Tonight, I plan to talk to you about globalization
and what it means to Washington state, Weyerhaeuser Company, and to those
of us in the field of chemical engineering in the Pacific Northwest.
Why should you care? Because globalization just might be the number
one determinant in all of our fates. Now, more than ever before, what happens
elsewhere in the world affects you and me. Some have suggested that this
current period in world history can rightfully be called the era of globalization.
What do we mean by “globalization”? According to the dictionary,
to “globalize” is to “make worldwide in scope or application.”
Stanley Fischer, former first managing director of the International
Monetary Fund, describes it this way: “Globalization means that the residents
of one country are more likely now than they were fifty years ago to consume
the products of another country … to invest in another country … to earn
income from other countries … to talk on the telephone to people in other
countries … to visit other countries … to know that they’re being affected
by economic developments in other countries … and to know about developments
in other countries.”
Such knowledge—especially when people
in developing countries see the relative wealth of people in developed countries—leads
to raised expectations. Remember the post-World-War-I song that had the
refrain, “How can you keep them down on the farm once they’ve seen ‘Paree.’”
Well, today almost everyone in the world has seen “Paree.” And not too many
in developing countries want to be relegated to the farm.
How
can we bring greater prosperity to these nations? For several decades, the
general consensus has been that free trade, combined with a global economy,
will provide the answer.
This idea was first surfaced
as far back as 1776 when Adam Smith published The Wealth of Nations. In
this book, Smith argued that prosperity could be increased for all nations
if each nation focused on producing those goods and services where it had
the greatest advantage … natural resources, skills, experience, etc.
Then, through free international trade, all consumers would enjoy
a wide range of products at their lowest prices, raising the overall standard
of living for everyone.
Some economists believe this
is exactly what has happened over the past century. Here’s what one has
to say: “This has been the best century ever, never mind the great depression,
a momentary setback from communism and socialism, and two great wars. Mankind
today is further ahead of where it has ever been and there are the seeds
of innovation from biology to the Internet for better and richer lives even
beyond our wildest dreams.”
And indeed, income statistics
show a dramatic decrease since 1950 in the global poverty rate, which the
World Bank defines as living on a real income of less than a dollar a day.
Admittedly, this is hardly a high standard, but it does enable us to measure
progress. According to this standard, global poverty declined impressively
from about 55 percent of the world’s population in 1950 to 23.7 percent
in 1992. And, according to another study, this decline has continued.
On the other hand, globalization has definitely penalized some
individuals, companies and nations to the benefit of others, while failing
to eliminate the large gap between rich and poor nations.
As
we witnessed in Seattle at a 1999 meeting of the World Trade Organization,
there are definitely those who are suspicious of globalization and its accompanying
theory of free trade, if not outright opposed.
In explaining
opposition to these concepts, one expert has theorized that globalization
and free trade create “invisible beneficiaries,” but very “visible losers.”
So is globalization a good thing or a bad thing? My
own belief is that since we must all learn to live together on this small
planet—and since I believe Adam Smith’s theories are essentially correct—it’s
a good thing. And regardless of how anyone feels about it, globalization
is here to stay.
To make it work well, however, we truly
do need free trade.
While free trade poses potential
penalties as well as potential benefits, if the game is played fairly, Adam
Smith’s vision can be attained. Besides, as you’ll hear later, without free
trade, business is prey to the unpredictable distortions of politics.
At this time, I’d like to bring into greater focus some of the
specific benefits of globalization to you and me as residents of Washington
state.
Washington is the most trade-oriented state in
the union, with a legacy of foreign trade in agriculture, forestry and aerospace
… and newer industries of telecommunications, and information- and bio-technology.
Washington generates more than 35 billion dollars each year in
export sales, with nearly 1.7 billion dollars from wood products, paper
and pulp. Boeing sells 70 percent of its aircraft overseas and, by the way,
65 percent of Boeing’s airplanes are components manufactured by others,
often from overseas.
