This is Bangalore Calling: Hang Up or Speed Dial? What Technology-Enable International Trade in Services Means for the US Economy
Article published by the Federal Reserve Bank of Cleveland
Globalization, always a contentious issue, has become even more so with media reports of U.S. service-sector jobs being outsourced to emerging-market economies, such as call center operations to Ireland or programming jobs to India. Traditionally, these jobs have been considered “nontradable” and therefore safe from the competitive forces of international trade and investment. But increasingly, technological advances are making it easier to buy services from other companies, even those in developing countries, where savings in the cost of labor or the opportunity to use the 24- hour clock to speed product development can be irresistible.
Both technological advances and globalization cause dislocations of domestic labor. They also generate great gains to the U.S. economy. But technology and trade have become so interdependent and mutually reinforcing that it is increasingly difficult, and in some sense meaningless, to try to separate out which is the cause of any given gain or loss. Because technology and trade reinforce each other, deeper global integration and increased worldwide sourcing of products and services have the potential to generate greater gains, and greater adjustment challenges, than either technology or international trade alone have before.
Existing research, mostly on the manufacturing sector, shows well the two sides of globalization. The positive side is well-touted—lower prices and greater variety of consumer goods and business inputs; innovation and efficiency from the discipline of foreign competition; technology transfer and new ideas from global markets. Ultimately, the productivity growth that results creates highervalue products, supports higher wages, and raises employment. These gains from trade result when firms change what they produce and the way they produce it in response to competition, technology, and opportunities at home and abroad. But these gains do not come without dislocations: Firms go out of business, workers lose their jobs, and communities are hard hit.
The Internet and information technology more completely integrate the United States with the rest of the world and extend the competition for markets, investment, and jobs from the manufacturing economy into the service sector. As the U.S. and global economies become more integrated, the gains from trade in services will most likely be greater, but the adjustment costs will probably be more widespread. Moreover, our deeper integration is taking place at a time when large players— China, India, countries of the former Soviet Union—are breaking onto the international scene. Putting the two sides of the new globalization together to make a positive equation for U.S. workers and firms is the critical challenge facing policymakers today.
Gaining from globalization and technological change requires that businesses and workers change what they do. Stopping global integration does not stop technological change. Policies to promote adaptation to a changing environment are critical even without any further international integration. But because technology and trade are more likely to go hand in hand these days, an integrated policy approach is needed, with businesses, workers, educators, and the government working together to maximize the gains and best ameliorate the costs of the changes brought about by technology and trade.
Because the globalization of services is just beginning, we don’t yet know for sure how much we stand to gain from it, but we can expect to gain plenty if the gains from the globalization of manufacturing are any guide. Research using very detailed plant-level data, summarized in a short book by Howard Lewis and J. David Richardson, shows that global engagement through trade and investment has been very advantageous for U.S. workers and firms. First, workers and companies that export have 0.6–1.3 percent faster sales growth and 2–4 percent faster employment growth and offer dramatically better pay and benefits. Exporting is the slam-dunk of global engagement.
But even if a firm only imports, it is more likely to receive foreign direct investment, which pays for advanced manufacturing technologies, which yield higher wages for the workers. For each 10 percent of imported input, worker salaries are higher by $1,000.
This research also finds that multinational groups are more robust than domestic-only companies. Plants that are part of a U.S.-parent multinational company have 11 percent higher labor productivity than those that are only domestic, and this higher productivity supports a 7–15 percent wage premium (blue- and white-collar, respectively). It is also the case that U.S. plants that are owned by a foreign parent are more likely to grow faster, employ more people, use advanced manufacturing technologies, and have 13–19 percent higher wages compared to domestic-only plants.