Tales of a New America

by Robert B. Reich

  4

  In addition to this worldwide tendency, the special nature of the Japanese-American company has been shaped by certain unique concerns. Foremost has been Japan’s desire to forestall U.S. trade barriers. If the Reagan administration succumbed so readily to protectionism, what about a future administration less ideologically committed to free trade?

  How, then, to forestall American protectionism? By doing an end run around the borders. The strategy had two aspects. First, it was necessary to enter into supply contracts with American companies; second, to build new factories in the United States. In both respects, American workers would get jobs assembling Japanese components and then selling the finished goods to their fellow countrymen. Americans would become partners in Japanese enterprise. As a result, it was thought, the two nations would become a single, integrated, transpacific production system. There would be less demand for trade protection, because there would be less to protect.

  By the mid-1980s the strategy was already bearing fruit. Corporations that were technically “American,” but which had developed close relationships with Japanese suppliers and joint venturers, were steadfastly opposing tariffs and quotas on Japanese imports. Such devices would drive up the costs of their supplies. General Motors, IBM, GE, Kodak, and even Houdaille Industries could be counted on to support free trade. Also on the side of unrestricted trade were certain congressional districts in Ohio, Tennessee, North Carolina, California, and Oregon, where Japanese firms had set up manufacturing operations. Even the United Auto Workers were enthusiastic about the General Motors-Toyota joint venture in California, because it preserved American jobs.

  The strategy had a second advantage for the Japanese. In supplying American companies with key components or entire products, to which the Americans thereafter affixed their trademarks and distributed as their own, the Japanese created a captive market for their wares. And they gained an inexpensive method of distributing them. This meant that the Japanese could negotiate large contracts, wholesale. The costs and vagaries of retailing could be avoided. Risks, accordingly, could be reduced.

  From the viewpoint of the Japanese, these advantages were worth paying for. American corporations that have linked up with the Japanese have thus received attractive terms. American towns that have welcomed Japanese manufacturers have gained good corporate citizens. By the late 1980s the new Japanese-American corporation seemed to be serving both nations well. Or was it?

  5

  The Japanese strategy has benefited Japan in a third but more important way. It is here that Americans might appropriately be concerned, because these benefits have not been entirely reciprocal.

  Look closely at these new joint ventures and transnational investments. There has been a pattern to them. Basic research leading to initial product design continues to be carried out in the United States. Then the specific design and production of the most complex parts and sophisticated assemblies has occurred in Japan. Back in America workers have put the final pieces together. And a different group of American workers has distributed, marketed, and sold the products to other Americans. In other words, Americans have taken charge of the two ends of the production process—the major research innovations and the final assembly and sales. The Japanese have concentrated on the complex production in between, where large numbers of workers gain technological and organizational competence.

  Consider: Through the mid-1980s breakthroughs in chip design continued to occur in the United States. University-based researchers and Pentagon contractors devised ways of cramming ever more memory, logic, or speed into ever smaller spaces. But the Japanese were better at producing the chips cheaply and reliably. So the Japanese licensed the designs and made them there. American computer manufacturers (Honeywell, Sperry, Amdahl) began linking up with Japanese semiconductor makers to get the advanced chips they needed for their computers. At the same time, American chip makers began setting up production facilities in Japan, to be managed and staffed by Japanese. The semiconductors that the Japanese started to fabricate in the United States represented only the most standardized segment of that market, for which all the jobs were relatively routine.6

  It has been the same in automobiles. The new Japanese-American auto company (regardless of whether its name is General Motors or Honda) has been making its engines, transaxles, and complex electronic parts in Japan, along with most of the robots and computer-controlled machines for putting the parts together, and then assembling and selling the results in the United States. The trend was particularly apparent in the production of the smallest cars, which must be designed and manufactured especially carefully in order to minimize costs and maximize comfort. As the Japanese have learned in producing everything from televisions to semiconductors, innovations in products and manufacturing processes often occur at the most compact end of a product line, where the engineering challenges are the greatest. For the same reason, development expenses often are highest at the compact end. But as part of a strategy for gaining experience in applying new technologies, the Japanese gladly bear these costs; the investment will pay off in a work force better able to innovate in the future.

  It has been the same in telecommunications. The breakthroughs have continued to occur in the United States—particularly within universities and defense annexes. But the complex applications occurred in Japan. Regardless of whose nameplates appeared on the new private-branch exchanges, cellular telephones, and optic-fiber cables sold in America, a large proportion of their sophisticated innards were Japanese. It has been the same in consumer electronic products like videocassette recorders, compact disks, and audio disk players; the same for facsimile equipment, large-scale integrated circuits, and sensing devices. Even the steel mills that the Japanese have built or modernized in the United States got their advanced steel-making machinery from Japan.

