“We’ve been really lucky in being able to focus on building our businesses and designing our economic strategies mostly without thinking about geopolitics. That’s just not true anymore,” says Nancy Qian, a professor of managerial economics and decision sciences at Kellogg and codirector of the Global Poverty Research Lab.
On this episode of The Insightful Leader: why fertility, immigration, and manufacturing trends are everyone’s problem.
Podcast Transcript
Laura PAVIN: We all have our morning routines: coffee, breakfast, kids to school, sit down at the old desk, catch up on the day’s geopolitical updates…. Wait, is that right?
Yes. A complicated, almost-academic topic is worming its way into everyday business operations.
But it wasn’t always this way.
Nancy QIAN: Since the end of the Cold War—this would be 1989 to early 1991—we’ve been really lucky. By “we,” I mean the global business and economic community.
PAVIN: This is Nancy Qian. She’s faculty here at Kellogg. She’s a professor of managerial economics.
QIAN: We’ve been really lucky in being able to focus on building our businesses and designing our economic strategies mostly without thinking about geopolitics.
That’s just not true anymore.
PAVIN: Qian says things are different now.
QIAN: These days, whatever you do, geopolitics is everywhere. When you talk about EVs, batteries, it’s geopolitics. When you talk about agricultural commodities like soybeans, it’s geopolitics. Even Barbies—when we talk about Barbies, it’s geopolitics.
PAVIN: You might remember back in the ’90s when the word “globalization” was on everyone’s mind. Qian says that free trade and the global economic community proliferated in the years following the end of the Cold War, and it’s led to the new climate we find ourselves in.
Today on the show, with Professor Nancy Qian, we look at a couple of geopolitical trends that stand to impact the economy. They could impact the way we do business for the foreseeable future.
We’ll trace the decline of American manufacturing with the rise of the services industry and how a declining fertility rate could spell disaster for an aging population.
From Barbies to Sharpies, we’ll get into it on this episode of The Insightful Leader.
…
NEWS CLIP: Astonishing news out of Berlin: the wall doesn’t mean anything anymore.
PAVIN: At the end of the Cold War, when the Berlin Wall fell, “globalization became an all-conquering force.”
That’s a direct quote from the World Economic Forum’s history of globalization.
After the Cold War, the World Trade Organization spread free-trade agreements all over the world. The proliferation of global exports paired with a steep rise in middle-class incomes, and business boomed.
Nancy Qian spoke about this at an Insightful Leader Live event we had in October last year. She says that over the past three decades, businesses put their heads down and focused on local and domestic conditions. But there have since been a few shifts that necessitate looking up, past our desks, past our borders, and even across oceans.
QIAN: It’s really everywhere. According to a recent survey of 1,000 C-suite executives in the United States, the number-one risk they think they face is geopolitical risk.
PAVIN: Qian says the global economy is at a crossroads, and there are two paths, two trends really, that have landed us here.
So let’s start with the first one.
QIAN: A shift from manufacturing to services for rich countries.
PAVIN: As the U.S. has grown and changed, its economy has evolved, and this has happened all around the globe.
QIAN: Historically, countries started off as agricultural economies that relied on producing food.
Then there was industrialization. The first industrializers were in Europe and in America. And as these countries get richer, they move out of manufacturing and into services.
PAVIN: Eventually, we learned how to industrialize, mass-producing goods for one another.
But manufacturing relies on cheap labor, something that declines when a country’s standard of living rises.
QIAN: Because right now it’s more expensive for the U.S. to manufacture than other countries. This is no surprise. The U.S. is the richest country in the world, so labor is expensive.
PAVIN: So as the U.S. became a richer nation, manufacturing went elsewhere, to places where labor was less costly.
QIAN: Where has manufacturing gone? It’s gone to middle-income countries in the ’80s and ’90s. That was Japan, South Korea, the Asian Tigers.
Then in the early 2000s, China, then India, then Mexico, and today Vietnam.
PAVIN: So now the geopolitical influence on business starts to make more sense, right?
When U.S. labor became too expensive for manufacturing, companies turned to international solutions. They imported goods and exported services. The trade deficit we hear so much about, it’s really only in manufacturing.
