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Mr. John Caron Responds to Mr. John Sweeney in The Initiative Report

Sincere Catholics can disagree regarding issues of economic justice.  In the last issue of the Initiative Report, John Sweeney, president of the AFL-CIO, commented from the viewpoint of organized labor.  In this issue, John B. Caron responds and comments from his perspective as a Catholic businessman.                                 
The Editor

Globalization and the North American Free Trade Agreement (NAFTA) are viewed by many with apprehension and outright fear as threats to the social and economic well-being of the people in the United States and the rest of the world. Yet I believe that globalization is a profound yet inevitable change to which we must respond and that NAFTA is good for both the people of Mexico and the United States.

NAFTA is blamed for Mexico's low wages, inhumane working conditions, suppression of unions, and environmental degradation.  The recent devaluation of the Mexican peso that substantially lowered purchasing power is also blamed on NAFTA.  Did NAFTA actually cause these problems? 
Long before NAFTA, Mexico did not enforce its laws regulating working conditions or wages, and ignored laws protecting the environment.  The devaluation of the Mexican peso was caused by large budget deficits funded by short term dollar loans, not by NAFTA.  Although NAFTA did not cause Mexico's problems, it could help solve them. 

Mr. Sweeney and I disagree on the effects of globalization.  He refers to it as a one way street benefiting only multinational corporations.  Yet, NAFTA is an example of how the benefits can flow to a developing country.  NAFTA gives Mexico preferential access to the United States market.  United States companies introduce competition that forces Mexico to address problems of inefficient industries and agriculture and allocation of resources.  Also, corruption, which has devastated Mexico for years, is being exposed by American and Canadian companies trying to compete for the Mexican market and is receiving wide coverage in the United States press.  Foreign investment in Mexico also has increased substantially since NAFTA.  Factories are being built, not just simple assembly-type "maquiladoras" operations, but technologically up-to-date plants that can compete on world markets.  Because of these plants, Mexican workers are learning new skills.  Wages are increasing.  History has shown that as skills and productivity increase, wages, benefits and working conditions improve. These advances are happening in Mexico.  

The structural changes being accelerated by NAFTA will result in the improvement of the standard of living for Mexicans.
NAFTA is part of a world wide move toward globalization.  Globalization also is blamed for the devastation of Asian economies, the economic demise of the Soviet Union and for United States companies moving to low wage foreign countries.  These moves are often called the "race to the bottom."  

I recently attended a conference in Milwaukee at which the keynote speaker emotionally declared that globalization must be stopped.  King Canute commanded the tides to stop. The Luddites demanded the Industrial Revolution to stop. The term globalization may be new, but the process has been going on for years.  Mr. Sweeney also says that Europe has retreated before globalization.  On the contrary, Europe has recognized the advantages of increased trade.  The European Economic Union and the single currency Euro are big steps forward.

Mr. Sweeney and I agree that the challenge is how to make the changes in the economic system benefit the most people.  We disagree, however, about how this is to be achieved.  Although NAFTA and globalization are blamed for taking jobs from the United States, most of the low wage, low benefit jobs in the United States are in the service industries: retail stores, health care, etc. These jobs are not the jobs that are confronted with foreign competition.  Blaming NAFTA or globalization for the plight of these American workers is illogical.  

Mr. Sweeney and I disagree on the motives that drive business people.  He seems to have an evil conspiracy theory.  In reality, business is also faced with the reality of globalization and the rapidity of technological change and must respond or they will be out of business.  In the long run that will also hurt workers.  A good example is Weirton Steel, a worker-owned company that is in dire trouble because steel making technology has changed and Weirton's processes are no longer competitive.

A strength of the United States economy has been the ability to respond to changes.  Textiles, the industry with which I am associated, is a good example.  The textile industry makes yarns and fabrics for the apparel (clothing) industry.  For the last 40 years, there has been a steady flow of the apparel industry (the textile industry customers) to the Far East—Hong Kong, Taiwan and now to China.  Over 60% of all apparel purchased in the United States is imported.  These jobs tend to be low-skilled and low-paid.  