  6

  Comparative advantage is among the most venerated of economic precepts. It boils down to the dictum that nations should stick to what they do best. To entrust the Japanese with turning our big discoveries into complicated components would by this view be eminently sensible. Japanese workers have been willing, on average, to work harder and for somewhat lower pay than their American counterparts. And Japanese production has been more efficient than the American, particularly with regard to the design, fabrication, and manufacture of complex equipment.7 Americans have made money from transferring our Big Ideas to them. They have made money by selling them back to us encased within terrific products and parts.

  What is left out of this calculation is the value of experience. As has been noted, the accumulation of experience in designing and making new things is critical for improving upon them. The emerging Japanese-American corporation allocates to the Japanese the most important asset for the future—experience in making complex products cheaply and well. They learn how to organize themselves for production—integrating design, fabrication, and manufacturing; using computers to enhance their skills; developing new flexibility; creating new blends of advanced goods and services. They learn how to make the kinds of small, incremental improvements in production processes and products that can make all the difference in price, quality, and marketability. In short, they develop the collective capacity to transform raw ideas quickly into world-class products.

  Such experience in making things is crucial for generating social wealth—in some ways more important even than the activities at either end of the production process, like invention or marketing and sales. Production experience tends to give large numbers of workers skills that have value in global markets. These skills can be applied generally, across all kinds of goods and services—not just the latest inventions. An entire nation benefits from having a large pool of workers who understand emerging technologies and can improve upon them.

  By contrast, the activities at the two ends of the production process either involve relatively few workers, or else entail skills that have little value in trade. Only a comparatively few people g
ain experience inventing the new technologies to begin with. Basic inventions do not raise the overall level of skills in a society, nor do they generate broad experience. They do not lead to the kind of day-to-day improvements in a host of products and processes, across an entire economy, that can only come from a work force broadly engaged with the latest technologies. Basic inventions do of course yield improvements, but these are easily disseminated in blueprints, codes, and instructions—reaching Seoul almost as soon as they reach St. Louis. The jobs at the other end of the production process—routine assembly, marketing, and sales—may involve many workers, but most of these jobs do not teach skills that contribute much to a global economy. Many low-skilled assembly operations will be automated in years to come, or else done by workers in less developed nations at a fraction of the cost. Jobs in marketing and selling to one’s fellow citizens are largely sheltered from international trade. (Knowledge about the tastes and needs of one’s compatriots has worldwide value only to the extent that these compatriots are wealthy enough to purchase things from the rest of the world.)

  The Japanese well understand this dynamic. That is why they place priority upon production experience rather than basic invention or final assembly and sales. Their overriding goal is to raise the competence of their work force in complex production. Complex products relying on advanced microelectronics, lightweight synthetic materials, sophisticated aerodynamics, or bio-molecular manipulation are launchpads for gaining skill and experience in the world’s newest technologies. Attaining immediate profits from these products (and related services) is less important to Japan than becoming a large and experienced world practitioner of the advanced methods that lie behind them.

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  There is a temptation to depict this as a plot through which the Japanese intend to emerge in a decade or so with the world’s most skilled work force, and the highest potential standard of living. But there is nothing particularly sinister about all this. As has been suggested, this sort of race for adding value can be entirely benign—and would be, but for the skewed distribution of production skills that has been the particular consequence of the Japanese-American corporation. Production experience does not come in a fixed quantity, to be divided between Japanese and American workers. Both societies would be better off if both work forces learned how to devise higher-quality products at ever lower costs. For then each nation would have more to offer the other, with the result that both would enjoy even larger gains.

  For us to blame the Japanese misplaces the responsibility. The problem lies not with them, but with us. American-based companies (or the American parts of Japanese-American corporations) could invest in more sophisticated production in the United States, developing in our work force the same base of technological competence and organizational experience that Japan is creating among Japanese workers. To do so would require broad sacrifices and commitments of the sort we are not accustomed to make or to demand of one another. I will discuss this point further in a later chapter.

  Nor can the responsibility rest solely with American corporate executives. They have been performing exactly as they are meant to perform. We can safely assume that the vast majority of our executives are patriotic and care about the future of their country. Their primary responsibility, however, is to enhance the wealth of their shareholders—not to enhance the technological competence of the American work force. When these two goals conflict—because, for example, it is cheaper to buy advanced components ready-made from the Japanese than to build them here—our executives must opt for the shareholders. This is their legal duty. If they failed to do so, they could be sued, or taken over. These are the incentives we build into our capitalist system.