QIAN: We don’t run a trade deficit in services.
PAVIN: In fact, Qian says we have a trade surplus in services.
According to the 2022 Economic Census, the top three industries in the U.S. are retail trade, professional services, and health care and social assistance.
So how do you try to fill that gap between services and manufacturing?
To make manufacturing here in the U.S. more affordable, you need cheaper labor. And how do you make labor cheaper? More of it.
QIAN: What makes human labor affordable? What determines wages? Supply and demand.
PAVIN: More available workers means more competition for jobs, and that means lower wages, more affordable production, and more affordable products made here in the U.S.
And this is where two trends intersect.
So let’s look at the second path leading to this crossroads.
QIAN: Fertility.
PAVIN: Qian says the global fertility rate has been dropping. People just aren’t having as many kids, and she says that’s happening all over the world.
QIAN: As countries have gotten richer and richer and richer, they’ve been having fewer babies.
PAVIN: And the question is, why does that matter?
Well, it’s a math problem. We have to have enough babies so that the next generation maintains our current population.
That’s called replacement rate.
QIAN: For every two adults, if we want the population to stay the same, we want to have 1.9 children. But rich countries are going below that replacement rate of 1.9.
PAVIN: Qian says almost no one is hitting that 1.9 replacement rate.
And that isn’t adding up.
QIAN: South Korea bottomed out at 0.7. So for every two adults, they were only having 0.7 kids. If you take that literally, it means that in one generation, the next generation is going to be half the size of the previous generation.
PAVIN: And she says the U.S. is experiencing a dip too.
According to the CDC, the U.S. birth rate is at a record low of 1.6.
To bring it back to manufacturing, if we want more workers and cheaper labor to make manufacturing in the U.S. more feasible, we need more people. And that’s not going to happen if we don’t keep up replacement rate.
So this is the scene: a crossroads, where manufacturing has been replaced with an economy of services in the U.S. and a flagging fertility rate is reducing the workforce.
So why are these two trends combustible in this particular moment?
Qian breaks it down for us next.
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Okay, so we’ve got manufacturing on the decline and services on the incline in the U.S. And we’ve got a flagging fertility rate, which is reducing the size of the workforce.
Back to Qian.
QIAN: This is a really exciting time to be an academic economist.
Because these are the three trends that are interacting in a really interesting and important way.
PAVIN: Enter the Trump administration.
QIAN: The Trump administration has essentially decided to fight against these trends. So it ran an election campaign that made a bunch of promises. Two of the most important ones were: one, to bring manufacturing back to the U.S., and two, to reduce immigration.
These two policies are not entirely consistent with each other, and they go against these trends.
PAVIN: To understand these promises and how they might ripple out, we have to go back to what intertwined business and geopolitics in the first place: free trade and the offshoring of manufacturing.
QIAN: Free trade has been great for the U.S. overall. What we pay for things has dramatically gone down, and we have access to many, many more things than before.
PAVIN: Free trade is what allowed companies to move their factories overseas in the first place. And it was great because it made goods cheaper for Americans.
And for the companies, there was virtually no downside as far as their bottom lines were concerned. Not only could they get labor cheaper, which made their goods cheaper, but there was no restriction on shipping the products back here to the U.S.
QIAN: But this came at a cost. There are entire cities and towns in the U.S. that suffered because they lost their factory. They lost their manufacturing.
PAVIN: When companies moved their factories overseas, it wasn’t so great for the communities they left. Jobs and production centers were lost.
Those communities were the victims of free trade when geopolitics allowed for offshoring of production.
QIAN: In the end, it felt like community-level shocks, economic and social. Losing the factory, losing the community. I think that’s where the pushback is coming from.
PAVIN: The people in these devastated manufacturing centers wanted to see jobs brought back to their communities and to America more generally.
And this is where the tariffs from President Trump’s administration come in.
Facing pressure from supporters in these devastated manufacturing centers, the White House imposed tariffs to make imported goods more expensive, hopefully encouraging companies to return to manufacturing products here in the U.S.
QIAN: In order to convince the American consumer to buy the thing that’s made in the U.S., a tariff, which is a tax on the import, makes that import more expensive so that now the American product is more competitive.