When NAFTA was first proposed, the textile trade association, American Textile Manufacturers Association (ATMI), favored its passage.  The United States textile industry felt that NAFTA would encourage a move of the apparel industry, their customers, to Mexico, back from the Far East.  This has happened.  Exports of U.S. made yarns and fabrics to Mexico have soared.  While the apparel industry continues to be labor-intensive, the textile industry has become capital intensive.  Textile industry employment is half of what it was several decades ago, but the volume of production is still large.  Productivity has increased dramatically.  

Labor costs are not everything.  A textile manufacturing friend in Mexico who makes products very similar to ours compared costs with me.  His wage and benefits costs were one-eighth of ours, yet our costs per pound were lower.  We were much larger, which gave us economy of scale and our labor productivity was much higher because of technology.  Another example of technology-driven productivity is our plant that makes yarns for automobile upholstery.  Quality standards for this type of upholstery are high.  To assure meeting these quality standards, extensive testing was needed.  At first these tests were time-consuming, laborious and expensive.  Now all testing is done electronically, directly on the machine while the yarn is being made.  Every two centimeters of yarn is tested electronically for 6 or 8 different quality standards at 500 yards per minute.  Machine malfunctions, which are often the source of quality problems, are immediately diagnosed electronically.  Quality is higher and costs are lower.  

This points to my disagreement with Mr. Sweeney on the way to increase wages in developing countries.  He wants to attach conditions to trade agreements that would force other nations to raise wages and improve working conditions.  I believe that economies must grow to support wage increases.  There must be investment in plant and equipment and education.  The reality is that people are poor because their productivity is low.  Only productivity gains will improve standards of living.  There are also practical factors that make mandating wage increases unrealistic.  If one country accedes to the demand, another country might not and cost advantages would flow to that other country.

Until after World War II, the textile factories were located in New England and were mostly family-owned companies.  After the war, there was an explosion of technological change.  Synthetic fibers were invented by Dupont.  New machinery increased productivity and quality.  The New England textile industry faced obsolescence.  The large multi-story factories, which one can still see in Lawrence, Lowell, and New Bedford, Massachusetts, were not suited to the newly-developed technology.  Labor relations were not good.  The electronic industry was growing.  Route 128 around Boston become the first Silicon Valley.  Wage rates were increasing in the area.  Textile companies moved South.  Some were forced out of business because they were not competitive.  Many New England communities lost their main employers and there was localized unemployment.  Change was painful.  Looking back, the change was good for New England.  Wages are now among the highest in the country and unemployment is low.  

A similar situation is happening in the South today.  The automobile and other high-paying industries, many foreign investments, are moving in.  Unemployment is low.  The textile industry in the South is being forced, once again, to become more competitive.  The less efficient companies are going out of business with an impact upon local economies.  We will probably look back on this as part of a positive long-range change, the same as it was for New England.  Contrast this with the situation in Europe with its high unemployment and low growth.  Legislation intended to provide worker security has caused companies to respond very cautiously to change. 
Change has always happened but globalization has expanded the horizon and accelerated the pace.  If something can be done cheaper or better or differently, someone will figure out a way to do it.

Employers want a level playing field.  They don't want a competitor to have an unfair advantage.  Lower costs are obviously a competitive advantage.  Mr. Sweeney has referred to the "Nike Economy."  The comic strip Doonesbury has featured the Nike foreign low wage issue.  The hot topic on college campuses is sweat shops.  Kathy Lee received a flood of negative publicity when it was revealed that the apparel with her label was made in sweat shops. 

Several organizations are trying to address the problem of the Nike economy.  The Fair Labor Association has been set up by Nike, Liz Claiborne, and other apparel companies and human rights groups.  The Council on Economic Priorities has been sponsored by Avon, Toys R Us and others.  The American Apparel Manufacturers Association has plans to monitor factories.  

Nonetheless, there is an old saying, "Perfection is the enemy of the good."  Proposals for change must be realistic.  Some of the proposals call for such drastic change that the likelihood of something happening is diminished.  Firms who had joined the Fair Labor Association are now dropping out because they feel they will be non-competitive if they adhere to some of the proposals and their competition does not.

Mr. Sweeney and I disagree on the importance of trade to increasing standards of living.  Most business people feel the only way to improve standards of living is by a growing economy.  Almost all economists agree that increasing trade leads to increased standards of living.  Yet, the AFL-CIO has tended to resist moves to increase trade on the grounds that imports will undermine U.S. wages.  Many special interest groups want to place conditions on trade agreements—environmentalists, human rights advocates, labor unions, etc.  All have admirable goals, but the practical effect is that the more conditions required, the less likely an agreement can be negotiated.

