THE BIG SQUEEZE

The United States and Europe were pleased with China's economic boom--for a few years. That's not the case anymore. Suddenly, the Asian giant seems more of a threat than an opportunity. In response to China's surging exports, growing by 30 percent annually, many U.S. legislators now delight in bashing the country's trade practices; one congressman criticized Beijing last week for flooding America "with trinkets and trousers, shirts and shoes... and yet they don't want to open their market to us." The EU is also glowering. It warned China last week to restrict its booming textile exports, which it said were causing "irreparable harm" to European producers. Washington has already reinstituted textile-import quotas on China--and more generally, the Bush administration last week practically ordered Beijing to revalue the yuan within six months. U.S. officials blame the currency's low value for America's $162 billion trade deficit with China--the largest ever with a single country. Seeking to avert a trade war, China has agreed to concessions. Beijing announced last Friday that it would raise tariffs by upwards of 400 percent on 74 categories of clothing exports, starting June 1.

That may temporarily allay worries about one long-vulnerable, low-tech industry--but not the many other sectors where China, India and other low-cost countries have gained competitive advantage. In fact, say economists, the trade pressure from globalization is certain to increase. Here's a big reason why: 15 years after U.S. and European multinationals started shipping large numbers of manufacturing jobs overseas, experts are saying that the "second wave" of offshoring is at hand--and it promises to be bigger and more disruptive to the U.S. and European job markets than the first. In the years ahead, sizable numbers of skilled, reasonably well-educated middle-income workers in service-sector jobs long considered safe from foreign trade--accounting, law, financial and risk management, health care and information technology, to name a few--could be facing layoffs or serious wage pressure as developing nations perform increasingly sophisticated offshore work. The shift portends a dramatic realignment of wealth over the next couple of generations--valued by the U.S. consultancy McKinsey & Co. at "hundreds of billions of dollars."

For Europe and the United States, that's a troubling scenario at a time when there is already plenty of economic insecurity. The EU unemployment rate is 9 percent. U.S. job growth has been weak the last few years, and real wages are falling at the fastest rate in 14 years. As economist Richard Freeman of Harvard points out, information technology was supposed to be "the magic field" that insulated North America and Europe from the harshest effects of globalization. In essence, some 2 billion new workers in about a dozen developing countries have joined, or will soon join, the global work force. This vast new labor supply, a sizable portion of it well educated, could squeeze the standard of living of both skilled blue-collar workers and higher-income white-collar workers.

According to a recent report by McKinsey, many Western workers in crucial "skill-intensive industries will feel substantial pressure [from low-cost countries] for the first time." And that competition will lead big firms in those sectors to buy products from developing nations, or even move plants abroad. The industries include auto parts, fabricated metals, machinery, pharmaceuticals and telecom equipment, which together account for nearly half of the manufacturing consumption in America. By 2015, notes McKinsey, those key "second-wave" industries will account for fully half of all U.S. imports from low-cost countries. Cambridge, Mass.-based Forrester Research estimates that more than 3 million U.S. jobs, and about half that number in Europe, will be moved overseas in the next 10 years. Two weeks ago, IBM said it was laying off 13,000 of its European workers.

This isn't the first time that the West has glanced fearfully at a foreign juggernaut. In the 1970s and 1980s there was much fear that Japan Inc. would steamroll complacent U.S. and European companies. Things didn't turn out that way. But this time the competitive attack is much broader. In a recent paper, University of California, Berkeley, professors Stephen S. Cohen and J. Bradford DeLong professed "a lot of confidence" that the impact will be large, if only because there are 240 million service-sector jobs in the First World today.

To be sure, China's manufacturing might is still concentrated on the low end of the technology scale. And India's fast-growing outsourcing industry (which employs 1 million people and accounts for about $5 billion in exports) remains dependent on call centers, telemarketing, data entry, billing and low-end software development. But both nations are poised to make great leaps forward over the next decade or two. China is obsessed with acquiring advanced manufacturing technology--including telecom and chip-making equipment--and often makes tech acquisition a part of negotiations with foreign investors. India has a deep pool of scientists, software engineers, chemists, accountants, lawyers and physicians who are steadily moving India's IT-related outsourcing industry up the value-added chain. Radiologists working for Wipro HealthScience, a division of the Indian software giant, now read CT scans and MRIs remotely for Massachusetts General and other U.S. hospitals--a medical specialization requiring seven years of postgraduate work. "From life sciences to financial consultancy, Indian companies can do any of these jobs," brags T. K. Kurien, the president of Wipro HealthScience.