[Excerpt from The World Is Flat, Chapter 2, "The Ten Forces That Flattened the World", p. 114 ff.]

China's joining the WTO [World Trade Organization] gave a huge boost to another form of collaboration - offshoring. Offshoring, which has been around for decades, is different from outsourcing. Outsourcing means taking some specific, but limited, function that your company was doing in-house - such as research, call centers, or accounts receivable - and having another company perform that exact same function for you and then reintegrating their work back into your overall operation. Offshoring, by contrast, is when a company takes one of its factories that it is operating in Canton, Ohio, and moves the whole factory offshore to Canton, China. There, it produces the very same product in the very same way, only with cheaper labor, lower taxes, subsidized energy, and lower health-care costs. Just as Y2K took India and the world to a whole new level of outsourcing, China's joining the WTO took Beijing and the world to a whole new level of offshoring - with more companies shifting production offshore and then integrating it into their global supply chains . . .

By joining the World Trade Organization in 2001, China assured foreign companies that if they shifted factories offshore to China, they would be protected by international law and standard business practices. This greatly enhanced China's attractiveness as a manufacturing platform . . .

I don't know how many Chinese actually ever bought a copy of Mao's Little Red Book, but U.S. embassy officials in China told me that 2 million copies of the Chinese-language edition of the WTO rule book were sold in the weeks immediately after China signed on to the WTO . . .

Here we get to the real flattening aspect of China's opening to the world market. The more attractive China makes itself as a base for offshoring, the more attractive other developed and developing countries competing with it, like Malaysia, Thailand, Ireland, Mexico, Brazil, and Vietnam, have to make themselves . . . This has created a process of competitive flattening, in which countries scramble to see who can give companies the best tax breaks, education incentives, and subsidies, on top of their cheap labor, to encourage offshoring to their shores.

Critics of China's business practices say that its size and economic power mean that it will soon be setting the global floor not only for low wages but also for lax labor laws and workplace standards . . .

But what is really scary is that China is not attracting so much global investment by simply racing everyone to the bottom. That is just a short-term strategy . . .

China's real long-term strategy is to outrace America and the E.U. countries to the top, and the Chinese are off to a good start. China's leaders are much more focused than many of their Western counterparts on how to train their young people in the math, science, and computer skills required for success in the flat world, how to build a physical and telecom infrastructure that will allow Chinese people to plug and play faster and easier than others, and how to create incentives that will attract global investors . . .

Most companies build offshore factories not simply to obtain cheaper labor for products they want to sell in America or Europe. Another motivation is to serve that foreign market without having to worry about trade barriers and to gain a dominant foothold there - particularly a giant market like China's . . .

. . . Either you get flat or you'll be flattened by China . . .

Over time, adherence to WTO standards will make China's economy even flatter and more of a flattener globally. But this transition will not be easy, and the chances of a political or economic crackup that disrupts or slows this process are not insignificant. But even if China implements all the WTO reforms, it won't be able to rest. It will soon be reaching a point where its ambitions for economic growth will require more political reform. China will never root out corruption without a free press and active civil society institutions. It can never really become efficient without a more codified rule of law. It will never be able to deal with the inevitable downturns in its economy without a more open political system that allows people to vent their grievances. To put it another way, China will never be truly flat until it gets over that huge speed bump called "political reform." . . .

If and when China gets over that political bump in the road, I think it could become not only a bigger platform for offshoring but another free-market version of the United States. While that may seem threatening to some, I think it would be an incredibly positive development for the world. Think about how many new products, ideas, jobs, and consumers arose from Western Europe's and Japan's efforts to become free-market democracies after World War II. The process unleashed an unprecedented period of global prosperity - and the world wasn't even flat then. It had a wall in the middle. If India and china move in that direction, the world will not only become flatter than ever but also, I am convinced, more prosperous than ever. Three United States are better than one, and five would be better than three.