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Looking Past Today: Staying Competitive in a Changing Global Economy
Pittsburgh - These are clearly challenging times for the United States economy. In recent months, we've seen the housing market falter, with an increasing number of foreclosures over the past year. We've seen credit markets tighten, making it harder for companies and individuals to borrow. And we've seen commodity and energy prices hit record highs. These events are taking a toll on the U.S. economy and affecting families across Pennsylvania and throughout America. Real GDP growth in the first three quarters of 2007 averaged 3.1 percent on an annualized basis, but slowed significantly at the end of last year and was 0.9 percent in the first quarter of 2008. While we expect the recent stimulus package to support an increase in growth in 2008 and for the overall growth outlook to be modestly better by the end of the years, the U.S. economy is clearly struggling.
This period of slower growth has generated anxiety among many Americans about our future. It has led some to question the ability of the United States to remain the world's leading economy at a time when competition across the globe is increasing. Still others suggest that recovery lies in a retreat inward, away from international economic engagement, and back to what they remember as a calmer and simpler time when the U.S. was less dependent on the rest of the world.
Yet, this is a false choice. In today's global economy, a shift inward is tantamount to economic stagnation and would cost millions of jobs, deter foreign investment, curtail growth, and increase the cost of many goods and services purchased by American households. In fact, the key to remaining competitive in today's changing world is embracing openness to trade, to investment, and to people. To continue our unprecedented growth and prosperity, America – and Pennsylvania – must adapt to the new challenges and opportunities created by the dynamic global economy. In short, we need a new national consensus on globalization that can provide the basis for continued U.S. economic leadership in the decades ahead.
Financial Market Turmoil
Let me begin by putting our current economic situation in context. Starting in 2002, the U.S. economy experienced a long period of benign economic conditions marked by low interest rates, low inflation, and less volatile asset markets, which led many to overlook the risk half of the risk-reward equation at the heart of financial markets. Investors around the world, who in preceding years had enjoyed above-historical returns on most types of investments, continued reaching for ever-higher gains. The financial-services industry created a variety of complicated new products to meet this demand. Regulators and investors alike showed a growing complacency toward risk. These factors blended into a dangerous cocktail of underlying conditions ripe for instability.
Last summer, these new vulnerabilities in our financial system became clear. Looser credit standards in the housing market, combined with an end to rapid home price appreciation, led to a significant rise in delinquent mortgages. This in turn contributed to immediate and unexpected losses for investors and a reconsideration of the risk-reward relationship – first in housing, and soon after, across all asset classes. Shaken investor confidence in housing assets had a domino effect throughout world markets, ratcheting up demand for cash and liquidity, and curtailing the pace of the new lending and investment necessary for strong growth to continue.
U.S. policymakers responded aggressively to stabilize the markets to reduce the turmoil's impact on the real economy and address the underlying regulatory gaps and policy weaknesses. The U.S. Federal Reserve took focused actions to protect the financial system from severe disruption by ensuring that markets have access to financing. The Administration and Congress responded with a $150 billion bipartisan stimulus package when it became clear that the market turmoil, together with the housing market downturn and high energy prices, were posing significant risks to the U.S. economy. This package provides stimulus payments for millions of Americans and tax incentives for business investment. Policymakers also launched a series of housing-market initiatives to help millions of Americans by increasing the availability of affordable mortgage financing and preventing avoidable foreclosures.
We have also begun to focus, in cooperation with international policy makers, on the weaknesses in business practices of financial institutions revealed by the market turmoil. Together, we are taking steps to strengthen the oversight of risk management and reporting practices of financial institutions; enhance disclosure of and the process for setting values for complex products; change and clarify the role and use of credit ratings; and reform the mortgage-origination process. In each of these broad categories, the specific proposals are concrete, widely accepted and, in a number of cases, already being implemented by national or international authorities, as well as by the private sector. With these efforts, along with the general flexibility and resiliency of the U.S. economy, we will work through these challenges and hope to see a strengthening economy by the end of the year.
Growing Protectionism
Unfortunately, the recent market developments have contributed to a climate of increased distrust and anxiety among Americans that is fueling support for protectionist policies. This is partially due to concerns created by the economic downturn, but it is also the result of a broad-based transformation underway across regions and within all sectors of our economy.
International competition from free trade, as an example, appears threatening to Americans already skeptical about the overall benefits of globalization. A recent Pew Research Center poll found that 48 percent of Americans see free trade agreements as a bad thing for the country, and only 30 percent seeing them as a good thing. This message has reached Capitol Hill, where there is reluctance to pass the Colombia Trade Promotion Agreement, despite its clear benefits to the United States and Colombia. We also see protectionist rhetoric particularly pronounced in this political year where the benefits of trade are being openly questioned by individuals from across the political spectrum.
