Today’s most critical challenges are impacting every American. These include the direction of globalization and Chinese relations, shifting demographics and labor shortages, and rising inequality and threats to American capitalism. Understanding these challenges, the risks they pose, and how to adapt will be necessary to survive and thrive in the years ahead.
Like falling dominoes, many of these challenges impact each other. For example, the key to America’s vibrant system of free-market capitalism lies in our ability to innovate new products and services and deliver them to the world’s consumers. This requires economic and tax policies that incentivize entrepreneurs to take risks, and pro-trade and globalization legislation that secures access to foreign markets.
But when it comes to trade and globalization, many Americans are skeptical. The truth: we need more free trade agreements that grant US producers access to the world’s nearly eight billion consumers. This empowers them to achieve economies of scale much more so than just selling to America’s 333 million.
Trade brings both benefits and risks
In 2021, US exports of goods and services worldwide reached $2.6 trillion. But this only tells part of the story. US multinationals based in other countries, those with more than 50% American ownership referred to as majority-owned US affiliates, sold nearly $6.8 trillion abroad in 2019, according to the most recent data published by the US Bureau of Economic Analysis. This is more than two and a half times the value of exports sold from the United States and a big source of financial support for US-based R&D operations, US-based employment in sales, marketing and logistics, and dividends to corporate investors back home.
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Additionally, often overlooked in global trade are the benefits derived from US imports. This includes greater choices of consumer products, inexpensive goods that effectively subsidize living standards for lower- and middle-income Americans, and the creation of millions of American jobs in marketing, sales, retail, wholesale, and transportation.
Over the last few decades, US access to Chinese suppliers and its 1.4 billion consumers has been very important for US companies and workers. But today, US firms that solely rely on China are incurring a great deal of risk.
President Xi Jinping’s decision to reverse China’s reform process, his willingness to defy long-established international rules, and recent threats to seize Taiwan by force continue to strain Chinese relations with the West. These factors, combined with China’s support for Russia during the Ukraine war, is resulting in a partial decoupling of economies with China, Russia and their few friends on one side, and the United States and its allies on the other.
This, on top of the impact of COVID-19, is forcing companies to prioritize risk mitigation over efficiency gains. In turn, American firms are focusing more on allyshoring and friendshoring—sourcing from countries that share our commitment to a rules-based trade regime—and less on China, Russia and others deemed unreliable, essentially putting limitations on globalization.
Globalization and its perils
Other concerns, like the fallout of China’s one-child policy, could destabilize that country in the years ahead. It has not only resulted in one of the world’s fastest shrinking labor pools causing worker shortages but can also result in too few working-age Chinese to support its aging population or provide enough domestic consumption to drive its economy.
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To attract and retain workers, Chinese manufacturing wages have increased 170% from 2010 through 2020, according to Statista, a German-based firm specializing in market and consumer data. Going forward, China’s increasing cost structure will likely end its title as the “world’s manufacturer” as well as its seemingly endless supply of low-cost exports to the United States. In turn, this will further impact globalization and increase long-term US inflation trends.
But globalization is like fire: it can cook your food, keep you warm, or burn your house down. It has lifted millions of people out of poverty and tremendously benefited the United States. But it has not impacted all of us equally and has left many behind.
Globalization has been tremendous for higher-skilled workers engaged in life-long learning, and for companies that are highly productive or producing goods and services rich in intellectual property. However, it has presented new challenges for employees with limited skills and for less competitive companies that produce low technology goods and services.
But the impact of globalization often has become confused with the impact of new technologies and automation, which are primarily responsible for job losses and could threaten nearly half of America’s workforce in the next two decades. And those with high school degrees are significantly more likely to hold jobs that will become automated as compared to those with college degrees.
The good news: after waves of new technologies destroy jobs, many more are created. Although we don’t know what the jobs of the future will be, we do know they will require highly skilled workers. The bad news: this process has led to rising income inequality between higher- and lower-skilled workers and is a major contributing factor responsible for eroding America’s middle class. It’s also an important factor resulting in rising support for populists who pretend to have the answers.
The threat of populism
Based on history, populists on the far left tend to implement socialist policies that significantly boost taxes and disincentivize entrepreneurs to take risks, resulting in poor economic growth and declining standards of living. On the other hand, populists on the far-right tend to give their friends economic benefits, ultimately resulting in an unsustainable system of crony capitalism. In both cases, capitalism is threatened.
Populists also tend to manipulate disillusioned voters by attributing inequality and directing anger at various groups, including elites, immigrants, and foreigners. And most recently, populists have misinformed the public as to the legitimacy of our institutions and demonized immigrants when they are needed most. In reality, American institutions are the envy of the world. And surprising to many, immigrants don’t take jobs away from native-born Americans; they are needed to help fill job openings.
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Due to shifting demographics in the United States and many other countries, birth rates have fallen below the replacement level of 2.1 per woman. This translates into fewer consumers and producers and can lead to declining standards of living. Immigrants help keep America’s population growing but are not the whole solution.
Shifting demographics also have tremendous consequences for US labor, resulting in worker shortages and skills deficits that will only become worse as the economy expands in the years ahead. As a result, companies will need to significantly invest in new technologies to improve productivity and automation and implement new strategies to attract and retain employees. And very importantly, workers will need to upgrade their skills and engage in life-long learning.
But unless pro-trade and globalization policies continue to support US corporate access to the world’s consumers, and the American middle class is strengthened through investments in education, healthcare and other areas, our system of free-market capitalism will increasingly be threatened.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.