Fast Company’s latest issue covered a great perspective on the "world is flat" idea, discussed by Richard Florida (originator and advocate of the "Creative Class"), in his book Who’s Your City?.  The general premise?

The world is not flat, a notion widely popularized by Thomas Friedman, but rather spiky.  Florida proposes that the geographic regions of the world at large, can be classified into four general types or clusters, based on population and socioeconomic circumstances.  What are the four clusters?

Four kinds of places make up the landscape of our spiky world: first,
the tallest spikes that attract global talent, generate knowledge, and
produce the lion’s share of global innovation. Second are the emerging
peaks that use established ideas, often imported, to produce goods and
services. Some of these cities, such as Dublin and Seoul, are
transitioning into places that generate innovation, but most, from
Guadalajara to Shanghai, function primarily as the manufacturing and
service centers of the 21st-century global economy. The two remaining
types of places are being left behind: third-world megacities
distinguished by large-scale "global slums," with high levels of social
and political unrest and little meaningful economic activity; and the
huge valleys of the spiky world, rural areas with little concentration
of population or economic activity.

A few interesting, additional observations made by Florida are that 1) the world is much more "flat" and connected for those in the "spikes", or areas of innovation and concentrated talent.  Thus, those that inhabit and frequently travel between cities like London, Paris, Shanghai, New York, San Francisco, Los Angeles, Chicago, Tokyo, Singapore, etc. are much more likely to be connected in the way that Thomas Friedman alludes to.  2) The divide between these areas and the bottom two areas, the developing world and rural areas, is growing dramatically. 

This spikey/cluster concept was first introduced to me a few years ago in a talk by a futurist at the Commonwealth Club.  I think Florida’s depiction paints a much more accurate portrayal of the world with respect to socioeconomics.  I live in and frequently travel in cities that would be considered spikes, but I have also lived in and traveled through places that would be at the bottom of the rungs.  From a cultural standpoint, there is a shift in the way someone like myself might connect to people in the rural areas of my own country and people in the spikes of other countries.  It largely depends on context.  My ability to relate to a farmer in Nebraska might be much stronger in
areas of politics, family, and issues that ring home in my American
upbringing.  However, in certain contexts, my ability to connect with the young, technologically hip, professional in Shanghai is markedly stronger than a farmer in Nebraska.  This would be apparent on issues of business, lifestyle, and world affairs, etc…

This also helps to bring a more accurate description to the socioeconomic circumstances of very dynamic, emerging economies like China.  Many of the China-hype articles that have been published in top business magazines over the last few years, depict China as a country ready to challenge the world in areas like innovation, design, and other cutting-edge capacities.  These articles are most assuredly talking about an extremely small, handful of people and companies in the spikiest of clusters like Shanghai.  Articles like this often serve as a reader’s only impression of China, if they have never done business there.  It’s no wonder that hype like this has fostered fear and suspicion of China’s imminent challenge to other economies in these areas.  In reality, China, in many ways, is still a country of rural peasants.  There are world-class talent and capabilities there, but believe you me, it’s a relatively small group of people in the spiky clusters.

So many products today are often truly global when considering who and what places are involved in developing, producing, marketing, and buying them.  Not only does this process bring together people in different geographic areas, it involves adept management of people across several of the clusters at one time, to capture the benefits and strengths of each in the process. 

In my last post, Fort Payne, Alabama Shows How to "Git ‘Er Done" When Challenged by Cheap Imports from Low-Cost, Overseas Labor, I covered a story regarding a U.S. town adapting well to the challenge that global trade and low-cost offshore labor poses to them.  I saw this article and I thought it would make a great follow-up, and highlight what’s going on while the United States’ debates whether freer trade or more trade barriers is the key to maintaining the United States’ economic excellence.  I say "excellence" in the place of "dominance" because, as this news flash shows, there are two other would-be superpowers that may soon share the limelight with us. 

This news came to my attention by way of SpendMatters (Jason Busch, SpendMatters author, cited  World Trade Magazine and India’s Economic Times).  Anil Gupta, of India’s Economic Times, writes in his article, The Future of India-China Trade:

First, trade between the
two countries has grown very robustly. Each country’s aggregate
international trade is expanding by 23-24% annually. In comparison, India-China
trade grew at a 50% rate during 2002-2006 and will increase by a further 54%
during 2007 to reach $37
billion.

