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mores into America, might align themselves with unions from the left wing of the

Democratic Party, who don't like globalization for the way it facilitates the

outsourcing and offshoring of jobs. They might be called the Wall Party and militate

for more friction and fat everywhere. Let's face it: Republican cultural

conservatives have much more in common with the steelworkers of Youngstown, Ohio,

the farmers of rural China, and the mullahs of central Saudi Arabia, who would also

like more walls, than they do with investment bankers onWall Street orservice workers

linked to the global economy in Palo Alto, who have been enriched by the flattening

of the world.

Meanwhile, the business wing of the Republican Party, which believes in free trade,

deregulation, more integration, and lower taxes-everything that would flatten the

world even more-may end up aligning itself with the social liberals of the Democratic

Party, many of whom are East Coast or West Coast global service industry workers.

They might also be joined by Hollywood and other entertainment workers. All of them

are huge beneficiaries of the flat world. They might be called the Web Party, whose

main platform would be to promote more global integration. Many residents of Manhattan

and Palo Alto have more interests in common with the people of Shanghai and Bangalore

than they do

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with the residents of Youngstown or Topeka. In short, in a flat world, we are likely

to see many social liberals, white-collar global service industry workers, and Wall

Street types driven together, and many social conservatives, white-collar local

service industry workers, and labor unions driven together.

The Passion of the Christ audience will be in the same trench with the Teamsters and

the AFL-CIO, while the Hollywood and Wall Street liberals and the You've Got Mail

crowd will be in the same trench with the high-tech workers of Silicon Valley and

the global service providers of Manhattan and San Francisco. It will be Mel Gibson

and Jimmy Hoffa Jr. versus Bill Gates and Meg Ryan.

More and more, politics in the flat world will consist of asking which values,

frictions, and fats are worth preserving-which should, in Marx's language, be kept

solid-and which must be left to melt away into the air. Countries, companies, and

individuals will be able to give intelligent answers to these questions only if they

understand the real nature and texture of the global playing field and how different

it isfrom the one that existed in the Cold War era and before. And countries, companies,

and individuals will be able to make sound political choices only if they fully

appreciate the flattened playing field and understand all the new tools now available

to them for collaborating and competing on it. I hope this book will provide a nuanced

framework for this hugely important political debate and the great sorting out that

is just around the corner.

To that end, the next three sections look at how the flattening of the world and the

triple convergence will affect Americans, developing countries, and companies.

Brace yourself: You are now about to enter the flat world.

America and the Flat World

::::: FIVE

America and Free Trade

Is Ricardo Still Right?

As an American who has always believed in the merits of free trade, I had an important

question to answer after my India trip: Should I still believe in free trade in a

fiat world? Here was an issue that needed sorting out immediately-not only because

it was becoming a hot issue in the presidential campaign of 2004 but also because

my whole view of the flat world would depend on my view of free trade. I know that

free trade won't necessarily benefit every American, and that our society will have

to help those who are harmed by it. But for me the key question was: Will free trade

benefit America as a whole when the world becomes so flat and so many more people

can collaborate, and compete, with my kids? It seems that so many jobs are going to

be up for grabs. Wouldn't individual Americans be better off if our government erected

some walls and banned some outsourcing and offshoring?

I first wrestled with this issue while filming the Discovery Times documentary in

Bangalore. One day we went to the Infosys campus around five p.m. -just when the

Infosys call-center workers were flooding into the grounds for the overnight shift

on foot, minibus, and motor scooter, while many of the more advanced engineers were

leaving at the end of the day shift. The crew and I were standing at the gate observing

this river of educated young people flowing in and out, many in animated conversation.

They all looked as if they had scored 1,600 on their SATs, and I felt a real mind-eye

split overtaking me.

My mind just kept telling me, "Ricardo is right, Ricardo is right, Ricardo is right."

David Ricardo (1772-1823) was the English economist

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who developed the free-trade theory of comparative advantage, which stipulates that

if each nation specializes in the production of goods in which it has a comparative

cost advantage and then trades with other nations for the goods in which they

specialize, there will be an overall gain in trade, and overall income levels should

rise in each trading country. So if all these Indian techies were doing what was their

comparative advantage and then turning around and using their income to buy all the

products from America that are our comparative advantage-from Corning Glass to

Microsoft Windows-both our countries would benefit, even if some individual Indians

or Americans might have to shift jobs in the transition. And one can see evidence

of this mutual benefit in the sharp increase in exports and imports between the United

States and India in recent years.

But my eye kept looking at all these Indian zippies and telling me something else:

"Oh, my God, there are so many of them, and they all look so serious, so eager for

work. And they just keep coming, wave after wave. How in the world can it possibly

be good for my daughters and millions of other young Americans that these Indians

can do the same jobs as they can for a fraction of the wages?"

When Ricardo was writing, goods were tradable, but for the most part knowledge work

and services were not. There was no undersea fiberoptic cable to make knowledge jobs

tradable between America and India back then. Just as I was getting worked up with

worry, the Infosys spokeswoman accompanying me casually mentioned that last year

Infosys India received "one million applications" from young Indians for nine

thousand tech jobs.

Have a nice day.

I struggled over what to make of this scene. I don't want to see any American lose

his or her job to foreign competition or to technological innovation. I sure wouldn't

want to lose mine. When you lose your job, the unemployment rate is not 5.2 percent;

it's 100 percent. Nobook about the flat world would be honest if it did not acknowledge

such con-

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cerns, or acknowledge that there is some debate among economists about whether Ricardo

is still right.

