Demographic Pressure: Help From Trade

Trade is the last and doubtless the most effective economic and financial answer to the country’s unfolding demographic burdens. My past three columns have described in turn: 1) the economic and financial problems that, in the absence of remedial action, could develop from the increasing overhang of dependent retirees; 2) the domestic means to mitigate the strains; and 3) the role of targeted immigration as a way to protect the country’s prosperity. This last in the series will describe how globalization will help relieve these strains and how efforts to use it will alter the entire focus of the economy.

History certainly testifies to the perennial role of trade as a way for economies to supplement their weakness and capitalize on their strengths. It can do so in coming years and decades. Increases in imports can sidestep the otherwise severe limits of its pinched demographic situation by giving this economy access to the youthful, eager workforces of the emerging economies even as those workers stay at home abroad. The United States can manage this solution by relinquishing to these newly emerging economies those simple products and processes that require a lot of labor input and that do not carry enough value to support this nation’s relatively high wage scale. It can further improve on the situation by concentrating its economic efforts on more complex, higher-value-added items and processes that capitalize on this country’s relative abundance of technology, equipment, and sophisticated industrial infrastructure.

A trade symbiosis of this kind between developed and emerging economies can last a long time, too. The United States retains huge and lasting advantages in higher-value production. A comparison with China, one of the best positioned emerging economies, is telling. Though that country produces many remarkably talented people, its broad workforce still has relatively limited skills. One person in ten in China still cannot read his or her own language, and that is a better rate than most other emerging economies. The average American worker has over 13 years of schooling compared with less than 8 in even the most advanced emerging economies. The average Chinese worker has barely 5 percent of the productive equipment at his or her disposal that his or her American equivalent has, and China is better off than most in the emerging world. Though Beijing’s one-child policy spells future demographic problems in that country, it will take decades to equal current demographic pressures in the United States. During this long interim, China and certainly other emerging economies will continue as a source of ample, if unsophisticated labor, while the American advantage in sophisticated products will remain.

A parallel symbiosis will surely follow in finance. Investment monies from the developed economies will follow the labor-intensive processes and products abroad and support more sophisticated technology-intensive processes and products at home. Retirees in the United States will happily support such trends with their investment dollars as they search for high-returning assets to support their long retirements. That investment allure will only increase as they face a constrained growth environment at home. Firms will tend increasingly to divide their operations and efforts, building, outsourcing, and buying simple, labor-intensive operations in the emerging economies, while emphasizing at home the more sophisticated, technology-and-capital-intensive operations. Indeed, as Thirty Tomorrows documents, the process has already begun.

But this solution will force significant and sometimes painful adjustments on both the United States and emerging economies. The shift toward high-value, capital-intensive products will displace the many today who still work in lower-value, labor intensive industries. To help these workers adjust and at the same time get the most out of them for the economy, the nation will need to make a more significant commitment than it has thus far to training and retraining. To maintain its technological lead, the country will have to pursue tax and regulatory reforms that encourage innovation and investment. The nation will need to upgrade its educational effort as well. The production of scientists and engineers will be a part of that effort. But it will also need to cultivate people who think outside hierarchical, intensive technical disciplines, for history shows that it is they who make the commercial applications, frequently in areas never considered by the scientists and engineers. While all this is going on, an increasingly better- trained workforce will naturally push business practice away from the command and control approach to organization that still largely dominates government and corporate America. A very different economy and workplace will emerge.

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