Globalization's Impact on the U.S. Economy in the 1990s

Introduction: Defining Globalization and Its Mechanisms

Globalization, generally speaking, refers to the integration of the global economy (Hanson, 2001) as economic resources — especially the means of production and capital — move freely across national boundaries. This movement has been facilitated by a regime of lower tariffs, reduced trade restrictions, greater access to information, and the enactment of laws and formulation of policies that offer various inducements to foreign entities to relocate outside the confines of national boundaries.

The globalization of production has meant that one of the most enduring concepts in economics — David Ricardo's theory of comparative advantage (Hollander, 1979) — no longer means that countries may only specialize in the production of goods for which they have been historically deemed most suitable in terms of their endowment of economic resources (Porter, 1990).

The principal vehicle of global change in production has been the multinational or transnational corporation (Lagace, 2002). The multinational corporation (MNC) carries with it the wherewithal for setting up production facilities far removed from the country of origin. It will transplant a manufacturing facility, lock, stock, and barrel if necessary, from the home country to the host country. It brings capital, skilled manpower, and specialized knowledge. It is truly an agent with all the potential to act as a catalyst for meaningful change.

The Automotive Industry and the Rise of Foreign Manufacturers

The United States was a world leader in manufacturing for the greater part of the 20th century. However, its previously seemingly unassailable position as an automotive production powerhouse was gradually eroded starting in the 1980s. Japanese manufacturers, with their innovations in so-called lean production techniques, consistently outperformed their American counterparts and were able to deliver a better product at a lower cost.

The gradual influx of Japanese automotive manufacturers into the United States (Dicken, 2003) is illustrated in Fig. 1 (Appendix). U.S. automotive power in the 1980s was concentrated in the "Big Three" corporations — GM, Ford, and Chrysler — and although it had become evident even then that foreign auto manufacturers were a force to be reckoned with (Michel Freyessenet, 1998), the Big Three relied on the loyalty of the American consumer for home-grown products. This loyalty was certainly a significant factor, but in time a dent was made, and slowly but surely a preference shift toward foreign automobiles became established. The "Buy American" battle cry became muted and then fell silent.

The impact of these changes in the 1990s was directly instrumental in a loss of customer base for Big Three products. By 2000, their market share had declined from 71% in 1999 to 69% in 2000. This downward shift accelerated in the post-2000 period, falling to 57% in 2006, while the share of foreign automakers rose from 29% in 1999 to 31% in 2000 and to 43% in 2006 (Charleston, 2007).

As more and more of the finished product began to be made in Japanese auto plants on American soil, the supply chain also began to change. Suppliers in the home country were preferred by Japanese corporations, which continued to buy from them and also encouraged — and in some cases convinced — some to relocate to America. U.S. suppliers for the Big Three continued to serve their traditional customer base, but some began to diversify and won new clients among the Japanese corporations.

For U.S. suppliers, the dynamics of globalization led to intense price competition, as the Big Three aggressively squeezed them to reduce product costs. This was necessary to compete against foreign manufacturers whose finished products were characterized by lower price, significant fuel efficiency, compact size, greater reliability, and good after-sale service — qualities that won over more and more U.S. customers. As a result, the average operating margin for several large U.S. suppliers shrank from 7% in 1996 to 5% in 2000, and further to 3% in 2005 (Charleston, 2007).

The quest to reduce labor costs led to the relocation of supplier production capacity from the relatively high-cost Midwestern states to the relatively low-cost Southern states within the U.S. In time, suppliers also began to outsource parts production to lower-cost manufacturers abroad in Latin America, Eastern Europe, and Asia.

Labor, Unions, and the Decline of Manufacturing Employment

Employment in motor vehicle manufacturing and automobile body and trailer manufacturing remained essentially flat, while employment in motor vehicle parts manufacturing followed a cyclical pattern reflecting industry dynamics following the arrival of foreign automobile manufacturers in the U.S. (Fig. 2, Appendix).

The advent of foreign manufacturing capacity on U.S. soil, as well as an increase in immigrant workers, led to a steady decline in the strength, membership, and bargaining power of labor unions. This kept wage levels down, especially for unskilled and semi-skilled workers. Fig. 3 (Appendix) illustrates the decline in union power between 1983 and 2000.

In less technology-intensive areas such as apparel, textile, and footwear production, the downward trend is even more pronounced (Fig. 4, Appendix). The decline in union power is also evident in the number of work stoppages involving 1,000 or more workers (Fig. 5). In these segments of the U.S. economy, the domestic manufacturer lost out to low-cost foreign suppliers (Florida, 2004). The drift away from U.S. production became firmly established in the post-2000 period, and employment figures in these sectors reflect this pattern (Fig. 6, Appendix).

Conclusion: Globalization as an Irreversible Force

Perceptions notwithstanding, globalization is a movement that cannot be halted or reversed (Bhagwati, 2004). Human evolution has reached a stage where national boundaries are no longer treated as sacrosanct and planet earth is increasingly viewed as a global village — albeit a village with over 7 billion inhabitants living on five continents. There is no doubt that globalization has greatly benefited developing countries as they receive infusions of capital and skills that transnational corporations bring in their wake. As these countries achieve a new, qualitatively higher threshold of life, their economic power is augmented. It is this economic empowerment that will eventually benefit all of humankind.