Foreign Affairs

GM: The Global Economy in Flux

At Redbank Valley High School in New Bethlehem, Western Pennsylvania, nearly everyone knows someone who’s lost a job. A once vibrant factory town, the community suffers from high poverty rates and struggles with unemployment as factory jobs disappear. In 2016, when New Bethlehem voted overwhelmingly for Donald Trump, the mere mention of Hillary Clinton at Redbank elicited groans from students.

Donald Trump blew Hillary Clinton out of the water in Rust Belt towns like New Bethlehem in 2016 because of his vision for industrial revitalization. He promised to bring jobs back home and create new, low-skilled jobs in iconic industries such as coal and auto. Indeed, his administration has gone to impressive lengths over the past two years to prove that it is intent on reversing over a decade of American industrial decline.

At the beginning of his presidency, President Trump paid a much vaunted visit to Carrier’s factory in Indiana. Carrier, an American company that produces air-conditioning units, had planned to shift manufacturing south of the border for lower costs. However, after receiving millions in state subsidies, Carrier agreed to keep its Indiana plant open. President Trump quickly swooped in to claim credit for saving nearly 1,000 jobs.

Given its efforts to revive American manufacturing, the Trump administration initially reacted to General Motors’ recent decision to cut 14,000 jobs and close five North American plants with a mixture of shock and horror. President Trump responded on Twitter by threatening to cut “all GM subsidies.” Cries of condemnation soon also rang out from our neighbor to the north, which will also be affected by GM’s restructuring.

These recent developments demonstrate just how tough market forces are to overcome. They also highlight underlying changes in the nature of the global labor force that are transforming the world economy. A slowdown in global workforce growth, the decline in global demand for labor, and the rise of robots are reshaping the labor market, transforming cost structures, and forging a new era of capitalism. In this brave new world, governments and firms will either sink or swim depending on their willingness to adapt to new market dynamics.

Past Meets Present

The past 25 years have been marked by unprecedented geopolitical stability and increasing globalization. After the fall of the Soviet Union, these trends accelerated as economies once hidden behind the Iron Curtain or aligned with the Communist Bloc underwent liberalization that linked them with global consumer markets as well as foreign markets for labor and capital. However, these wonder years were underpinned by American dominance, and America’s status as a hyperpower is coming to an end as rival economies with vastly different political systems acquire comparable wealth.

These geopolitical tremors are occurring simultaneously as the West distances itself from globalization. Several decades of globalization have brought unevenly distributed growth, and people negatively impacted by disruption and growing wealth inequality have voiced their discontent in recent elections. Nationalist movements in America, France, the U.K., and elsewhere have responded by promising to protect domestic jobs from foreign competition. However, nationalist policies are struggling to push back against automation, outsourcing, and unfavorable demographics.

Deus Ex Machina

According to a report published by Bain & Company, automation “may eliminate 20-25 percent of current jobs” by 2030. The declining cost and rising speed of computing means that the automation juggernaut will continue to hinder efforts to boost the number of middle- to low-income manufacturing jobs. Although Bain & Company expects the approaching wave of automation to displace workers at much higher rates than in the past, the biggest challenge to labor may have more to do with unfavorable demographics than technological improvements.

As populations plateau across East Asia and the developed world, the abundance of cheap labor that made manufacturing cheap in places like China will disappear. Shrinking labor pools will drive up wages, but also encourage firms to automate more and more of their processes. And as for Carrier? After deciding to stay put in Indiana, it shed 600 jobs of the 1,000 that President Trump purportedly “saved.” Instead of shifting jobs to Mexico, the company’s management simply decided to automate instead.

Even as labor markets around the world shrink, the manufacturing labor costs in places such as East Asia will remain significantly lower than the ones in America. Volatile business environments and unprecedented foreign competition create risks that firms will feel pressured to mitigate by either automating or outsourcing. Trade wars and geopolitical tensions raise the cost of doing business by disrupting complex international supply chains, thereby pressuring firms to find alternative ways of reducing costs. Tariffs on steel and aluminum, key raw materials required to produce vehicles, have cost GM $300 million and were one of the reasons cited by GM for reducing production and shutting down plants in North America. Coupled with the fact that retaliatory tariffs have made exporting to China, GM’s biggest market, expensive, President Trump’s measures have backfired by actually making production in China more economical.

The Future

Opportunities for automation are penetrating the services sector as technology improves. Clerical jobs and tasks are prime targets for automation, and the above report predicts that service sector automation could displace up to 25 percent of the national workforce by 2030. Even if your job is not on the chopping block, some the peripheral tasks you perform could be. In tomorrow’s business environment, workers who add value to their work and possess interdisciplinary knowledge will be more likely to keep their jobs.

As we enter this new era suffering from historic levels of inequality, the people best positioned to confront these new challenges are the best paid and most well-educated people today. These trends, left to play out on their own, would likely reinforce existing inequality. So what can we expect?

Historically, governments have opted to intervene in situations with high levels of inequality to maintain social stability. Therefore, we can expect more government intervention in the near future. Perhaps not always the sort of protectionist ideology espoused by the Trump administration, but maybe more efforts aimed at redistributing wealth and retraining workers. Of course, the choice of remedy would vary depending upon the country’s political climate.

Several countries already experiencing this transformation, the first and foremost of which is Japan, offer valuable lessons for adapting to a demographically challenged society with widespread automation. Prescient of its country’s deteriorating demographic situation, the Japanese government began early on incentivizing continued labor force participation among older workers. Various policies to provide unemployed middle-aged workers with seminars and counseling services promoting re-employment were introduced in the 1970s to offset the declining availability of labor. Partly due to these initiatives, a highly automated Japan boasts an employment rate among men aged 60 and above that is 30 percent higher than the one in America.

The failure to keep GM from trimming its workforce and shifting manufacturing to China reveals the limitations of economic nationalism. In short, protectionism will not shield the American economy from technological and demographic disruptions affecting the globe. Because of its status as a leading tech innovator, America has the resources to respond to these changes. However, visionary leadership at the top of the political system is needed in order to marshal America’s strengths to prepare rather than protect workers from the inevitable disruptions about to rock the globe.

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