Donald Trump’s strident call for American manufacturers to reboot American industry by bringing back jobs outsourced to Mexico, China and other countries provide our economic planners and policy makers an opportunity to do some stock taking and re-strategizing development planning for job creation.
Most of the jobs outsourced by these American companies fall under their global production networks or GPNs. The GPNs, also called global value chains (GVCs), allow American, European, Japanese and Asian multinationals to atomize or “fragment” the production of a product such as a car and distribute the manufacture of the different parts such as engine, transmission, axle and so on in different countries. The idea is to produce parts and components or even whole products such as garments where it is cheapest to do so. John West of Asian Century Institute sums it up as follows: in GPNs/GVCs, “companies from ‘headquarter economies’ like the US, Japan and Korea create and design products, and then outsource the labor-intensive stages of manufacturing to ‘factory economies’ like Southeast Asia or China”.
In short, the world is treated as one market and one workshop; however, profits are not distributed equitably and wages are not paid uniformly based on a global division of labor and rewards. For example, the US Congressional Research Services found in 2006 that iPod sold in the US market for $299 gave American companies $163, Japanese and Korean parts suppliers $132, and Chinese workers doing assembly work $4. And yet, 30 percent of iPod jobs are created in China!
Now Trump wants those jobs back and is unilaterally changing the trade rules despite trade agreements under the World Trade Organization and North American Free Trade Agreement. What should the Philippines then do in the face of this American trade unilateralism? What should it do if other populist Trumps of the world emerge in other developed countries and, like Trump, demagogically call for a return of industry and jobs at the home country?
There are several points to ponder in a stock-taking on a new industrial strategy for the Philippines.
First, we should take a lesson from our own history. Jobs in the GPNs/GVCs are not forever. In the 1980s, the Philippines became one of the world’s biggest assembler of garments for export. Under the NEDA’s labor-intensive export-oriented industrial (LIEO) strategy, the Philippines was able to entice American and other global garments designers-distributors to help create around a million jobs in the country — one-third in the big factories and the rest under the scattered home-based subcontracting system. However, when China and other cheaper production platforms such as Cambodia and Bangladesh became available as alternative sites for the footloose multinational investors, garments jobs in the Philippines declined sharply, especially after 2004, the end year for the Multi-Fibre Arrangement which gave us trade market quotas for nearly three decades. Today, garments is a comatose industry.
The other major export industry bred by the LIEO is the electronics assembly industry, which registered high growth in terms of value and jobs in the 1990s. However, at the turn of the millennium, the industry’s growth began slowing down as China, Vietnam and other countries became cheaper alternative production sites. Moreover, the Philippines, unlike South Korea in the 1980s, was unable to climb up the electronics industry ladder, meaning to do higher assembly work and develop new electronic-based products just like what Samsung, originally an electronics assembler for Sanyo, did.
With the export industries down and most of the domestic industries not doing well under LIEO and the regime of trade liberalization, the Philippines was confronted in 2000 with a growth-less and jobless 21st century. But luck was on the side of the country. Despite the absence of an economic blueprint or program for its development, the call center-BPO sector took roots in 1997-2003, thanks to the global advances in ICT and the pioneering efforts of companies like AOL and Sykes. Similar to the GPN for industry, the call center-BPO sector came in as part of the global service outsourcing (GSO) of big American companies, specifically those belonging to Fortune 500.
The subsequent boom in the call center-BPO sector has also been accompanied by the tremendous expansion of OFW remittances. The huge remittances have enabled the Sys, Gokongweis, Ayalas and Villars to build malls, homes, stores, theaters and other facilities all over the archipelago. The Philippines has become a unique example of a consumption-led economy, meaning consuming and growing despite limited industrial and agricultural production because the remittances keep pouring in.
Now back to the call of Trump for American companies to build/re-build factories inside America. Is this doable in the era of fragmented global production system under the GPNs?
The answer is yes… and also a bit terrifying. Why? The big issue in labor market studies today is the rise of the robots, which enable developed countries to erase the cheap labor advantage of developing countries. For example, in Denmark, they are able to manufacture again the plastic materials they used to outsource to China. This time at an equal or even cheaper rate, with a little help from what the Danish workers call as “co-worker robots”. In Germany, Adidas is now able to manufacture shoes on German soil, again with the help of robots. Remember in the early 1990s, over 4,000 workers in Rubberworld Novaliches lost their jobs when Adidas transferred production to China because of the unsettled labor dispute in the Philippines.
The point is that the global division of labor under the GPN system is also being shaken by the new labor-displacing technology. Labor economists call this displacement phenomenon as technology disruption, a process that paves the way for the establishment of a new work organization. The problem is that unlike in the past episodes of technological breakthroughs, job destruction today is not accompanied by the creation of new and hopefully, better, jobs.
Right now, there are observations that part of the Philippine electronics assembly industry is vulnerable not only to Trump’s America First policy but also to the increasing ability of robots to do more and more of the manual assembly work. The next question is: will robotization also spread in the call center/BPO sector? Maybe but not yet in a radical or massive way. As it is, there are certain services that are increasingly being placed under the do-it-yourself (DIY) computer-aided programming such as airline ticket reservation, purchasing and check-in.
Clearly, all these developments tell us that the Philippines cannot afford to stick to simplified economic solutions raised in the past such as export or perish, open up or collapse, and so on. We need to have a more balanced economic policy that gives equal importance to the development of both the domestic and export markets, that encourages the entry of productive foreign investments and the full mobilization of domestic resources, and, yes, promotes the building of an independent and self-reliant economy.