UPS President Brings Home Outsourcing Debate

By David Abney

(Excerpts from the UPS International president’s keynote address to the Southern Growth Policies Board on June 13, 2004.)

This is an election year. So, of course, jobs are front-page news. Many of these stories remind us that American companies have outsourced jobs overseas, and that globalization is responsible. What could be so bad, then, about taking steps that will limit trade, if these steps can protect the erosion of American jobs?

At the most basic level, that interferes with a process history tells us is human nature. Trading is as natural as communicating. In the l9th century, technology advances in ocean steamships and the intercontinental railway opened new territories and U.S. state markets to trade. And prosperity quickly ensued for poor and rich alike.

More recently, networking technologies like the World Wide Web have allowed information to cross borders at cyberspeed. As we remember the achievements of President Reagan, we remember how democracy has spread around the world with the fall of the Berlin Wall in l989. We continue to see the European Union and the euro expand. And new trade agreements that forge new partnerships are unfolding all the time. That’s all been a recipe for an explosion of global trade.

Just 30 years ago, some $10 billion in foreign exchange transactions occurred every day. Today, $10 billion in foreign exchange transactions occurs every second.

Today, 20 percent of all manufactured goods cross national borders. By 2020, that number is expected to increase to 80 percent. Of course, technology and open borders have made it easier for some manufacturing jobs to follow the path of lower labor costs to developing nations. But we shouldn’t forget that the rest of that story means we receive the benefits of lower prices when we import goods produced at lower costs.

What can protectionist steps accomplish in such an environment?

Consider candy cane manufacturing. Despite the fact that 90 percent of the world’s candy canes are consumed in the U.S., manufacturers have sent much of their production south of the border in the past five years. At the same time, U.S. protectionist quotas on sugar imports have caused the domestic price of sugar to soar 350 percent higher than world market prices.

As candy makers have relocated production to countries where sugar is cheaper, between 7,500 and 10,000 workers in the Midwest have lost their jobs. They are victims not of outsourcing, but of protectionist measures called for by outsourcing’s critics.

A similar story is found in the steel tariffs imposed from March 2002 until December 2003. The tariffs were meant to protect steelworkers. But in the U.S., steel users employ roughly 40 times more people than do steel producers. Thus, according to estimates by the Institute for International Economics, between 45,000 and 75,000 jobs were lost because higher steel prices made U.S. steel-using industries less competitive.

Protectionism is a misnomer. It more often harms, rather than protects. The reason is today’s world is interconnected and interdependent. Even the U.S. can’t go it alone. We need the rest of the world as much as it needs us. On the other hand, what about the opportunities presented by a global economy? The picture is bright for the U.S. and the South.

As the world’s second-largest exporter, global trade today accounts for a quarter of the U.S.’s $11 trillion economy. And here are some important trends to keep in mind. Last year, the U.S. posted more than a $53 billion surplus in private services trade with the rest of the world.

As producers, consumers and trading partners, China and India are juggernauts of growth. Both of the world’s most populous countries have fast-growing middle classes. A recent study found that l9 percent of all Chinese were middle class in 2003. That’s up from 15 percent at the end of l999. India’s middle class – at less than 10 percent of the population in l985 – has more than tripled since.

The recently elected prime minister of India, Monmohan Singh, understands his nation’s connection to the rest of the world. And he believes that effective government reforms that further global trade are essential to raising the standard of living of India’s ordinary citizens.

Of course, as India increases in prosperity, it will need to boost its infrastructure in areas like telecommunications and computing products. Since U.S. companies are the world’s leaders in producing these and other high-level services, our exporting opportunities will increase. And exporting is a major job creator. More than 10 million American jobs are now tied to exports.

At UPS, every 45 new international packages either entering or leaving the U.S. through our system each day creates a new job. And jobs created by exports pay 13-18 percent more, on average, than non-export jobs, according to U.S. Trade Department estimates.

And then there’s the global economy’s “in-sourcing” effect to consider. In-sourcing describes the jobs created by non-U.S. companies that have located operations in the U.S. According to the Bureau of Labor, the number of outsourced jobs increased from 6.5 million in l983 to 10 million in 2000. But during that period, the number of in-sourced jobs increased even more – from 2.5 million to 6.5 million.

Since l990, foreigners have made direct investments of $1.5 trillion in U.S. companies and factories. And foreign firms are responsible for more than 6 million U.S. jobs.

In the South, one need only look at the impact of a single industry – automobiles – to see the benefits of in-sourcing. A generation of hyper-efficient foreign-owned factories have popped up across America’s rural South in places like Lincoln, Al., Canton, Miss., Spartanburg, S.C., and Buffalo, W.Va.

These growing new car factories have employed thousands. And they’ve replaced thousands of jobs lost in textiles, and other manufacturing industries in the South. And for each auto job created by these operations, five additional jobs are created in supplier factories, or elsewhere in the community.

As Detroit auto companies use more imported parts from Mexico and other countries, their contribution to the U.S. economy is slipping. At the same time, the contribution of foreign-based companies is increasing. That’s another interesting dynamic of the competitive global economy.

What do we need to do to take advantage of this transformed world economy?

The South can draw upon many strengths. Our region has a rich history of trading. Southern ports are among the oldest trading centers in this country. The port of Charleston sent the rice that fed Napoleon’s Army in the early l800s. More recently, Georgia has played host to the world and its leaders in hosting the ’96 Olympic Games and the G-8 Summit.