More than half of Microsoft’s sales
are international. Eighty percent of eastern Washington’s white wheat is
sold to Asian markets and one third of our apples are exported.
Weyerhaeuser as well has benefited from international trade.
Last year, our sales to customers outside the United States totaled
2.8 billion dollars, and our products flowed to more than sixty-five countries
around the globe. These products include softwood and hardwood lumber, building
panels, market pulp, containerboard, newsprint and paperboard for milk and
juice cartons. Many of these products are produced in Washington state.
For years, we’ve been the largest exporter of forest products from
this country—and many of our exports are shipped via our own shipping line,
Westwood Shipping. Additionally, we own timberlands and/or manufacturing
operations in Canada, Australia, New Zealand and Uruguay, Ireland, France,
and Mexico. While these do not produce exports from the United States, they
do earn us money outside U.S. borders.
Remember, though,
that other states and nations are competing with us and going after our
customers. This is where we can feel the sting of globalization, the potential
“loser” side of the equation, if we are not fully competitive.
Washington state citizens have seen it by the incursions of Airbus
into Boeing’s market share … in the squeeze on Washington apples from those
from Japan or Chile … in the pirating of Microsoft software in Southeast
Asia. At Weyerhaeuser, we’ve seen it in the loss of markets for wood products
because of imports from Europe and South America to the United States, as
well as loss of market share in other countries because of competing imports
there. In our containerboard and corrugated-packaging businesses, we’ve
also lost markets to overseas producers, especially China.
But
let’s look beyond just Washington or Weyerhaeuser. Take a look at the labels
on the clothes you buy. How many are from China, India, Eastern Europe?
How about electronics? Most of them come from Asia. There is not one American
manufacturer of televisions anymore. How about the cars we drive? How many
are from Asia or Europe? Even if they are from the United States, many of
their component parts are not.
Lately, the balance of
trade has been swinging even more against the United States and in favor
of other parts of the world. Why is that?
A relatively
strong dollar is one factor. That makes the goods and services we produce
in America more costly to overseas customers—and foreign-made goods and
services cheaper for U.S. consumers. For example, the Scandinavians are
still benefiting from a 21 percent cost advantage due solely to the currency
exchange rate. You can imagine how this impacts Weyerhaeuser’s ability to
compete with these producers.
Lower labor costs in many
parts of the world are another factor that works against U.S. businesses.
For example, Chinese clothing and furniture workers make 3 to 5 percent
of the wages of their American counterparts. Bringing this statistic home
to those of us who are engineers, engineers in India can be hired for 15
to 20 dollars an hour. Already, 30 percent of the world’s software engineers
can be found there.
How do low wages in developing nations
affect Weyerhaeuser? In an indirect, but substantial way.
For
example, lower wages in other countries draw clothing and furniture manufacturing
away from the United States and into China. And, since Weyerhaeuser provides
corrugated shipping containers to U.S. clothing and furniture-makers, it
draws box business away from us.
Then there are the costs
of environmental and other regulatory hurdles American businesses face.
Insofar as these regulations are well founded and can deliver the results
we want as citizens, we don’t want to abandon or get around them.
However, until all nations equally protect the world’s environment
and include the cost doing so in the products they sell, products made with
the environment in mind will lose out to those that are not. Ah, but one
might say, consumers will favor environmentally friendly products even if
they cost more. So far, experience shows that this remains wishful thinking.
Finally, there still exist many barriers to free trade. For example,
for years, Weyerhaeuser has faced barriers in trying to sell wood products
into Japan in the form of quotas or tariffs. Although some progress has
been made, our industry recently reported to the U.S. Trade Representative
that “serious obstacles remain to increased value-added exports to Japan.”
And now, Weyerhaeuser is facing a major trade barrier in bringing
lumber from our Canadian mills to our U.S. customers. U.S. lumber producers
have succeeded in getting the United States to impose an average duty of
27 percent on softwood lumber from Canada. This duty is currently costing
Weyerhaeuser about 30 million dollars a quarter. Even more damaging is the
fact that elements of this penalty actually stimulated increased Canadian
lumber production. This unintended consequence resulted in lowering the
price for all lumber produced throughout North America during the latter
half of 2002 and, so far, into this year.
