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Globalization And American Jobs

 February 14, 2012 11:32 AM

A much-talked about article about Apple's role in globalization recently appeared in the New York Times (see How the U.S. Lost Out on iPhone Work). It addresses topics of great interest to many Americans as it attempts to explain why companies, like Apple, seem to be increasingly manufacturing products and therefore, employing workers overseas. Apple's reason for manufacturing abroad isn't strictly about access to cheap labor, though it certainly is a consideration.

…Apple's executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts…China provided engineers at a scale the United States could not match…

[Related -Google Inc (GOOG): Why Nest Labs Deal Is A Wakeup Call For Apple Inc.?]

Paul Krugman similarly recognizes (see Apple and Agglomeration) the importance of scale:

 …manufacturing plants don't exist in isolation; they benefit a lot from being part of a manufacturing cluster, with specialized suppliers and a large pool of workers with the right skills close at hand.

So again, it's not just about lower costs. It's also about the quality of the labor inputs, and the advantages that certain countries enjoy because they have chosen to specialize in certain activities (e.g., manufacturing), building scale and scope that is difficult for others to match.

[Related -Apple Inc. (NASDAQ:AAPL): Why Gross Margins Will Expand In 2014 and Beyond?]

Many have since criticized Apple for its reliance on foreign manufacturers, viewing it as a zero-sum outcome in which one foreign job directly displaces an American job. But this is a shortsighted view. The loss of one job in a manufacturing industry does not necessarily displace a job in the United States –it could be replaced by a service job. And if those service jobs are created in higher-skill, higher-margin, knowledge-based industries, the United States might in fact be better off in the long run. Furthermore, just because manufacturing is currently offshored doesn't mean it couldn't be back onshored if it really needed to be (e.g., if manufacturing were to become too expensive in China).

In this sense, overseas manufacturing is not necessarily bad for our economy. And indeed, Krugman's argument about specialization (and agglomeration) also applies to knowledge-based activities. That is, by allowing other countries to specialize in manufacturing, the US might actually be freeing up domestic resources (resources that would otherwise be tied to the manufacturing sector) to focus on higher-margin, higher value-added activities like software, industrial design, nanotechnology, biotech, alternative energy, etc.

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