Second, after
adjusting for partner GDP (i.e., bilateral trade divided by the trading
partner’s GDP), India’s trade with China is greater than that with
Japan, the US, or the entire world. After similar adjustments, China’s
trade with India is only slightly below that with Japan, the US, or the entire
world.

Third, China already is
(or will shortly become) India’s number one trading partner. From
China’s side, India already is one of its top ten trading partners. Also,
China’s trade with India is growing much faster than with any of the other
nine. Thus, India is rapidly becoming an increasingly important trading partner
for China.

Fourth,
India’s overall international trade is significantly below that of
China’s, in terms of both absolute figures (for 2006, $306 billion vs
$1,760 billion) as well as relative to GDP (34% of GDP vs. 65% of
GDP).

Fifth, even if the growth
rate in India-China trade slows down to 25% annually (a conservative projection)
from the current rate of over 50%, bilateral trade between them will be almost
$75 billion in 2010 and $225 billion in 2015, i.e., as large as China-US trade
just three years ago. These are very large numbers. Political and business
leaders need to start getting ready now for this radically different
world.

There is still a lot left to unfold that could positively or negatively impact trade between these two countries.  China and India are dancing around various trading partnership deals (India-China Free Trade Agreement, India granting China Market Economy Status) which could foster increased trade.  In contrast, continued growth in trade depends upon these two countries not getting caught up in quibbles over trade issues and protectionist attitudes.

Currently, the United States, at large, seems to be debating clamping down on international trade (demonstrated by those with protectionist attitudes in Congress and certain presidential candidates) and those that promote increased trade between the U.S. and other countries (also demonstrated by certain members of Congress and the current administration).  While we think about these issues, we may want to take note of the growth in trade and relationship-building taking place between the two most likely candidates for shared, superpower status in the next 50 years. 

For my two cents, (which isn’t as valuable in the global currency markets as it was one year ago), perhaps more open attitudes towards trade and more towns adjusting like Fort Payne, Al (e.g. increased focus on innovation, education, and higher-skilled jobs), are our best bet at maintaining the lead we’ve worked so hard to gain over the last 50 years.      

As more low-skilled jobs work their way out of the hands of U.S. workers’ and into those of low-cost laborers overseas, many in the U.S. shout "what’s in it for us?"  Adaptation to circumstances like this has never been easy.  But, as anyone who has taken 6th grade biology knows, adaptation is critical to continued evolution and survival, whether you’re a salamander, lion, or sock factory worker in Fort Payne, Alabama.

The following example of Fort Payne’s sock industry dominance challenged by cheap imports from Honduras, China, and Pakistan, demonstrates that being edged off the factory floor by a low-cost labor force overseas doesn’t always have to create a net loss to people in the United States.  It can, in fact, result in improved circumstances for our citizens here.  Fort Payne, Al, shows us that’s not just crazy talk.

I caught wind of this story in a blog post at Marc Andreeson’s blog.pmarca.com, and it seems it can be traced back to an NPR story found here.  Marc does a great job at putting the pieces together:   

The [US government] today announced it has [decided] to… apply a
textile safeguard measure [i.e., protectionist tariff] on cotton socks
imported into the United States [from Honduras]…

"[The US government] reached this decision after careful
consideration of all available information and comments submitted by
all interested parties. [What’s that smell?] The substantial increases
in imports of cotton socks from Honduras found during the investigation
have led [us] to move forward with the safeguard [i.e. protectionist
tariff] process…" said Deputy Assistant Secretary of Commerce Matt
Priest…

[The US government] made a determination that a safeguard measure
[i.e. protectionist tariff] is warranted with respect to imports of
Honduran origin cotton socks based on the substantial growth in imports
from Honduras. Imports of cotton socks from Honduras were 27.3 million
dozen pairs through the first eleven months of 2007, an increase of 99%
from the same period a year earlier. [The evil brown people are
strategically swamping us with cotton socks!]

Based on the substantial level of imports of cotton socks, [the US
government] determined that it will not, at this time, make a
determination to apply a safeguard measure with respect to wool and
man-made fiber socks. [The evil brown people are not yet strategically swamping us with wool and man-made fiber socks!]

Source: US government International Trade Administration.

