Remarks of Franklin L. Lavin
Under Secretary of Commerce for International Trade
“American Economic Opportunities in a Changing Global Marketplace”
Columbus Chamber of Commerce and Tech Columbus, Columbus, Ohio
Monday, August 14, 2006

As Prepared

I am delighted to be here, thank you for having me. It is great to be back in Columbus.

It is especially nice to be speaking to the Chamber and to Tech Columbus. You and your companies have been an economic engine for this region, one of the fastest growing areas of the state.

Let me also thank Roberta Ford, who helped organized this lunch. Roberta is the Director of the Columbus office of the U.S. Export Assistance Center.

Many of the companies here understand how adapting quickly in a competitive global economy relates to business success. What I would like to do in my remarks is to put these day-to-day business challenges into context by looking at the broad trends that shape our operating environment. This will give us a better idea about where the U.S. economy is going, how the global business climate is evolving and what we can do to take advantage of these opportunities. Then I would be happy to take questions.

Three Trends

There is a range of developments that effect the business environment, from energy price shocks, to innovations in technology, to political shifts. But I believe there are fundamentally three central trends that define our era. When we think about the good news, and about the challenges, in our operating environment, it probably stems from at least one of these three points:

1) Three billion new customers and competitors

2) The death of distance

3) The rise of the service sector

There are three billion new customers and competitors for American businesses that have emerged in the last 25 years or so. Today we have the ability to do business in countries that have recently not been active in international trade. The most important of these is China, but there is also India, the countries of Central Europe that were part of the Soviet sphere, many countries in Southeast Asia, and others in Latin America. If you add them up, this totals about three billion people, or almost half of the world’s population.

These three billion are not only potential competitors; they are also customers, suppliers and partners. These countries, regions and individuals have the ability to enhance the success of your businesses.

Already, India and China have more people broadly defined in their “middle class” than there are people in the United States. Their importance as trading partners is only going to increase.

This is reflected in recent statistics that show exports to China and India are growing at around 30 percent a year (30.6 percent last year for India and 36.5 percent since June, year on year from China). China is now the fourth largest export market for the U.S., up from eleventh five years ago. In fact if you look at the trend lines, sometime this year China will surpass Japan as America’s the third largest export market.

There are companies here in Columbus that are benefiting because of these emerging markets. For example, Worthington Cylinders, with 8,000 employees is the world’s leading supplier of pressure cylinders. India is one of the 70 countries they export to. At the Commerce Department, we were able to work with Worthington to reduce some barriers they faced and they now sell more than $2 million worth of cylinders a year in India

Three billion new customers and competitors is one of the three major trends. The second trend is the death of distance, illustrated by several phenomena.

One phenomenon is the increased connectivity provided by enhanced communications. Here are some figures on cell phones and Internet connectivity that illustrate how communications has brought the world closer together. Today in the U.S., there are about 200 million Internet hookups. In China, there are about 111 million, with 50 million in India. There are more than 335 million cell phones in China, with 194 million in the U.S. Cell phones, e-mail, the internet, web pages, jet airplanes and a host of other connectors are making a difference in terms of how people understand, develop and sustain relationships.

Another element of the death of distance is the movement toward greater trade liberalization. At the first GATT round in 1948, the average rate of tariffs in the industrialized nations was 40 percent. Now it is four percent. GATT, WTO, free trade agreements, and other steps have increased cross border economic activity everywhere, with America leading the way in reducing barriers to trade.

As a result of this increase in connectivity and trade liberalization, we have seen the emergence of global business integration and the shrinking of supply chains. Delivery of goods and services is now faster, more reliable and cheaper than ever before. Management structures, air services, supply chains, and express delivery are all becoming integrated across borders.

Columbus has been a leader in this trend, with the transformation of Rickenbacker into an air transportation hub. Let me take a minute here to salute Congresswoman Deb Pryce for her leadership in securing $120 million for an intermodal facility at Rickenbacker, which will create an estimated 20,000 jobs over 20 years in the Columbus area.

So, the first phenomenon is three billion new customers; the second phenomenon is the death of distance; the third phenomenon is the rise of the service sector.

This is frequently described as implying that there is a decline of the manufacturing sector in the U.S. By some measurements, such as manufacturing’s contribution to GDP, or manufacturing employment, this might be accurate. On the other hand, the value of manufacturing in absolute terms in the U.S. continues to grow and manufacturing remains central to America’s economic success. And we should bear in mind that much of the improvement in the service sector, such as the transportation and distribution points I mentioned a minute ago, are largely means to an end for manufacturing. Improving logistics only makes sense if we have a product to move.

