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…
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.
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.
If American companies can fruitfully create and develop the valuable knowledge that overseas manufacturers use as key inputs in the production process, they will be in a position to appropriate the lion’s share of the benefits associated with knowledge creation activity. For example, because Apple is intimately involved in, and jealously guards, the intellectual property creation of its software and hardware products, it is able to capture most of the profits associated with the manufacture of its products. For example, the Economist estimates that Apple commands some $368 out of the $560 total revenue associated with the iPhone (see Apple and Samsung’s symbiotic relationship). The remaining $192 is divided among many of the component suppliers.
Although not all companies can emulate Apple, if we have enough of a critical mass when it comes to knowledge creation, in the aggregate, the U.S. will be able to keep its technological lead over other nations. Specialization in knowledge-creation activities benefits from economies of scale, much in the same way as physical agglomeration benefits manufacturers. Specialization in knowledge-creation spawns related knowledge-creation activities. For example, in the case of Apple, its products have resulted in the creation of a variety of cottage industries (e.g., software apps), and have stimulated demand for complementary goods and services. The article acknowledges this point in Apple’s case.
One source estimated that sales of Apple’s products have caused other companies to hire tens of thousands of Americans. FedEx and United Parcel Service, for instance, both say they have created American jobs because of the volume of Apple’s shipments…What’s more, Apple sources say the company has created plenty of good American jobs inside its retail stores and among entrepreneurs selling iPhone and iPad applications.
Overall, I think the NY Times article provides a nice read and raises some important issues. However, focusing only on the jobs that Apple has sent abroad misses half the story. And as I’ve mentioned on this blog, so far I’m not concerned about the competitive imbalances that some have suggested will arise due to a lack of manufacturing in the US (see Globalization Revisited and Globalization Discontents).
As the American economy transitioned from agriculture to manufacturing and then to other industries, farmers became steelworkers, and then salesmen and middle managers. These shifts have carried many economic benefits, and in general, with each progression, even unskilled workers received better wages and greater chances at upward mobility.
Do the gains associated with globalization need to be more evenly divided across the population? Probably. Do we need to do a better job finding gainful employment for workers who lose jobs as manufacturing migrates overseas? Absolutely. But there are long-run gains to globalization, and I don’t believe resorting to protectionism is the right way to go.