The situation is grim for Fort Payne, Alabama, the "sock capital of the world", says NPR:

There’s no question that globalization has been really bad for the
sock industry of Fort Payne, Ala. Just a few years ago, the town called
itself the sock capital of the world, and with good reason: Most of the
town worked in the sock business.

There were more than 150 sock factories, churning out a big chunk of
the socks worn in the U.S. But lately, there has been a flood of
cheaper socks coming in from China, Pakistan and Honduras. It has
devastated Fort Payne. Two-thirds of the town’s sock mills have
closed…

Jimmy Durham, the county economic development officer, shows just how grim things have been for the sock business here.

On street after street, he points to buildings that used to house sock mills, most of which are now gone.

Terrible, right?  Well…

With all these businesses shuttered, you might think [county
economic development officer] Durham is in despair about the future of
Fort Payne. He isn’t.

Those closed sock factories are reopening as new businesses.

He points to Steadfast, which makes bridges; Ferguson, a major
plumbing supply company; a distribution center for Children’s Place;
two new metal tube manufacturers; a high-tech label maker. For a town
of only 13,000 people, this is a lot of new, good-paying employment.
These jobs pay more than sock-making jobs.

In fact, most of 4,000 recently laid-off sock workers quickly found new jobs…

Durham says there has been a high-tech revolution in Alabama.
Mercedes-Benz, Toyota and Honda have all opened plants in the state.
And that means a huge influx of parts suppliers. BAE Systems, a major
U.K. aviation company, opened an engineering office in Alabama.

Durham says there are now more high-paying, high-skill jobs in the state than there are people qualified to take them…

The unemployment rate has stayed the same, even as the population
has increased. In other words, the number of jobs has gone up, even as
thousands of sock-making jobs have gone away.

So why on Earth would the US government put a protectionist tariff on Honduran socks now — particularly when Honduras is a fellow participant in CAFTA, the Central American Free Trade Agreement?

There’s only one reason: a deal President Bush struck late one night in July 2005.

That July night, Bush met with Fort Payne’s congressman, Robert Aderholt, to talk about tariffs and the sock business.

That meeting was, most likely, the moment Aderholt had more power
than at any other time in his life. The House was voting on CAFTA, the
Central America Free Trade Agreement. The vote was an exact tie.
Aderholt was the holdout. And President Bush very much wanted CAFTA to
pass. So, Aderholt offered the president a deal: He could get his big
free-trade deal only if he rolled back free trade on one industry, the
sock industry.

"I told him this was what I needed," Aderholt said. "This was the one thing I had great concerns about."

That night, President Bush agreed to Aderholt’s deal. CAFTA passed.
And the White House gave itself a self-imposed deadline of Dec.19,
2007, to put back tariffs on sock exports from Honduras [which they
missed by about a month].

Globalization can be tough on those in jobs and industries that can be done easily, anywhere.  I’m sure if my job or function was outsourced within a year to someone in India or China, it would be a challenge for me to reassess my situation, pick up what I have left, and keep moving forward.  But, adaptation is critical to my survival and is an intrinsic element of a globalizing world.  If I sit on my haunches, I’m done for.   

The bright side is, like many workers in Fort Payne, I may find myself in a better position.  Trading out low-skilled/low-paying jobs for higher skilled/higher-paying jobs can be advantageous if tackled head on.  I have to extend kudos to an entire town that seems to be on their way to accomplishing this.  They’re changing with the times and finding a better future
for themselves, rather than throwing up their hands and saying "no
fair".  The Honduran sock makers may have a better claim to "no fair", who are also honest, hard working people who want to provide for their families.  They are unable to compete to their full capability, not because of economic forces, but political wheeling and dealing on the part of our politicians.  Hopefully, they’re just as resourceful as their Fort Payne counterparts.         

A good friend in the intelligence community offered to look over my previous blog post, The United States, China, and Trade, Part I: Has China Got it Right and Are We Missing the Point?,
before I published it, and he made several astute comments that were
not only thought-provoking, but drove home several key, no b.s.,
observations contrasting China’s growing international relations and
trade with that of the United States.  His comments stem from his
intimate knowledge of Chinese culture, politics, and U.S.-China
security issues, and while they are by no means classified information,
I do need to keep his identity anonymous.  His take:

In 2007, trade on the global stage requires more than
just waving around some greenbacks and wearing your american flag pin.
Other nations are no longer as impressed by the simple fact that we’re
America.  In recent years, we’ve made it increasingly difficult for the
newer markets (such as Africa, SE Asia, etc) and the bourgeoning
economies of the world to do business with us.  Every trade agreement
we attempt comes with all sorts of ridiculous, often self-righteous
conditions (human rights, environmental considerations) that countries
are in no position to meet at their early stages of development.  I’m
sure that’s what you mean when you talk about our "inflexibility". 

