From Factories to Private Schools

If there is a brand that embodies the industrial history of the United States of America, it is Levi Strauss & Company. When I moved to San Francisco in the early 1990s, there was still a Levi Strauss factory in the city. Levi’s was founded there in 1853 during the Gold Rush, when a twenty-four-year-old German immigrant began supplying sturdy pants to gold prospectors. The San Francisco factory had been in operation ever since, one of the thousands of manufacturing plants that used to dot American urban neighborhoods. In the summer of 1994 I visited the facility, where dozens of mostly Latin American women were cutting and sewing the trademark 501 jeans. I distinctly remember wondering how long they would be able to hang on. For years the company tried to protect its American employees, but with wages at $9 to $14 per hour plus benefits, its production costs were significantly higher than those of its competitors. Finally, in 2001, the company closed down all of its facilities in the United States and relocated production to Asia. The San Francisco factory is now an elite Quaker private elementary school, with a yearly tuition of $24,045.

 I was not surprised. If anything, I found it remarkable that Levi Strauss had resisted outsourcing for so long. Other companies in its sector—Gap, Ralph Lauren, Old Navy—had shifted their production overseas much earlier. In this respect, the apparel sector is typical of the manufacturing sector as a whole. In the decade after World War II, textiles were a major piece of the U.S. labor market. America’s most important industrial cluster in terms of jobs was not the Detroit auto industry but the New York garment industry. As recently as the mid-1980s, more than a million American workers were still employed by U.S. companies making clothing and garments. Today that number has dropped by more than 90 percent. Take a minute to check where your clothes were made. If you are wearing clothes sold by an American company, a third-party vendor in a place like Vietnam or Bangladesh probably manufactured them. American brand names are thriving, but only a handful of jobs—in design, marketing, and sales—remain in the United States.

What is interesting is that on a superficial level, this story is similar to that of the iPhone: design and marketing jobs remain in this country but vendors in Asia make all the parts. However, there is a major difference. For apparel—and for traditional production in general—the design and marketing jobs that remain are few and are not growing in any appreciable way, while in the innovation sector the design and engineering jobs are numerous and growing fast.

 Until recently we did not import much from low-wage countries. As recently as 1991, these countries accounted for less than 3 percent of U.S. manufacturing imports, a number too small to affect a large number of jobs. But over the past two decades the world has become a global village of ever-expanding commerce. By 2000 the percentage of imports from low-income countries had doubled, and by 2007 it had doubled again, with China accounting for most of the increase. What happened was an enormous shift in the production of physical goods away from rich countries with high labor costs to poorer countries with low labor costs. As the iPhone illustrates, there are much better places on earth to make many physical goods, including fairly sophisticated ones.

Since labor is cheap in developing countries, factories there tend to use fewer machines than in the United States, a fact that gives those factories the additional advantage of being more flexible and more adaptable to sudden change. In a recent interview, an American businessman doing business in China was quoted as saying, “People think China is cheap, but really, it’s fast.” An American industrial designer who works in China added, “People are the most adaptable machines. Machines need to be reprogrammed. You can have people doing something entirely different next week.” Unlike American factories, factories in China can respond almost overnight to changes in production plans or design.

The effect of globalization on American blue-collar jobs is not the same everywhere. An important new study by the economists David Autor, David Dorn, and Gordon Hanson finds that the impact of imports from China depends heavily on where you live. Cities like Providence and Buffalo have manufacturing sectors that are heavily skewed toward traditional, low-value-added productions similar to those of China, and they have experienced large negative effects from the increased competition. By contrast, cities like Washington, D.C., and Houston are engaged in very different kinds of manufacturing and have experienced much smaller effects. In cities that directly compete with China, imports were found to cause rising local unemployment, decreased labor-force participation, and lower local wages. Interestingly, not all of these costs are borne by the workers directly displaced: a part of the cost is borne by other Americans in the form of government aid. The study finds that imports from China increased the use of welfare payments such as unemployment insurance, food stamps, and even disability insurance, which is often used as a hidden form of welfare. In essence, while the direct effect of trade was highly localized, the ultimate costs were at least in part shouldered by taxpayers in the rest of the country through federally funded programs.

 The effect of globalization also varies enormously depending on companies’ ability to react. A recent study by Nicholas Bloom, Mirko Draca, and John Van Reenen shows that increased trade with developing countries causes faster technological upgrading but that the eventual effect depends on each company’s willingness to adjust. Using a comprehensive data set on half a million firms in twelve industrialized countries between 1996 and 2007, the economists found that firms facing Chinese import competition tend to react by upgrading their technology: they buy more computers, spend more on R&D, take out more patents, and update their management policies. The irony is that this external threat has become an important driver of productivity gains for American companies and therefore economic growth for the country. But not everyone gains. While high-tech firms successfully respond to the threat, low-tech firms—those with limited innovation, limited investment in IT, and limited productivity—have a harder time reacting to Chinese imports and end up laying off workers or disappearing. Thus globalization stimulates technical progress, which in turn increases the demand for educated workers, but it reduces the demand for unskilled workers.