If that doesn’t
make sense to you, let me assure you, it doesn’t make much sense to me either.
At any rate, the point I’m trying to make is that there are an array of
factors working against U.S. competitiveness at the present time.
In response, some U.S. companies are moving manufacturing operations
offshore. I recently read that Black & Decker is moving one of its plants
from Maryland to Mexico. The reason: lower labor costs. But then I participated
in a conversation with President Vincente Fox of Mexico. His biggest concern:
loss of Mexican plants to China.
Within our industry,
we’ve seen many of our domestic equipment suppliers go bust because they
cannot compete with the lower wage structures in other nations. Beloit,
a former large American manufacturer of paper machines, is a good example.
I sometimes wonder if it just may be the case that our nation can no longer
compete globally with our current combination of high wages and benefits,
high taxes, and strangulation by regulation.
All these
factors are furthering the erosion of America’s manufacturing base. According
to a recent article in USA Today: “Fifty years ago, a third of U.S. employees
worked in factories, making everything from clothing to lipstick to cars.
Today, a little more than one-tenth of the nation’s 131 million workers
are employed by manufacturing firms.”
The author goes
on to say that “The decline in manufacturing jobs has swiftly accelerated
since the beginning of 2000.” Admittedly, part of the decrease in manufacturing
employment from fifty years ago is due to the increased productivity of
each worker. But this is not the reason the author gives for the more recent
decline. She blames that on a sharp rise in global competition. “Unable
to raise prices—and often forced to cut them—companies must find any way
they can to reduce costs and hang onto profits.”
Personally,
I find this trend alarming. While some people may rest easily at night with
the thought that America is fast becoming an almost exclusive provider of
information, financial, and other services, I cannot. Aside from the impacts
of this development on the manufacturing company I lead, I cannot believe
it is in our nation’s interest to become an economy of nondurable and intangible
products.
David Friedman, a fellow at the New America
Foundation, echoes this concern in the January/February issue of Atlantic
Monthly. “Although it is fashionable,” he writes, “to imagine that America
could flourish as a deindustrialized society, manufacturing remains crucial
for prosperity. The average production-sector job creates three times as
many additional employment opportunities as the average service job.” The
author goes on to say that “Seattle and Portland—which not so long ago were
hardscrabble lumber, aircraft and shipping communities—have mutated into
elite post-industrial enclaves over the past decade. Soaring property prices
have driven out the working class. Increasingly anti-industrial policies
have alienated even the region’s most coveted manufacturers, such as Boeing
and a once world-class cluster of metals and machinery producers.”
Friedman attributes part of this trend to “an almost aesthetic
or cultural distaste for blue-collar work among our political, economic
and media leaders.” Let me suggest that America cannot afford such a bias.
So what can we do? How can we—Washington state or Weyerhaeuser— maintain
or enhance our competitiveness in the face of a global economy?
To start with, we do have some advantages—and we must make full
use of them. We have—and must maintain—an educated work force. The productivity
of both Washington state and American workers remains high. But many other
countries can now make the same claim, including China!
We
enjoy good access to key Asian markets, many of which continue to grow faster
than our own. In the case of Weyerhaeuser, some of the best tree-growing
regions in the world exist here west of the Cascades.
And
there are opportunities. For example, Asian countries, excluding Japan,
will account for 55 percent of projected world paper and paperboard growth
over the next 10 years. We at Weyerhaeuser aim to get some of that business.
To do so, we must continue to cut costs.
But we also
need a favorable business environment within the state—and there are some
aspects of Washington’s business environment that concern me.
First, in Washington, a greater percentage of the overall tax burden
is paid by business than in many other states.
And taxes
are especially high on the growing and harvesting of timberforest products
industry as compared with other states—the highest, to be exact, of any
of our operating states … by a substantial margin.
