There's a worm in new economy's apple

October 12, 1999|By Eamonn Fingleton

FOR anyone who imagines that the new information-based economy is a panacea for America's economic ills, the U.S. trade figures released Sept. 21 are a startling wake-up call.

Not only do they show that the United States' chronic trade problems have not gone away, but they also raise fundamental questions about the wisdom of America's New Age economic strategy.

Quite simply, the new industries that the United States has been so enthusiastically embracing -- whether computer software, financial services, entertainment or Internet web site construction -- are no match for the export prowess of the old manufacturing industries that were the backbone of the American economy at its zenith.

The proof is in the trade numbers, which are now clearly threatening to spiral out of control. At $25.2 billion, the trade deficit for July was not only the largest monthly deficit ever recorded, but also it was a shocking 71 percent higher than the figure recorded in July 1998.

The United States is now on track for a deficit totaling more than $250 billion for this year, a rise of at least 48 percent on the already startling record of $168.6 billion incurred last year.

It takes no more than a glance at the export prospects of the United States' vaunted new postindustrial businesses to see why the information economy is clearly exacerbating the growing trade crisis for the United States.

Of the several handicaps that information-based products face in export markets, these are just the most significant:

Theft: Illegal copying of such key postindustrial products as movies, computer software and recorded music cut deeply into American receipts from major export markets -- sometimes by as much as 70 percent or more.

Language and culture barriers: Postindustrial products tend to be highly culture-specific and therefore in their unadapted state generally do not meet the needs of prospective customers in key foreign markets. In practice, most American information-based companies do not find it worthwhile to do the necessary adaptation.

Yet even in the minority of cases where companies invest in such adaptation, the benefit to the American balance of payments is generally disappointing. The reason is that such adaptation is usually carried out outside the United States, and the heavy costs incurred cut deeply into the net revenues remitted to the United States.

The service imperative: Many postindustrial products have a high service content that requires much face-to-face interaction with clients. This applies to everything from the advertising business to consulting services to banking.

In practice, this often means that the services must be conducted on the ground in the markets concerned, using local employees, paying local rents and utility bills and buying local supplies.

Essentially, apart from a small trickle of dividends, most of the revenues generated from such postindustrial businesses remain in the nation concerned and do nothing for the U.S. balance of payments.

In these New Age times, does any of this matter anymore? Yes -- profoundly. If a nation does not export, it cannot pay for its imports, and therefore it has to borrow abroad or sell assets to keep going.

In the long run, as the example of Britain shows, a nation that for too long chooses to overlook a weak trade performance is destined to be an economic also-ran.

Eamonn Fingleton is a Tokyo-based economic commentator and author of "In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity" (Houghton Mifflin, 1999). He wrote this for the Los Angeles Times.

Pub Date: 10/12/99

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