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Farewell to Free Trade. What Will Take Its Place?

Say goodbye to the era of free trade.

It was transformative while it lasted. But a new administration that is openly hostile to multilateral free trade agreements, coupled with rising sentiment among Americans against offshore production, cheap imports and open borders, promises to reverse decades of progress toward globalization.

In fact, the concept has been moribund for at least five years, says Kevin O’Marah, head of research with SCM World. China is no longer the source of low-cost labor for a broad range of consumer products. And even if it still were, “it doesn’t make that much sense to ship items all over the planet all the time, just because someone’s willing to work for a little less money,” O’Marah says. “Globalization ran its course.”

The main driver all those years was the consumer’s appetite for rock-bottom prices, which big-box retailers such as Wal-Mart Stores Inc. were happy to provide by selling huge selections of imported goods. At the same time, manufacturing jobs in the automotive, aerospace and industrial sectors were fleeing to offshore locations.

None of this has killed the U.S. manufacturing base, which remains the nation’s largest economic sector by far. While the number of plant jobs has fallen by approximately 5 million since 2000, total manufacturing output has doubled over the last three decades. Nevertheless, offshoring to China and other low-cost countries has caused a great deal of pain to American workers over that time.

Notwithstanding the ball cap that the President-elect sported during his campaign, the country is not about to step into a giant time machine and rewind to the glory days of post-World War II America. Tax breaks won’t bring those high-paying manufacturing jobs back, at least in the form they existed when they left. Robotics technology is drastically reducing the number of human bodies needed on the assembly line and in the warehouse. And much of the production capacity returning to the western hemisphere will end up in Mexico and other lower-cost countries in Latin America.

The big opportunities for job growth will be in the service sector, says O’Marah. He sees the emergence of an army of workers who will take care of machinery and equipment, even to the point of becoming neighborhood craftsman and small shopkeepers. Add to that the continued growth of the gig economy, typified by Uber, Lyft and Airbnb, Inc., who rely entirely on an independent and temporary workforce. “Uberization” will take place throughout the supply chain, affecting such tasks as trucking, storage, field service and personal shopping.

When it comes to hiring labor and crafting supply chains, O’Marah says, the key word will be local. He envisions manufacturing plants and distribution centers shrinking down in order to serve smaller and more proximate markets. Such a trend would be in keeping with the consumer’s growing demand for specialized product and rapid fulfillment of online orders. “E-commerce facilitates massive localization,” O’Marah says, adding that providers can tap into “incredibly specific information about what each home wants.”

Great for the consumer, but not necessarily for the worker who’s producing the goods. Gone are the days when a high-school graduate could make $30 an hour on the assembly line or in a machine shop. And job security will become a thing of the past. The new economy won’t be kind to those who aspire to a comfortable middle-class existence, yet lack technological skills and a college degree.

Trade agreements will still be around, but multilateral treaties in the mode of the North American Free Trade Agreement (Nafta) and proposed Trans-Pacific Partnership (TPP) “will start to rust and cease to operate,” says O’Marah. He likens the development to the death of old empires just prior to World War I. The big trade pacts, he says, “are complicated, political, unreliable and don’t stay fixed.”

Even bilateral trade deals, such as the 2012 U.S.-Korea Free Trade Agreement, will undergo intense scrutiny. “I don’t think that F.T.A.s are going to solve the globalization problem,” says O’Marah. More likely to find favor in the years ahead, he believes, will be business-to-business arrangements. Ironically, multinational corporations could end up with a broader global scope than trading nations – assuming that’s not already the case.

In place of trade pacts, get ready for trade wars. To some extent, that’s already happening, with China and the U.S. filing a rash of antidumping complaints and slapping punitive duties on one another’s products. As a result, U.S. exporters will increasingly find themselves shut out of lucrative markets. “There’s no question that a trade war is underway,” says O’Marah. “It’s just a question of what various bombs are going to go off along the way.”

Nevertheless, he believes, global businesses will adjust. Chinese hiring managers still plan to add six supply-chain-oriented jobs for every one they cut, and the ratio in the U.S. is as high as three to one. (In Mexico, O’Marah, notes, it’s 47 to three, suggesting that the bulk of future economic growth will be taking place south of the border.)

How it will all shake out depends on a number of unpredictable variables – interest rates, tax policies, oil prices, currency exchange values and infrastructure investment, to name a few. What’s undeniable, says O’Marah, is that we’re in for an “epic shock” to the world economy. And we’ll be dealing with the aftermath for years to come.

Comment on This Article

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Patrick Ryan

Monday, 12-12-16 08:31

Nearsourcing is becoming a reality for businesses looking for solutions to the rising costs of fuel and Chinese labor. What we have to see is what countries they will go to and why.


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