PAVIN: But to ultimately lower the cost of goods manufactured in the U.S., you have to lower overheads like wages.
And lowering wages for manufacturing in the U.S. is tough. In a rich country with a high standard of living, it’s hard to get people to work in factories for low wages.
QIAN: We need people to work in the factories at a wage that’s competitive with other countries, or we need robots that are cost-effective substitutes for workers.
PAVIN: If success for the tariffs means bringing more manufacturing to the U.S., automation could make that happen.
QIAN: This isn’t impossible. Sharpies have been brought back to America. Everyone uses Sharpies. It’s a permanent marker. It’s the one I use to write my kids’ names on their T-shirts so that we don’t lose them.
PAVIN: Production of Sharpies was moved offshore around the year 2000. But the company later decided to bring it back to the U.S., well before the Trump administration started the tariffs.
In order to do that, the company needed to make a $2 billion investment in automation so they wouldn’t have to raise the price of the products they now make in America, where labor is more expensive.
QIAN: They’ve been very successful in doing so, and that’s great. That can happen sometimes. But most companies don’t have $2 billion to invest in an automation process, and not everything is suitable for automation.
PAVIN: So that might not pan out either, and we’re back to square one. An expensive square one.
QIAN: These tariffs are being paid for partly by Americans. We don’t call that a subsidy. We call it a tariff. But it’s a subsidy coming from American consumers. It’s coming from the American economy.
PAVIN: So to try to bring manufacturing back to the U.S., we have the tariffs.
The administration made another promise Qian wanted to linger on.
The promise?
QIAN: To reduce immigration.
PAVIN: The Trump administration’s two-pronged approach to bringing jobs back to Americans was to reshore manufacturing jobs and reduce immigration.
But to Qian …
QIAN: These two policies are not entirely consistent with each other, and they go against these trends.
PAVIN: Remember the fertility rate? Americans aren’t having enough babies to refill the declining stock of American labor.
That’s a problem if you want to increase manufacturing in the U.S., because you need to increase the pool of laborers to reduce the cost of labor.
And if you can’t reduce the cost of labor, bringing manufacturing back to the U.S. is a harder sell.
Qian says restricting immigration isn’t helping that pool of labor either.
QIAN: Immigrants, low-skilled and high-skilled, can help dampen the effect of declining fertility and fill some of the needs of American factories. Immigrants can work as healthcare workers. Immigrants can work as agricultural workers. Immigrants can work in factories.
But unfortunately, this is something else that current U.S. policy is pushing against. It’s going to increase labor costs even more.
PAVIN: And when you compound that with the long-term effects of declining fertility, you’re going to see a lack of workers to care for the elderly as our generations age.
QIAN: We’re going to have fewer workers in the future than we do now, and we’re going to have fewer younger people relative to older people.
Even if we don’t think about manufacturing, we’re going to have rising labor demand because we’re going to need people to take care of our elderly. We’re going to need health workers. We’re going to need home caregivers.
All of that is going to increase labor demand, increase the cost of labor, and increase wages.
PAVIN: That’s why Professor Qian says you need to be keeping an eye on geopolitics.
How the U.S. and other countries respond to these trends could have long-term consequences.
She says she doesn’t have answers for exactly what to do about them. But being aware of them alone can be helpful for leaders to keep tabs on and to possibly anticipate what they’ll need to plan for in the years ahead.
QIAN: Things are changing so fast that, in addition to the concern about the actual tariff rates, it’s just an environment of uncertainty.
It kind of seems like anything’s possible, like every piece on the board is movable and everyone is moving all the pieces all the time.
[CREDITS]
PAVIN: This episode of The Insightful Leader was written and mixed by Dalton Main. It was produced and edited by Laura Pavin, Rob Mitchum, Fred Schmalz, Abraham Kim, Maja Kos, and Blake Goble. Special thanks to Nancy Qian. Want more The Insightful Leader episodes? You can find us on iTunes, Spotify, or our website, insight.kellogg.northwestern.edu.
We’ll be back in a couple weeks with another episode of The Insightful Leader. See you then.