. Spaulding, 55, works at Buffalo's Trico Products Corp., a maker of windshield wipers, purchased by Tomkins PLC in 1998. Trico began shifting 2,200 jobs to Mexico in the mid-1980s. Then in 1995, management said the 300 remaining jobs could stay if employees slashed costs. So Spaulding and his colleagues swallowed a $2-an-hour cut, to $12.50, where his pay remains today. ''We've had to cut back on our lifestyle--forgo some vacations and going out to dinner,'' he says.
Demands like Trico's have lowered pay across the auto-parts industry. One-third of U.S. auto-part employment migrated south to Mexico between 1978 and 1999, according to Stephen A. Herzenberg, an economist at the Keystone Research Center in Harrisburg, Pa. The result: Wages in the U.S. auto-parts industry plunged by 9% after inflation, he found.
Some companies use the mere threat of overseas job shifts against workers who try to unionize to raise their pay. In February, Yvonne Edinger and some colleagues tried to form a union at a Parma (Mich.) factory owned by Michigan Automotive Compressor Inc., a joint venture of Japan's Denso Corp. and Toyoda Automatic Loom Works Ltd. The 425 workers at the plant, which makes car air conditioners, earn $12 to $14 an hour--vs. $16 to $18 for parts makers in the United Auto Workers. But when the organizing drive began, ''Japanese coordinators sent over to troubleshoot the line told people that the plant would be moved if they voted in the UAW,'' says Edinger. That scared so many workers that the organizing drive has been put on hold. A company spokeswoman says it has heard no allegations of threats by its coordinators. Yet such threats are routine. According to a 1996 study by Cornell University labor researcher Kate Bronfenbrenner: 62% of manufacturers threaten to close plants during union recruitment drives.
For nearly a decade, political and business leaders have struggled to persuade the American public of the virtues of globalization. But if trade truly brings a net gain to the U.S. economy, why not use some of the extra GDP to compensate the losers and diminish the opposition? True, this wouldn't address wage cuts and threats of moving offshore, much less qualms about the environment and the supranational role of global trade and finance bodies. Still, if the decision makers don't start taking Americans' objections seriously, the cause of free trade could be jeopardized.
By AARON BERNSTEIN
With Elisabeth Malkin in Mexico City and bureau reports
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