Many Americans are also fearful about the implications of foreign investment. In the wake of September 11 th, concerns about national security have led Congress and the public to take a careful look at investment from outside our borders. The Dubai Ports World case epitomizes this concern, as do the frequent headlines about investment by sovereign wealth funds. And it is not just in the United States. Many countries are now considering further restrictions on foreign investment in certain sectors of their economies, and are also considering limits to sovereign wealth fund investment. In an increasingly globalized world, some countries seem resolved that the only sure protection is the rejection of foreign capital. While some investments may pose genuine national security concerns, broader restrictions on foreign direct investment, whether explicit or implicit, also pose serious economic risks.
Finally, we also see Americans increasingly concerned about competing for jobs against people from around the world. Talent is the most important commodity in the global marketplace and ever more fungible as advanced technology makes borders less relevant. U.S. companies are global leaders in a variety of industries, and to maintain or improve their global leadership position they have to hire the best talent, wherever that talent may be. And their U.S. employees benefit as these companies maintain their competitive edge and grow. But this is a difficult reality for many Americans to accept.
One response by Congress to this concern has been to limit the number of highly-skilled worker visas allowed into the United States. Ironically, restrictions on highly skilled people into the United States have led many American companies like Microsoft, for example, to relocate some operations overseas in order to find a more skilled workforce. This only exacerbates the perception that America can no longer compete. The fact is that the United States must attract and retain the world's best and brightest to remain at the cutting edge of innovation. And, increasingly, many of these individuals will not have been born in the United States.
The Case for Openness
These fears and anxieties are symptomatic of a rapidly changing world. But, the free flow of trade, investment, and intellectual capital to the United States is more of a cure for our economic challenges than a root cause. Indeed, America's openness has historically been the bedrock of its competitiveness, ingenuity, and productivity. If we are to continue to prosper in today's global economy, openness is no longer a choice but a requirement.
The data unequivocally support these claims, whether it is in the area of trade, foreign direct investment, or the free flow of talent. On trade, U.S. exports to the world are at an all time high. In 2007, exports accounted for 12 percent of GDP, and contributed to more than a third of U.S. economic growth. Exports have been a boon for Pennsylvania too, with one-sixth of all manufacturing workers in Pennsylvania dependent on exports for their jobs. The greater Pittsburgh metro area exported $8.3 billion of goods in 2006, nearly one-third of Pennsylvania's exports. In addition, Pennsylvania exported nearly $30 billion in goods in 2007, up from $26.3 billion in 2006, and overall exports are up 85 percent since 2002. These exporters include not just large firms such as Alcoa and Heinz, but smaller companies such as Advanced Materials and American Textile, located here in Pittsburgh. For many U.S. companies, international markets – that contain ninety-five percent of the world's consumers and where purchasing power is growing at an accelerating pace -- offer the greatest opportunity for growth.
One way the Administration is trying to further the benefits of trade is through Free Trade Agreements (FTA) with our strategic economic partners. FTAs benefit both countries by reducing or eliminating tariff rates, improving intellectual property regulations, opening government procurement opportunities, and easing investment rules. Under President Bush's leadership, we have negotiated 10 new FTAs, for a total of 15 agreements, and our exports to these partners are growing twice as fast as our exports to the rest of the world. The fact is, FTAs promote fairer trade for America, as we already have very low tariffs in the United States, and in many cases give duty-free treatment to goods from other countries. Free Trade Agreements even the playing field by ensuring these partners cut their tariffs on American goods. As one of my colleagues recently put it, we already have free trade with Colombia – it just so happens to be one-way free trade, because currently, 90 percent of goods from Colombia come into the U.S. duty free. The purpose of this agreement is to make trade a two-way street, so a growing number of American goods made by American workers enter Colombia duty free.
Trade agreements also help promote investment opportunity, which fuels economic dynamism and innovation, as well as deployment of new technologies that raise productivity and, ultimately, our standard of living. Free trade agreements help spur American investment overseas and foreign investment in the United States by setting transparent ground rules for doing business in each country. This improves investor confidence, makes the United States a more attractive investment destination, and makes it easier for American companies to expand their businesses overseas.
This is important because over 5 million jobs in the United States are directly created by foreign direct investment (FDI), and about the same number of additional jobs are indirectly supported by the U.S. operations of foreign-owned firms. Pennsylvania is a clear beneficiary of such investment. It ranks as the fastest-growing state in attracting international business, and in 2006, Pennsylvania ranked as the number one destination for new cross-border investment. In addition, over 987 foreign-owned firms employ approximately 230,000 workers in Pennsylvania. Not only does foreign investment create jobs, it tends to create better-paying jobs with compensation on average more than 25 percent higher than U.S.-owned firms. These jobs are heavily weighted in manufacturing, and foreign firms account for 14 percent of all R&D investment in the United States.
Like with investment, it is also increasingly true that skilled employees are a competitive advantage for global businesses, and that companies and countries that attract and retain the world's best and brightest win in the marketplace. When looking at the U.S. economy, it is easy to understand why this needs to be a top priority. One quarter of all U.S. start-ups in engineering and technology established between 1995 and 2005 had at least one foreign-born founder. These include big name firms like Google, Sun Microsystems, and eBay. Other countries are catching on. Germany, Australia, and the United Kingdom, for example, are all taking the global competition for talent very seriously and are aggressively recruiting to snatch up the next business visionaries. To keep up, the United States cannot rest on its past reputation as being the best place in the world to live and work and instead must compete actively to win the global war for talent.