Having listened to the arguments on both sides, though, I come down where the great

majority of economists come down-that Ricardo is still right and that more American

individuals will be better off if we don't erect barriers to outsourcing,

supply-chaining, and offshoring than if we do. The simple message of this chapter

is that even as the world gets flat, America as a whole will benefit more by sticking

to the basic principles of free trade, as it always has, than by trying to erect walls.

The main argument of the anti-outsourcing school is that in a flat world, not only

are goods tradable, but many services have become trad-able as well. Because of this

change, America and other developed countries could be headed for an absolute decline,

not just a relative one, in their economic power and living standards unless they

move to formally protect certain jobs from foreign competition. So many new players

cannot enter the global economy-in service and knowledge fields now dominated by

Americans, Europeans, and Japanese-without wages settling at a newer, lower

equilibrium, this school argues.

The main counterargument from free-trade/outsourcing advocates is that while there

may be a transition phase in certain fields, during which wages are dampened, there

is no reason to believe that this dip will be permanent or across the board, as long

as the global pie keeps growing. To suggest that it will be is to invoke the so-called

lump of labor theory-the notion that there is a fixed lump of labor in the world

and that once that lump is gobbled up, by either Americans or Indians or Japanese,

there won't be any more jobs to go around. If we have the biggest lump of labor now,

and then Indians offer to do this same work for less, they will get a bigger piece

of the lump, and we will have less, or so this argument goes.

The main reason the lump of labor theory is wrong is that it is based on the assumption

that everything that is going to be invented has been invented, and that therefore

economic competition is a zero-sum game, a fight over a fixed lump. This assumption

misses the fact that although jobs are often lost in bulk-to outsourcing or

offshoring-by big individ

ual companies, and this loss tends to make headlines, new jobs are also being created

in fives, tens, and twenties by small companies that you can't see. It often takes

a leap of faith to believe that it is happening. But it is happening. If it were not,

America's unemployment rate would be much higher today than 5 percent. The reason

it ishappening is that as lower-end service and manufacturing jobs move out of Europe,

America, and Japan to India, China, and the former Soviet Empire, the global pie not

only grows larger-because more people have more income to spend-it also grows more

complex, as more new jobs, and new specialties, are created.

Let me illustrate this with asimple example. Imagine thatthere are only two countries

in the world-America and China. And imagine that the American economy has only 100

people. Of those 100 people, 80 are well-educated knowledge workers and 20 are

less-educated low-skilled workers. Now imagine that the world goes flat and America

enters into a free-trade agreement with China, which has 1,000 people but is a less

developed country. So today China too has only 80 well-educated knowledge workers

out of that 1,000, and it has 920 low-skilled workers. Before America entered into

its free-trade agreement with China, there were only 80 knowledge workers in its world.

Now there are 160 in our two-country world. The American knowledge workers feel like

they have more competition, and they do. But if you look at the prize they are going

after, it is now a much expanded and more complex market. It went from a market of

100 people to a market of 1,100 people, with many more needs and wants. So it should

be win-win for both the American and Chinese knowledge workers.

Sure, some of the knowledge workers in America may have to move horizontally into

new knowledge jobs, because of the competition from China. But with a market that

big and complex, you can be sure that new knowledge jobs will open up at decent wages

for anyone who keeps up his or her skills. So do not worry about our knowledge workers

or the Chinese knowledge workers. They will both do fine with this bigger market.

"What do you mean, don't worry?" you ask. "How do we deal with the fact that those

eighty knowledge workers from China will be willing

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to work for so much less than the eighty knowledge workers from America? How will

this difference get resolved?"

It won't happen overnight, so some American knowledge workers may be affected in the

transition, but the effects will not be permanent. Here, argues Stanford new economy

specialist Paul Romer, is what you need to understand: The wages for the Chinese

knowledge workers were so low because, although their skills were marketable globally

like those of their American counterparts, they were trappedinside a stifled economy.

Imagine how little a North Korean computer expert or brain surgeon is paid inside

that huge prison of a nation! But as the Chinese economy opens up to the world and

reforms, the wages of Chinese knowledge workers will rise up to American/world levels.

Ours will not go down to the level of a stifled, walled-in economy. You can already

see this happening in Bangalore, where competition for Indian software writers is

rapidly pushing up their wages toward American/European levels-after decades of

languishing while the Indian economy was closed. It is why Americans should be doing

all they can to promote more and faster economic reform in India and China.

Do worry, though, about the 20 low-skilled Americans, who now have to compete more

directly with the 920 low-skilled Chinese. One reason the 20 low-skilled Americans

were paid a decent wage before was that, relative to the 80 skilled Americans, there

were not that many of them. Every economy needs some low-skilled manual labor. But

now that China and America have signed their free-trade pact, there are a total of

940 low-skilled workers and 160 knowledge workers in our two-country world. Those

American low-skilled workers doing fungible jobs-jobs that can easily be moved to

China-will have a problem. There is no denying this. Their wages are certain to be

depressed. In order to maintain or improve their living standards, they will have

to move vertically, not horizontally. They will have to upgrade their education and

upgrade their knowledge skills so that they can occupy one of the new jobs sure to

be created in the much expanded United States-China market. (In Chapter 8 I will talk

about our society's obligation to ensure that everyone gets a chance to acquire those

skills.)

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As Romer notes, we know from the history of our own country that an increase in