Further, the US seems reluctant to look any further
ahead than next week when it comes to engaging in trade agreements.
The attitude seems to be "if you’re not gonna let us use your country
as a landing strip or give us oil, then we aren’t that interested."
This is the other side of trade agreements, I think…the big "S"
strategic side (highlighting the impact of economic and trade relations
on security and defense). 

China is not simply making trade agreements to bring in capital, they’re making trade agreements because:

1. it’s the first and easiest way to make friends diplomatically
2. it builds interdependence. 

Countries
who NEED you will take your side in disputes.  I think that aspect
ought to bring home the idea to people that positive, pro-active,
flexible trade practices abroad are our only hope for winning this race
with China.

Right now they’re whipping our asses because they don’t
judge, they don’t ask questions, and they invest in infrastructure
projects all the while giving very handsome "gifts" to the prominent
citizens of whatever country they are engaging.  We dig wells and build
schools for poor people, but the reality is that those who need a well
don’t hold much sway in their countries.  Those are great things to do,
but we’re gonna have to play China’s game if we want to get ahead. 

Thought-provoking indeed…

More to come.

I’ll be honest, before becoming involved in trade policy research a few years ago, if a newscaster on TV mentioned "free trade agreement", I couldn’t have flipped back to Sportscenter fast enough.  It wasn’t until I was neck deep in trade policy research, working on think tank research teams, that I realized how these agreements drill down to every detail in a country’s economy and affect why, where, how, when, and who we buy and sell things from.  Make no mistake, they affect your daily life.

During a recent trip to Hawaii, in between surf sessions at Diamondhead and the North Shore, I was able to catch up with some old colleagues and friends from the East-West Center and other Asia related organizations, many of whom are more than familiar with the policy goings-ons of Asia and the U.S.  Some of them have participated, at a very high level, in the development of trade policy in the PacRim for several decades.  Others are security and intelligence analysts, and others are businessmen that regularly work in Asia, like myself.

Consistent with what’s popular in the news today, many of the discussions dwelled on China and the U.S.  One of the overriding themes that I came away with was the observation that the U.S. has been rather neglectful, or perhaps better put, less strategic than our Chinese counterparts when it comes to developing trade relationships with other countries. 

In recent years, the Chinese have been much more active and successful in this area.  They enjoy an ability to approach free trade agreement negotiations in a flexible manner, sticking to easy trade issues that will have a substantial impact, offering considerable incentives to other countries, etc.  The U.S., in contrast, forces the hammering out of every issue and trade talks often falter entirely when difficult areas cannot be agreed upon.  Additionally, the U.S. has a lot on its plate right now and it’s not a secret that the U.S. has probably not taken enough interest in what’s taking place in Asia in general.

Yes, the U.S. signed an FTA with Singapore a few years ago, which was a promising move.  And now, the Korea-U.S. FTA has been negotiated and awaits ratification.  But China is doing much much more.  They are working with ASEAN (Association of Southeast Asian Nations) on trade liberalization and have already made substantial progress in opening up the trading of goods.  This, coupled with other efforts, is helping to push ASEAN +3, an initiative by Southeast Asia, China, Japan, and Korea, to develop a regional trading bloc, an initiative which the United States is noticeably not a part of.  Even India and other South Asian countries are moving to be included in this regional trade pact.  Instead, the U.S. pushes trade liberalization in the PacRim through either bilateral agreements (one-on-one country agreements) or APEC (Asia-Pacific Economic Cooperation) which provides little to none in the way of tangible results. 

And it’s not just in Asia that China is beating us to the punch.  Africa is also a continent where we may be noticeably falling short.  Take a gander at this press release recently issued by the Export-Import Bank of the United States.  According to the document:

China’s growing commercial presence in Africa, and low participation by
U.S. companies in the region, present critical challenges to U.S.
commercial interests, panelists at a meeting of the Sub-Saharan Africa
Advisory Committee (SAAC) of the Export-Import Bank of the United
States (Ex-Im Bank) agreed during a public forum at the Bank’s
headquarters here.