Now,
make no mistake, we want to be a good corporate citizen and pay our fair
share of the taxes that keep a state healthy. But, in the end, we have to
compete against companies in these other states.
We’re
just not convinced we’re paying a fair share here. We’re also aware of the
extreme difficulty in changing the state’s tax structure. It’s been tried
and the state’s voters have turned it down. So we’re not blaming the state
government for the current tax structure.
I’m well aware
of the old rhyme about taxes: “Don’t tax you, don’t tax me, tax that man
behind the tree.” It is almost instinctual for all parties to attempt to
shift taxes to someone else, and business is often perceived as the “man
behind the tree.” However, to use another metaphor, we must never forget
that business is the golden goose … the true engine of growth for the economy.
We also have concerns about the regulatory environment in Washington.
Actually, it’s not so much the regulations themselves, but the way they’re
administered, particularly at the state level. Regulators and the private
sector need to partner better to resolve regulatory and permitting issues
more quickly and less expensively.
Washington businesses
cannot compete well when there are no clear timelines and criteria for decision-making
by state agencies. The Governor’s Competitiveness Council highlighted this
issue, and while some progress is being made, we have a long way to goSome
state agencies seem to have an anti-business bias, which is reflected in
the imposition of additional hurdles or delays in gaining approvals for
new projects or required process improvements.
For example,
it took us nine years—and an inordinate amount of money—to obtain land-use
approvals to develop our Snoqualmie Ridge master-planned community … and
eighteen years for Redmond Ridge. At our Cosmopolis pulp mill, we’ve been
working with the state for years to amend a permit based on a thirty-year-old,
untested model. Yet, despite overwhelming data that we could meet the intent
of the law much less expensively, we have not been able to get the permit
amended.
For the benefit of all Washington residents,
the state and private sector must work together to foster a more pro-business
environment. A key step would be to agree upon—and execute—permitting decisions
under clearly defined timelines and processes. A business considering risking
capital on a project needs a reliable process for moving forward.
Something must be done to change attitudes among some state bureaucrats
and agencies if Washington wants to maintain a healthy economy and attract,
not frighten away, business.
Transportation is another
factor making the state—in particular, the Puget Sound Region—less attractive
for business. The Seattle-Tacoma metropolitan area continues to rank among
the worst in the nation in terms of congestion. According to the Texas Transportation
Institute’s Indexes of Urban mobility, the Seattle-Everett corridor ranks
4th worst in annual delay per person and 5th worst in travel time. Tacoma
ranks 36th and 35th, respectively, in these same categories. When raw materials
or products get stuck in traffic, that imposes another cost on business.
The tax burden on business, regulatory delays, traffic gridlock—those
are my major concerns with the business environment in Washington. Does
Weyerhaeuser intend to continue doing business in Washington state? Yes—as
long we can do so and meet shareholder expectations.
We
like it here. We have roots here. But we must remain competitive—and we
need for Washington state to provide a conducive environment for profitable
business.
Those of you in the audience can play a part.
Never has it been more important to maintain a highly educated work force,
with people such as yourselves to provide leadership and collaboration.
You can urge the state and our fellow citizens to put resources
toward building a 21st century infrastructure—and creating a tax and regulatory
system that encourages businesses to come to, grow in, and remain in our
state.
So what does all this mean to those of us in the
field of chemical engineering? Will there be jobs here in Washington? Will
there be jobs in the forest products industry?
The answers
to both questions are a qualified “yes.” There are plenty of industries
left in the state that need chemical engineers: aerospace, agriculture,
biotechnology, engineering and construction, electronics, food products,
nuclear, petroleum, software, utilities, and no doubt more.
What
about my industry … the forest products industry? Although there is little
new plant construction going on in the United States, there are plenty of
needs for facilities upgrading and maintenance, as well as ongoing process—optimization
work for chemical engineers.
But, as I’ve tried to point
out, until further steps are taken to enhance the nation’s and state’s competitiveness,
manufacturing jobs will continue to leak offshore. So if you want to cover
all your bases, keep your passports up to date.
