While the impulse to erect trade barriers is understandable, it is not the way to create lasting growth and shared prosperity, write Gary Pinkus, James Manyika and Sree Ramaswamy in Harvard Business Review.
You can’t go forward by going backward. Take the current debate about trade and globalization, for instance. While the impulse to erect trade barriers is understandable given the pain experienced by workers in a range of industries and communities in recent years, it is not the way to create lasting growth and shared prosperity.
That doesn’t mean we should keep doing the same old things. Ignoring the very real costs of trade and globalization is not only counterproductive but indefensible. Instead, the United States needs to move forward based on a new economic agenda, one that promotes inclusion and helps workers and communities caught in transition.
Over the past three decades, global flows of trade and investment have accelerated dramatically, creating enormous economic value. Between 1980 and 2007, cross-border trade and financial flows grew tenfold in nominal terms. During the past decade, the United States was the world’s largest recipient of foreign direct investment, with nearly $2 trillion invested in a range of sectors, companies, and workers across the country. What’s more, hundreds of millions of American consumers benefit from access to wide variety and lower price of goods, ranging from home appliances to cars, increasing their purchasing power noticeably.
However, trade and globalization have also brought wrenching job losses. These have been aggravated by declining worker mobility; people are less likely to move to a new state or county, or to switch employers or industries, than they used to be. The financial crisis, recession, and weak recovery have made matters worse, helping to intensify and galvanize the backlash against trade and globalization. The data is striking: Between 2005 and 2014, wages and other income stagnated or declined for more than 80% of U.S. households.
Part of the problem is that the benefits of trade and investment go largely unrecognized, while the job losses are often overstated. According to our analysis, trade accounted for only 20% of net manufacturing job losses in the United States between 2000 and 2010. But the impact of these losses is localized, painful, and persistent — unlike the more diffuse benefits of foreign investment and a wider variety of lower-price consumer goods being available.
Another significant problem is that participation in trade and investment is limited to a relatively small set of firms in the U.S. For example, less than 1% of the nearly 30 million registered U.S. companies sell abroad — a far lower share than in any other advanced economy. To put this in context of other large economies, the export intensity of the U.S., its ratio of exports to GDP, has been rising slowly for decades but remains significantly lower than in the European Union, China, and India. Large firms account for more than three-quarters of total exports. The vast majority of small and medium-size businesses in the United States do not export, and those that do export tend to sell their products or services to a single country.
This means U.S. firms have a significant opportunity to boost their growth and productivity through wider participation in trade and investment. Firms that export have higher productivity growth, according to research. Perhaps that’s because the most productive firms benefit from export growth, or it could be because domestic firms become more productive by competing in export markets. Regardless of the reason, our research shows that firms that participate in the global economy see stronger earnings and productivity growth and that their workers experience higher wages.
The U.S. is in a strong position to take advantage of the changing nature of globalization. In the past decade, globalization has become more digital, with data flows increasing by a factor of 45, contributing as much as $450 billion to global growth annually. As the world’s largest producer of digital content, platforms, and companies, the U.S. has a unique opportunity. The U.S. runs a large surplus in digital services trade with the European Union.
Digitization makes it easier for smaller firms and startups to participate in the global economy. By joining e-commerce marketplaces, individuals and small companies can reach a critical mass of global customers. Sellers on eBay, for example, can sign up to be featured on eBay sites in other countries, join a global shipping program, and clear transactions with PayPal. Today there are some 50 million small and medium-size enterprises worldwide on Facebook, a number that has doubled from two years ago. We’re also witnessing a new breed of startup that may help lead the way. A joint McKinsey Global Institute/1776 survey of startups worldwide found that 86% engaged in some form of foreign business activity from inception. These tech-savvy, globally minded entrepreneurs think nothing of seeking out venture capital from Europe, hiring talent from South Asia, and selling into markets around the world right out of the gate.
That leaves the question of how to help those hurt by trade and globalization. Too often we talk about retraining as a panacea; we need to do much more. We need to reinvest in dislocated communities, lower the costs and barriers to trade, match smaller firms with foreign markets, match communities with foreign investors, ensure unfettered access to cross-border digital platforms, provide greater safety net measures, update our system of unemployment insurance, provide relocation assistance, encourage portable health insurance — and yes, retrain our workers for the new opportunities that will result.
Retraining does not involve a one-size-fits-all approach. Many manufacturing industries have a large and growing share of older workers; in the commercial and service equipment manufacturing industry, for instance, nearly a third of workers are over the age of 55. In such cases, retraining needs to take into account the different requirements of each workforce and needs to be part of a wider set of supports for affected workers and communities. Retraining will be far more successful if the programs and educational institutions that help workers reskill, such as community colleges, are upgraded and well funded. Retraining for experienced workers should be delivered quickly, efficiently, and through a wider variety of learning pathways. This could include apprenticeships by employers, certifications by industry consortia, joint programs by local government and industry, or other programs that provide portable credentials.
Above all, it’s important to recognize that our economic transition to a global and digital economy is here to stay, and that there’s a need to foster a climate of courage and creativity to help all Americans start and continue adapting. Only by broadening participation in the global economy, rather than by trying to turn back the clock, will America discover answers to today’s most vexing economic problems and create a cycle of growth and shared prosperity for decades to come.
This article originally ran in Harvard Business Review.