Southern urban centers like Atlanta and Charlotte are home to a number of the world’s leading global companies including Coca-Cola, Home Depot, Georgia-Pacific, Wachovia, Bank of America, UPS and others.

Three of the last five U.S. presidents have been from the South.

I can tell you from my personal experience that the South is recognized by business people around the world for taking a pro-business posture. And the South is one of the nation’s most diverse regions – adding new skills, points of view and market opportunities for our communities.

Georgia, for example, has the fastest-growing Hispanic population. And the highest number of new small businesses in the U.S. are established by Hispanics. Sixty percent of these businesses are owned and operated by women. Our increasingly diverse region reminds us that globalization is more than just an economic movement. It’s first and foremost a social movement, involving connections among people, cultures, currencies and institutions.

Fortunately, I think there’s a growing realization in the business community that if we’re to make the global economy a sustainable success, we need to invest not only in offshore markets, but in people. If people in the South are dislocated from jobs, we can help them get new jobs, or prepare them for a future of good jobs that are requiring increasingly higher skills. If we are to win in this new global economy, we absolutely must work together to make education and training at all ages a priority. Education is critical to our economic development futures.

UPS is doing its part. As one of the five Welfare-To-Work Partnership founding companies, we’ve provided training and found jobs for more than 60,000 former welfare recipients, many throughout the South.

Through our Earn and Learn program, we’ve provided students at 34 colleges and universities within the Southern Growth Policies Board’s 13-state region with tuition reimbursement assistance and job experience.

Our Metro College program in Louisville, a joint effort coordinated by UPS, the state of Kentucky, and local universities, pays all tuition expenses at local colleges for students who work part-time in the UPS Louisville operations between 10 p.m. and 4 a.m. More than 1,200 students are now enrolled in this full tuition assistance program.

Helping Americans is important. Helping people in the offshore communities we do business in is also important. Poverty is a world-wide affliction. Companies have begun to realize that if they make long-term investments in the social wellbeing and environments of the world’s communities, it benefits all concerned.

UPS has developed a “think global, act local” approach to offshore markets. Of our 40,000 employees in overseas operations, fewer than 40 are U.S. ex-pats.

For businesses, a responsible social, environmental, and economic approach to offshore development can bring the benefits of new market opportunities, and what we describe as the synchronized global supply chain.

The latter concept is a lot like Henry Ford’s conveyor belt. Ford demonstrated the benefits of division of labor when he unveiled the world’s first automated conveyor belt at a new Model T plant in 1914. He revolutionized the way cars were built. Before then, workers would come to the cars. Now, the cars would come to the workers.

As Model Ts moved down the conveyor belt, workers would specialize in certain tasks. Some would put on wheels. Others would attach fenders. And on it went, each person doing what he did best. This efficient division of labor helped cut the time it took to turn out a Model T from 10 hours to 93 minutes. And the cost savings allowed Ford to cut the price of the car dramatically, making it affordable for the masses.

Global supply chains are like really long conveyor belts where workers in different countries contribute by doing specialized tasks faster, cheaper, and more efficiently. Costs go down; prices go down; new products get developed; businesses grow; jobs are created; wealth is generated, and investment dollars are spread around the world. In doing business in this climate of greater specialization, smart Southern companies are working to synchronize their supply chains and their businesses.

Scovill Fasteners of Clarkesville, Ga., is one such company. The 200-year-old firm manufactures snaps, buttons, buckles and other fasteners for apparel makers and companies in other industries. In recent years, many Scovill customers have moved their manufacturing operations to Mexico and Asia. In an effort to get closer to customers to improve service and cash flow efficiency, Scovill believed it could improve access to customers by moving its inventory to those locations as well.

But in doing so, the company would not be able to use its assets for additional working capital. That’s because few, if any lenders, allow customers to borrow against collateral outside their national borders.

UPS provided a solution by handling Scovill inventory from UPS warehouses in Laredo, Texas, and Hong Kong. That included handling product fulfillment, securing customs clearance, and providing just-in-time delivery to Scovill customers. Our trade financing arm, UPS Capital, also managed Scovill’s flow of funds by lending on the value of the capital. That’s something no other lender was able to offer.

Companies like Scovill illustrate that the story to be written about the South’s economic future is one of innovation. That’s not an unfamiliar plot. Some of you may recall that 20 years ago many pundits said we should fear the Japanese economy. Then, it appeared Japan was poised to dominate the world economy at the expense of the U.S.

Between l980 and l998, we did lose 44 million jobs. But through American innovation, particularly technology advances, we replaced them with 73 million better ones. So the net of U.S. innovation was a gain of 29 million higher paying jobs.

The global economy provides us that same opportunity. We must use our comparative advantages to develop and export the high-level services that the fast-expanding middle classes around the globe already need. And we must work together to educate and train a skilled Southern workforce to succeed in an economy that will produce high-paying, high-skilled job opportunities.

Ninety-five percent of the world’s consumers live somewhere other than the U.S. Sixty percent of them are in Asia, where middle-class spending power is rapidly accelerating. That’s a pretty large market opportunity.

If we as leaders of government, education, economic development and business can collaborate to move the needle from “global-phobia” to “trade literacy,” we’ll be well on our way to enjoying a prosperous future ahead.

Reprinted by the Georgia Public Policy Foundation with kind permission of David Abney, president of UPS International, who began his UPS career in 1974 as a part-time employee loading and unloading packages.The Georgia Public Policy Foundation is an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (July 30, 2004). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.

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