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Markets: Benefiting From Free Trade
New York: January 30, 2006
By John R. Stephenson

It seems that hardly a week goes by without yet another American company restructuring. General Motors was the first to go into the shop and most recently it was the Ford Motor Company. The headlines are staggering, with job losses in the tens of thousands — all from a single company. For some, all of this was inevitable. How, one wonders, can a bloated company with far too many costs and too little sales make it in the world of free trade? With more and more competition coming from offshore, are Ford and General Motors a sign of more painful restructuring to come?

For many, the answer is yes . The culprit in all of this is none other than free trade and the outsourcing of both goods and services that it brings. How can a developed economy, such as that in the United States, possibly compete with India and China who have massive populations of eager, well-educated workers who are willing to work for a tenth of the wages we pay. To the pundits, America and the West in general are destined for a massive decline in living standards, courtesy of free trade and outsourcing.

The solution? Erect massive trade barriers to protect certain industries from competition. Only through protectionism can our standard of living be preserved. But is this really the case?

No. The reason? The assumption that outsourcing is bad is flawed. Those who argue that outsourcing is the root of all evil assume that the size of the economic pie is fixed. In other words, it is a zero-sum game. If the size of the pie is fixed and there are only so many manufacturing jobs and white-collar jobs to go around, then low-wage competition brought about through outsourcing is indeed a bad thing. But to believe that, you have to believe that all the innovation that is going to occur in the world has occurred.

But that makes no sense. Innovation has marked our lifetimes. New industries have been developing all the time, whether they have occurred through the commercialization of the Internet or through affordable air travel, change has marked our lives. And while change has destroyed certain industries, new industries have developed to take their place.

As more and more people around the world become liberalized through free trade with their neighbors, they have the time and resources to start to demand what the world has to offer. Already, this is starting to happen in places like Bangalore, India where the wages of Indian software writers are starting to leap toward that of their Western counterparts.

Not only that, but since ideas are unlimited, the possibilities for employment in idea-generated businesses are also unlimited. For this reason, the world economic pie continues to grow. Instead of less opportunity globally, there is more. The reason? Because things that once were regarded as wants suddenly become needs.

Whole new industries, such as the Internet, which brought about low-cost email service and 24-hour access to information, were industries that just weren't in existence ten years ago. Today, the Internet and the associated businesses of e-commerce (electronic commerce) employ millions of specialists all over the world.

Every time the world has undergone expansions in trade, dislocations and upswings in global wealth have been the order of the day. Here at home, the supply of college-educated workers grew rapidly throughout the 1960s, 70s and 80s. But in spite of this growth, the wages for these same workers continued to rise at a faster rate. This is because the economic pie continued to grow as consumers began to demand a greater range and complexity of products and services. In turn, this created demand for people with the skills and abilities to create and deliver more sophisticated products and services.

Is this still true in a world where countries such as China and India, with their massive populations, are starting to compete with us in the West? Yes. China and India are not in a race to displace us at the bottom of the economic pyramid, but rather at the top. They want what we want (strong, economically viable businesses with recognizable brands the world over). The more they succeed, the more we will succeed, as successful individuals in these countries trade-up from motor scooters to cars and computers and in the process increase the size of the economic pie.

But as we continue to globalize, there will continue to be winners and losers. Those that adapt — win. Those that don't adapt or who can't innovate — lose. For many, it will be necessary to broaden our skills both horizontally and vertically by retraining for the new jobs in the global economy. But with an increasing economic pie, markets and margins for idea-generators should continue to grow.

Rather than fighting the reach of a more interconnected world, individuals should try and embrace it. While the march of globalization is likely inevitable, our response is not static. The world is getting more complex, large and sophisticated — so our products and services need to as well. Only through upgrading our skills can we hope to get a larger slice of an expanding global pie.

For investors, the reasoning is simple. Invest in businesses at home and abroad that have a comparative advantage the world over. Does it make sense to invest in the car business in North America when the rest of the world seems able to produce a more attractive, reliable car for better value? No. There are plenty of business opportunities in gold and oil & gas companies, to name a few, where everyone around the world wants these products and yet few global suppliers exist. Isn't that a much better idea?

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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