The Wall Street Journal mentioned earlier this month, “Manufacturing productivity has increased so rapidly that U.S. companies have been able to keep or grow their global market share and expand output. And while manufacturing employment has grown only modestly, the rapid job losses of the late 1990’s and earlier this decade are long over.”

In an absolute sense, American manufacturing is stronger than ever, but relative to the economy as a whole, the service sector is increasingly important. This rise of the service economy has social and political ramifications that we are still dealing with.

For example, manufacturing tends to be much more geographically specific than services. People have to come together to participate in certain tasks. Raw material comes in and the final product goes out. The service sector doesn’t have the limitations that manufacturing has in this respect: the service sector’s inputs can be disaggregated, with different activities taking place in different locations. The end work product is transmittable, with employees and contractors working on different aspects of assignments from different locations that are not necessarily all in the same city, or even in the same country.

An example of this disaggregation are firms like Burgess and Niple here in Columbus where in the process of providing architectural services they might have multiple nodes that create value. They can move data across borders very easily. Specialty design work might take place in Atlanta or Los Angeles, while final design work may take place in Columbus, and final customer contact in Europe. Further, services allow for greater labor flexibility. People can enter and leave employment with the firm on a regular basis, and work on a part time or full time basis. Architects can be employees or consultants, and design activities can be ramped up or down quickly as needed.

What do these three trends mean? What are the implications of three billion new customers, the death of distance, and the rise of a service economy?

One implication is a rise in international competition: It has never been easier for any company in the world to do business in the U.S., and it has never been easier for U.S. companies to do business in the rest of the world.

This leads to another implication that is more sociological: The pace of change is such that it can be outside of people’s comfort zone. There are often concerns about dislocations and anxiety about confronting new and often difficult to define challenges. Even though we are in a period of strong economic growth, there can be unease about the economy.

The Administration’s Policies Have Created a Pro-Growth Environment

And how do we respond to these challenges? The business response is to be as nimble as possible, by responding quickly to changing needs of customers, product innovations, and by finding new markets, businesses are positioned to get through and even thrive during this period.

For America as a whole, the Bush Administration response is similar. The single best way of getting through a period of economic transition is to back pro-growth policies to help businesses adjust, innovate, and take advantage of transition in the global economy.

Look where we are today: America’s economy has been growing for each of the last 18 quarters. Since the beginning of 2003, GDP growth has averaged four percent each year. Productivity is on the rise, with industrial production increasing at 4.3 percent over the past year with higher growth during the past five years than in nearly four decades.

Employment in the U.S. has increased in 47 states in the past year, with 5.5 million new jobs created in the past three years and an unemployment rate of 4.8 percent last month, almost 50 percent less than in Europe. Here in Columbus it is 4.6 percent, which by some measures is considered nearly full employment.

Just like a wise business needs to be nimble, so does a wise government.

The Bush Administration is committed to lowering the tax burden on families and businesses. The President is working to cut taxes on capital gains and dividends, to create new incentives for small businesses to invest, and to reduce income taxes for every American who pays them.

We want a research and development tax credit to encourage businesses to more aggressively invent and innovate as well as increase Federal support for vital basic research.

Finally, The Bush Administration is committed to expanding market access for U.S. goods and services, increasing transparency, and improving enforcement of intellectual property rights around the world.

We will expand opportunities for American industry, farmers and workers through our free trade agreements and leadership in multilateral trading forums. As a result, exports were up by over 10 percent in 2005 and are growing at over 12 percent this year. FTAs sometimes come in for criticism, but there is a simple fact. When we negotiate a free trade agreement we are able to lock in market access for our companies, we are able to define the terms of the agreement and we can shape the outcome. FTA partners account for about 7 percent of the world GDP, but about 42 percent of our exports.

Your success in business depends on the decisions you make every day. And our success with the U.S. economy depends on choices too. President Bush made the tough call to cut taxes and took political heat for it. He made the tough call to go for R&D tax credits, and he made the tough call to open up new markets through FTA’s. But as a result of these decisions the U.S. economy is the strongest in the world, and it is communities with a 21st century vision like Columbus that are helping to lead the way.

I will be very happy to answer any questions. Thank you very much.