It's also true that people will pay more for a product if they have a reason.  Organic produce is an example.  Sales are small but growing.  People pay more because they perceive organic to be worth more.  Some people may pay more for apparel if they know it is not made in a sweat shop.  But to give people an incentive to pay more, a consumer campaign must be well-conceived, well-promoted, and well-financed.
I have tried to convince my family to buy only products made in the United States.  I have never bought a foreign car.  Almost all of my apparel and shoes are made in the U.S.  My wife tells me it is getting more difficult to buy U.S. made apparel gifts for me but I want to support the American worker.  A friend who is an unquestioning liberal and a social activist buys imported clothes because they are cheaper.  She drives a foreign car.  I ask why?  They are better, she replies.  How does this affect the U.S. employment? I ask.  No comment.  The moral to this story is that United States companies must be competitive or the public will not buy its products.  

Like Nike, McDonald's is another lightning rod.  A friend declared that 79 cent hamburgers were possible only because McDonald's destroyed the rain forest and exploited their suppliers and workers.  I asked where she got all of that information.  From the Internet, she said.  So I called it up.  Sure enough there was a site "What is wrong with McDonald's?"  McDonald's was accused of "promoting meat products and encouraging people to eat meat more often which wastes food resources."  "Forests are being destroyed because McDonald's buys 'beef raised on ex-rain forest lands'."  "Methane emitted by cattle is a major cause of the global warming crisis."  "McDonald's packaging ends up littering our streets and pollutes landfill sites."  The site goes on accusing McDonald's of ruining our health, for the inhumane way livestock is raised and so on.  McDonald's is blamed for many societal ills.  People loved hamburgers, people littered and livestock emitted methane long before McDonald's.  McDonald's has a lot of competition, Burger King, Wendy's, and many non-hamburger competitors such as Taco Bell, KFC, etc.  Competition  has been so severe for McDonald's that the same store sales in the United States have been down for several years.  Just this year McDonald's has made a comeback.  

The National Policy Association is an organization composed of business, labor, and academe.  The committee of which I am a member is concerned with the issue of U.S. competitiveness in world markets.  One of the issues is the quality of the U.S. workforce and how this affects our competitiveness.  This group asked to have a meeting at McDonald's in Oak Brook, Illinois, at the training center called "Hamburger U" because McDonald's does so much training of the entry level worker.  McDonald's has developed a process of training that includes not only the fundamentals of what is needed on any job, but also focuses on human relations and problem solving skills.  All of this is far beyond the training required for a person to be a "hamburger flipper." 

Another result of globalization has been the trend to bigness.  Big companies tend to be more efficient and able to market their products more broadly.  The rise in the stock market of the 90's has been driven mostly by "large caps," the very large corporations who have taken advantage of globalization.  Big companies have more buying power.  It is no wonder that General Motors is trying to outsource its parts manufacturing.  Competitors have already outsourced their parts manufacturing.  Years ago, our company had thousands of customers.  Now there are only a few very big ones.  Do I like this?  No, but it is a fact of life.  The only way to compensate is to become a more valuable supplier to our customers, to provide better service, better products and, yes, lower prices by getting our costs down.  

It is not just U.S. companies that are getting bigger.  British Petroleum has bought Amoco and is buying Atlantic Richfield.  Deutsche Bank bought Bankers Trust.  Daimler bought Chrysler.  The big keep getting bigger.  Look at the recent mega-mergers in the telecommunications business.  SBC is buying Ameritech.  Bell Atlantic bought NYNEX and is buying GTE, and so on.  Future capital expenditures requirements are formidable as technology changes rapidly.  Only the big companies will survive as large customers demand more sophisticated services.  As companies get bigger, the necessity of anti-trust vigilance increases.  Competition must be maintained.  Productivity increases driven by competition have kept prices down and innovation up.  The consumer benefits. 

Father Hesburgh once said at a conference of business executives at the University of Notre Dame that there was nothing less inspiring than an ethical failure. Competence is required of Catholic business people.  I want to emphasize that business is confronted with increasingly complex and competitive problems in today's changing world.  If we are to achieve high wages and good working conditions, we must recognize and respond to change, realistically and quickly.

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