U.S. Export-Import Bank Chairman and President, Charles Lambright, noted:

China-Africa trade is growing much faster than U.S.-Africa trade. In
2006, China-Africa trade totaled $56 billion while U.S.-Africa trade
totaled $100 billion, of which $80 billion were African sales to the
U.S. In five years, total trade between China and Africa is expected to
reach $100 billion.

With recent rumblings in Congress creating a scenario in which FTAs will likely be more difficult to pursue in the near future, an irrational fear of China’s rise in defense and protectionist circles, and U.S. consumers’ angered by the quality issues of a few companies out of thousands, there is a lot of talk about returning to protectionism and erecting trade barriers to keep the U.S. competitive and keep China down.

I have to ask myself if we’re asking the right questions and seeing the whole picture in relation to trade and Asia.  Are we looking at the U.S.’ future from a strategic standpoint?  If we are, what’s our strategy–keep China down?  I do see quite a lot of anti-China sentiment out there. 

How did we become focused on a "keep China down" strategy rather than a "propel the U.S. ahead" strategy?  The problem occurs  when we are led to believe that one cannot be had without the other and then we start tackling the side of the coin (ahem…"keep China down") that is much easier to address because it is a more focused question and offers a great scapegoat. 

Is China employing a "take the U.S. down" strategy?  Hardly.  They’ve got a "make China glorious again" strategy.  Let’s ask the question: "if we’re not going to focus on keeping China
down, how do we propel the U.S. ahead?"  I’ll break the suspense: I don’t have all the answers.  But, I do have one
suggestion and it looks like we could steal a page from China’s book at
this point:  foster trade relationships through trade liberalization
with other countries.

One basic characteristic of the U.S. that has helped ensure our economic strength is our relative openness to economic competitiveness.  This has been fostered within the country since it’s inception.  But now, in a global world, competition has fewer and fewer borders and global competition, is in fact, global. 

Freer trade brings competition.  Competing means taking on all comers and this is the most effective way to realize the best in oneself.  Our industries need to go up against industries in other countries, which will force us to grow, become more efficient, and keep us on the cutting edge.  This does not come without it’s pain points.  But it’s necessary, or we risk losing ground entirely.  Trade liberalization opens the doors for competition and international relationships.  If China is doing a better job at this than us now, what does that mean for our ability to compete ten years down the road? 

Luggage-free sourcing?  I had to see for myself.  I recently attended Alibaba.com’s first Open Sesame Event in Oakland, California, a week or so ago.  I know Alibaba.com well, but I had no idea what to expect, who would attend, and what would take place.  For those new to this website with a strange name, Alibaba.com describes itself as "the world’s largest online import-export marketplace", and boasts of 3.1 million members in over 200 countries.   It’s an impressive website.

Our company, Global Sourcing Specialists, will use Alibaba.com to occasionally track down a factory or two if we don’t have one in our network that will suit the needs of a project.  On other blogs and in conversation, I’ve always praised Alibaba as a tremendous catalyst for connecting buyers and sellers.  But, I’ve also noted that many companies and people using the website were generally remiss when it came to taking all the appropriate due diligence and business steps that remain necessary after one has established contact.  I don’t think Alibaba can be held responsible for making the sourcing process seem deceptively easy (although the term "luggage-free" is a stretch), but it’s quite obvious that users are in serious need of education when it comes to sourcing and Alibaba.  When it comes to doing business in China, or Asia in general, and the notion of quality, it can be hard to wrap one’s mind around just how different the approach and perspective on quality is.  See this post by Chinalawblog for some great anecdotes depicting the sobering reality.   Dan Harris speaks the truth when he says:

If you are going to source product from China, you must recognize and
account for the differences from sourcing product in the United States
or in Western Europe.