A New Consensus for Globalization
We face a real challenge – a growing risk of protectionism and a turn inward at a time when America's openness could not be more important to its future. In order to bridge the divide, we need to set some new rules of the game which recognize both the enormous benefits as well as the potential downsides of globalization. I do not have the answers, but as a starting place, I would like to suggest several broad areas in which we will need new ideas, new levels of cooperation, and ultimately, a new bipartisan consensus on globalization if we are to compete and win in today's global economy.
First, we need more effective policies and approaches for helping individuals, companies, and regions to adapt to the rapid pace of global economic change. Even though it generates significant benefits in the aggregate, globalization inevitably results in winners and losers. While trade provides great benefits to the U.S. economy as a whole, these benefits are not always distributed equally. Workers in certain industries, for example, will sometimes lose their jobs, and communities will sometimes be disaffected. Helping those negatively impacted will require new training, new skills, and a new model for helping those displaced to not only land on their feet, but to climb even higher up the economic ladder.
Companies, cities, and regions must also change, diversify, and reinvent themselves - a constant reality as new technologies replace old and growth breeds competition. Here in Pittsburgh we see evidence of this, as the city has transformed itself from one dominated by steel mills to a city focused on developing new industries in information technology, advanced manufacturing, and medical devices.
Such focus fits well into the second principle, which is creating a predictable and welcoming investment environment. Capital is like water, flowing to where there is the least resistance. And, also like water, capital is the lifeblood of entrepreneurship, innovation, and growth. To attract capital, cities, regions, and the country overall must ensure that the business climate reflects investment-friendly tax regimes, attracts and retains a talented work force, and predictably enforces the rule of law.
The World Bank ranks countries' overall business climate in its annual `Doing Business' study. Not surprisingly, the United States ranks very high in the latest study, third overall out of 178 countries (Singapore and New Zealand are first and second). But, the U.S. ranks only 76th on taxation, 24th on dealing with licenses, and 18th on working through bankruptcy proceedings. This is unacceptable for the most dynamic economy in the world, and other countries are not standing still.
Third, we need to invest in winning the global talent war and this will require targeted policies to recruit and retain these highly-skilled, high potential workers to America's shores. This not only means significant changes in current policies but a fundamental shift in our mindset as a nation as well. For example, the current cap on temporary visas for skilled workers, so called H-1B visas, should be raised significantly from its current cap of 65,000. As recently as 2001-2003, Congress raised the cap to 195,000, providing important skills to the U.S. economy, but it has returned to dramatically lower levels.
Moreover, we must adopt more aggressive approaches for pursuing outstanding foreign students and professionals and create incentives for them to stay in the United States upon completion of their degrees. Foreign born scholars hold more than half of all science and engineering post-doctoral positions at U.S. universities, while about 38 percent of U.S. doctoral-level employees in technical firms are foreign born. This is an asset America cannot afford to lose.
There are other areas such as investment in education, particularly math, science, and engineering that are the cornerstone of any innovative economy, and which will enhance our competitive strengths. The United States leads the world in R&D and has boosted federal R&D funding by almost half under the leadership of President Bush. Still, these investments are a fraction of what they can and should be. Total R&D spending in the U.S. is likely to rise by about 3 percent this year, reaching almost $350 billion. China, which is second in R&D investment in the world at about $150 billion, is boosting its spending by roughly 15 percent per year and Asian universities now produce almost half of all engineering graduates in the world. Given these trends, we can no longer take our leadership in these areas for granted.
These suggestions are merely a starting point for a discussion about a competitiveness agenda for winning in today's global economy. None of these ideas are mutually exclusive -- they are interdependent. For the United States adapting to globalization is not just about changing one policy but requires a holistic approach to maximizing the benefits of globalization while addressing its inevitable disruptions.
Conclusion
The challenges of our current economic climate have led some to question America's global economic leadership in the future. I don't want to make light of these challenges. They are very real. And, when we have a problem in our markets, we don't minimize it, but we shine a light on it and move quickly to clean it up. As I discussed earlier, we are responding aggressively and comprehensively to address our challenges and reduce the impact on the U.S. and global economies. But we should also take confidence from the fact that the performance of the U.S. economy for the past five decades is unmatched, and its long-term fundamentals compare favorably today to any advanced economy in the world. I have no doubt that the United States will weather the current storm and will emerge stronger than before.
A more fundamental question, however, is whether in this time of dramatic global economic change and turmoil we will remain true to the underlying principle of openness that has made this country great. We are a country of immigrants, whose strength was forged from our differences and a common vision for a better life. This strength is embodied still by the United States' place as the world's leading economy, innovator, and manufacturer, and home to many of the world's most brilliant scientists, engineers, and entrepreneurs. It is a country that has thrived because of its engagement with the world. We have not yet deviated from this path, and we most assuredly should not.
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