  Telling our mythic tale of trade competition with Japan as if it depended on the relative prowess of Japanese and American corporations, with the help or hindrance of their respective governments, has distracted us from looking at the prowess of the American work force—and its capacity to add value to an increasingly international system of production. Once again, in focusing on a putative Mob at our Gates, we have neglected to address questions concerning reciprocal obligations and mutual benefits underlying our political economy. In this case, what is the responsibility of corporations doing business here—and of their various constituents—for investing in the future competence of Americans? How can American capitalism elicit this investment from them? Until we ask, we are unlikely to find satisfactory answers.

  CHAPTER 7

  LOCKING THE GATES

  1

  In the third century B.C., the Emperor Shih Huang Ti commenced the building of a wall along China’s northwest border to seal off the Middle Kingdom from marauding nomads. Five hundred years later, Hadrian tried the same approach in England. A thousand years later the same solution was invoked by the lords of medieval Europe to keep out bandits and armies. In this century, the French built a fortified wall along their border with Germany. It is not a particularly new idea. The instinct to define and defend a safe bit of territory, secure against evil forces, runs deep in the species. High walls and tightly locked gates give palpable evidence of security. The bounded area, at least, is safe. So long as we stay within it, we feel invulnerable.

  Most people who now inhabit the planet have been forced to give up this idea as a realistic goal. They are too often reminded of their dependence upon, and vulnerability to, others beyond their borders. Rather than raising their walls higher, they have had to take joint responsibility for managing sometimes difficult relationships across borders—helping to avoid joint losses, seeking joint gains. But in America, a land historically and geographically cut off from the rest, where we tell one another stories that celebrate self-reliance and warn of evils “out there,” Americans cherish the dream of invulnerability.

  When threatened, our instinct is to raise the walls higher and lock the gates tighter. When cocaine and other noxious chemicals began coursing into America, the primary response was to fortify our perimeters. Narcotics agents used paramilitary techniques to eradicate drug crops, interrupt supply routes, and seize contraband at the border. When inexpensive imports of steel, automobiles, televisions, and computer chips imperiled American jobs, demands arose for protection. Tariffs and quotas guarded the borders. When America’s vulnerability to sudden rises in the price of foreign oil became apparent in the wake of the Arab oil embargo, the reflexive solution was “Project Independence”—a plan to free America from the need to import any oil at all. When what had been a stream of illegal immigrants turned into a flood by the late 1970s, a chorus of American voices demanded that we regain “control of our borders.” Border patrol agents became more aggressive in capturing foreigners trying to enter illegally from Mexico; immigration officials, more ruthless in ferreting out aliens who had sneaked through or overstayed their visas. When we looked for a way to become less vulnerable to Soviet missiles in the mid-1980s, we came up with a variation on the same theme: The Reagan administration set out to build a wall in the sky.

  2

  The dream of invulnerability has led us to concentrate our efforts on warding off outside perils, often at the expense of tending to perils within. It is always easier to feel righteous than responsible. Consider cocaine. In the early 1980s the Reagan administration launched a major offensive against international drug trafficking. The effort involved the State Department, CIA, FBI, IRS, Drug Enforcement Administration, the Agency for International Development, and the military. Third World governments were cajoled or coerced into cooperating. The administration obtained legislation allowing military personnel and equipment to be used in the assault. Enforcers resorted to all the techniques of modern warfare—spies, informants, fancy electronics, armored vehicles, helicopters. It was a costly business: In 1985 the United States spent over $1.2 billion trying to stop illegal drugs from entering the country. The effort also cost the lives of several Andean peasants, drug runners, and narcotics agents in the field. It jeopardized American relations with Mexi
co and other Latin American nations whom we periodically accused of harboring drug traffickers.1

  There is no question that drugs such as cocaine are dangerous. By defining our problem primarily as one of intercepting these substances before they get here, however, responsibility for controlling the poisoning was delegated to border patrols and foreign governments. The evil was declared external. The mythology of a Mob at the Gates led us to neglect the growing drug appetite of our citizens until it became overwhelmingly, painfully clear. By 1985, according to government estimates, one out of ten Americans had experimented with cocaine. Five million used it regularly. Twenty percent of all high school students had tried it at least once. Usage was not limited to central cities and marginal populations. It was endemic in the American middle class. All told, it was estimated that Americans were spending about $110 billion a year to buy illegal drugs. Sales were climbing over 10 percent a year.2 With Americans willing and able to pay such sums to muddle their minds, no strategy to wreck the trade could be expected to succeed. Capitalism is a sturdy institution; enterprising drug traffickers are only slightly deterred by border patrols and helicopter gunships when so lucrative a market beckons. In 1985 twice as much cocaine found its way to America than five years previously.3