My hunches on the lack of education in the Alibaba community were confirmed when I attended the Open Sesame event.  I was surprised to find that the preponderance of the audience did not consist of CEOs and purchasing managers of mid to small-size companies, and service providers like myself, doing business overseas.   Instead, I would guess that 95% of the audience were complete newcomers to sourcing, offshore manufacturing, and the import-export industry.  I met many who were considering a new career as a "trader" or "sourcing agent" in addition to their daytime jobs.  Many of these folks often had family or connections in a given country and hoped to capitalize on this.  And, although the event focused on creating a community of Alibaba’s users offline (I think this is a good move on their part), and demonstrating the capabilities of the site, it became evident that people wanted to know how to verify business partners’ legitimacy, inspect factories, inspect quality, ship goods, and about all the other major issues involved with sourcing products offshore.  But, these questions and issues were largely outside of Alibaba’s realm. 

The most fruitful and interesting event of the evening was an icebreaker game, during which the audience competed to exchange the most business cards in a one minute period.  I got 7 cards.   The winner collected 13.  Much like the service and value offered through the website, it was a brief exchange of general business information from one person or company to another, with the chance to learn more and possibly do business.   But just because Mr. Y gave me his business card in person, doesn’t mean I’m going to trust everything he says and am ready to send $US 50,000 to his company in Asia to commence tooling for a product.  Just read these stories at Complaintsboard.com, or here at Alibaba-scam.info, by scammed users, and you can quickly get a feel for those that followed this approach. 

Alibaba.com and matchmaker/trading websites like it are here to stay.  They are part of the technology that is helping to break down barriers to a more free Global Economy and intertwine our economies and lives. But their user community is in serious need of education and services beyond a connection through email–services that require people on the ground.  When I first entered this business, I previously worried that Global Sourcing Specialists’ services would be eclipsed by the internet.  In fact, several consultants who were very senior in age to me, bluntly told me that the internet was all that was needed now–and I should look elsewhere in business.  Now, I realize the opposite is occurring.  If anything, because of the internet, there are more companies and people out there than ever, that need education and help with doing business, manufacturing, and trading overseas.  "Luggage-Free Sourcing"?  Only if it’s my luggage in the place of your’s.

Since I lived in Indonesia a few years ago, the country has experienced impressive signs of growth and potential.  The economy is "lebih sehat" (in better health) as they might say.  But, as most know, they’ve also experienced the devastation of natural disasters, terrorism, and other setbacks.  Unfortunately, disasters like these have always seemed to make for better news than 5% yearly economic growth over the last few years.  Or, the first democratic elections in over 30 years, in which there was a 90% voter turnout rate and proceeded in a peaceful fashion.  These are some respectable achievements only 8 years after the Asian Economic Crisis sent the whole region into a tailspin and ousted a government that held power since the 1960’s.  But when I overheard a conversation the other day about traveling to Bali, and one woman asked "Isn’t that where that horrible earthquake was?", and another woman chimed in, "no, that’s where the terrorists blew up a bar", I realized that Indonesia needs to hire a PR firm in America.  They really have made some laudable advances, but you wouldn’t otherwise know it if you tuned in to the majority of media outlets here.   

They certainly have a ways to go, but the challenges they have had to deal with and the accomplishments they have made in this decade are worth pat on the back.  A politically stable, low-wage country with considerable natural resources stands to offer quite a lot.  If ASEAN (Association of Southeast Asian Nations) is able to move forward with bilateral and regional trade agreements, and the government can effectively deal with the growing workforce and stabilize the country, we will see a resurgence in economic activity and foreign direct investment in the region.  Keep your eyes on Indonesia.  In five to fifteen years, the largest muslim nation in the world could be a major economic force in the region.

Vietnam’s National Assembly ratified the country’s accession to the WTO today.  In his closing remarks, after 90.24 percent of the delegates voted in favor, National Assembly Chairman, Nguyen Phu Trong, said that Vietnam’s asscession to the WTO was a political, economic, and social event of great significance.

Vietnam attracted foreign direct investment (FDI) of 5.8 billion USD in 2005, a record high for the past eight years.  And, 2005 couldn’t have gone better for foreign entrepreneurs in Vietnam, who reached their highest revenue, 20 billion USD, since the 1997 Asian monetary crisis.

What does this mean?  Vietnam is continuing its advance, and that of Southeast Asia’s, onto the world stage as an attractive place to do business.  The government is making slow and steady improvements to improve and promote the investment climate.  The country offers low labor rates, factories that can produce quality product, and employees demonstrating a strong work ethic.  Vietnam will increasingly become more attractive as a sourcing destination.