Remarks of Franklin L. Lavin
Under Secretary of Commerce for International Trade
Council on Competitiveness
April 17, 2006

Trade & Competitiveness

There is a great deal of economic literature about the extent to which trade fosters economic growth, and this school of economics has been part of our received wisdom since David Ricardo. But I want to focus my remarks today not so much on the relationship between trade and growth, but the relationship between trade and competitiveness. This particular relationship has not been subject to the kind of scrutiny as the topic of growth but I want to try to develop a few themes with you today. Let me talk about two implications: the magnification effect, and social capital.

By the magnification effect, I am referring to a simple thesis: the international-ization of an economy magnifies the strengths and the defects of the various sectors and companies in that economy. Companies perform at a certain level of competitiveness in a closed economy, but as that economy opens those companies’ competitive advantages and disadvantages are brought to the forefront. Compet-itiveness is a measure that makes sense relative to other measures and the more data points in the chart the clearer the chart becomes.

As trade liberalizes and economies internationalize non-competitive sectors of a nation’s economy are more exposed than in a closed economy. International-ization simply means that you pay a greater price for being non-competitive and that you reap a greater reward for being competitive.

Look at these figures from General Motors.

How bad or how good are these numbers? Let’s compare them to Toyota.

Competition in the Automotive Industry
	General Motors	Toyota
Vehicle production started in U.S.	1908	1986
U.S. Sales in 2005	-4.3% vs. 2004	+1-% vs. 2004
U.S. Market Share in 2005 (9 mos)	26.8%	13%
Profitability per vehicle	$2,331 loss	$1,488 profit
Net income in (9 mos)	$3.8 billion loss	$7.89 billion profit
# of Plants in North America	77	12
Average Plant Capacity Utilization	85%	107% (with overtime)
Production Time per Vehicle	34.3 hours	27.9 hours
Average Hourly Salary (non-skilled)	$31.35	$27/hour
Health Care Costs per Vehicle (2004)	$1,525	$201
Global Market Share	14.2% (14.6 in 2002)	12% (10.6% in 2004)

Sources: Company data, Autodata, Harbour Consulting, Center for Automotive Research, NPR

This has a political dynamic as well. The companies that are globally competitive are more likely to that favor greater internationalization. Those that are not globally competitive are likely to be more hesitant.

We see the magnification effect at the human level. Look at the March unemployment numbers.

UNEMPLOYMENT RATE POWERPOINT CHART

Unemployed by Education Level
Level of Education	March 2006
Less than high school	7.0%
High school	4.2
Some college	3.7
Bachelor’s or higher	2.2

Source: Bureau of Labor Statistics

The numbers drive home the point that internationalization means people will pay a greater price for not being competitive.

Technology accelerates this trend, a point noted as a political phenomena in Tom Freidman’s The World is Flat, and as a business phenomena in Cairncross’s “Death of Distance.” Advances in telecommunications, the Internet, containerized shipping, and discount air travel have revolutionized trade. In turn, trade liberalization is accelerating social changes across the world for the better in those countries that embrace it and for the worse in those countries that are not competitive.

Let me offer a few comments about social capital in that context.

I was reflecting on some of the strengths of the US economy. We know in general what these are: our financial markets, our IPR protection, our retail distribution system, our tertiary education system. All of these contribute to a vibrant, sometimes roaring, U.S. economy.

But I wanted to mention one other key strength of our economy. It’s a strength of our society, and it is difficult to quantify or even to perhaps fully describe, but I call it social capital. I think this encompasses at least three elements of our society: individualism, mobility, and free association. This gives members of our society an unparalleled ability to collaborate with others, to innovate, and to experiment.

It is our celebration of individualism that rewards the person who challenges the status quo, who marches to a different drummer.

It is our respect for mobility that tells every kid in America: it doesn’t matter where you came from, it just matters how well you can do your job.

It is the free association in our society and our business life – the open architecture – that allows for a high school kid to go study Chinese in Beijing, then volunteer to clear land mines in Cambodia, then dub Japanese anime into English for broadcast on American television.

If we consider the driving forces of human impulses as factors of success in economic competition, it will not be the impulses that want order and predictability that produce results, it will be the impulses for freedom and creativity. The companies and indeed the nations that succeed in today’s world will be the ones that have a surplus of the creative impulses and a system that rewards that.

You can guess that I am not leading up to an endorsement of current youth labor laws in France.

Individualism, mobility, and free association allow for talent to be combined in an ongoing flexible way. A combination of people, ideas, talent, and finance can be applied in America unlike any other country. A kid can start in a pizza parlor as a waiter and be a shift manager in six months. Then he can start his own restaurant with a few friends in another six months. Perhaps in another few years, he can create his own brand and open international franchise operations.

Or another example: Mel Mellinger, who started cleaning toilets on boats. He realized that these toilets tended to get clogged easily. In 1982, he came up with an idea for a better maritime toilet and started his own company, Headhunter. Now, Headhunter is the leading supplier of high-end yacht sanitation systems in the world. The guy who cleaned toilets on yachts now has his own yacht. And the toilets work pretty well.

The two points I have mentioned in these remarks, the magnification effect and social capital highlight the challenges and the strengths of the U.S. economy. The magnification effect shows we have a number of rigidities in our economy, particularly when it comes to our labor market and health costs, which serve to make us less competitive. But our social capital illuminates we have many strengths as well, some of which I mentioned in passing.

So, if David Ricardo were writing in the 21st century about the true comparative advantage of the United States in international trade, I think he would take note of both these phenomena. Our challenge, as the old song goes, is to accentuate the positive and eliminate the negative. Let’s do what we can to foster America’s many strengths, not the least of which is social capital. And let’s do what we can to tackle the areas in which we currently under-perform. Right now there are kids out there delivering pizzas and cleaning toilets, but they have a gleam in their eye, hope in their heart, and an idea in the back of their head. They are counting on you and I to create a world in which those ideas can come true.