Once Google starts offering video searches, for instance, there will be demand for new machines and the chips that power them, of which no one was even dreaming five years ago. This process takes time to unfold. But it will, argued Bhagwati, because what is happening in services today is the same thing that happened in manufacturing as trade barriers were lowered. In manufacturing, said Bhagwati, as the global market expanded and more and more players came onto the field, you saw greater and greater “intraindustry trade, with more and more specialization,” and as we move into the knowledge economy, you are now seeing more and more intraservice trade, with more and more specialization.

Don't be surprised if your son or daughter graduates from college and calls you one day and says he or she is going to be a “search engine optimizer.”

A what?

A slew of firms has started up around Google, Yahoo!, and Microsoft to help retailers strategize on how to improve their rankings, and increase the number of click-throughs to their Web sites, on these major search engines. It can mean millions of dollars in extra profits if, when someone searches for “video camera,” your company's product comes up first, because the people who click through to your Web site are those most likely to buy from you. What these search engine optimizers (SEOs as they are called in the trade) do is constantly study the algorithms being used by the major search engines and then design marketing and Web strategies that will push you up the rankings. The business involves a combination of math and marketing-a whole new specialty created entirely by the flattening of the world.

And always remember: The Indians and Chinese are not racing us to the bottom. They are racing us to the top-and that is a good thing! They want higher standards of living, not sweatshops; they want brand names, not junk; they want to trade their motor scooters for cars and their pens and pencils for computers. And the more they do that, the higher they climb, the more room is created at the top-because the more they have, the more they spend, the more diverse product markets become, and the more niches for specialization are created as well.

Look at what is happening already: As American companies send knowledge work to India, Indian companies are turning around and using their earnings and insights to start inventing new products that poorer Indians can use to lift themselves out of poverty into the middle class, where they will surely become consumers of American products. BusinessWeek cited the Tata Motors factory, near Pune, south of Mumbai, “where a group of young designers, technicians, and marketers pore over drawings and examine samples of steel and composite plastics. By early next year, they plan to design a prototype for Tata Group's most ambitious project yet: a compact car that will sell for $2,200. The company hopes the car will beat out Suzuki's $5,000 Maruti compact to become India's cheapest car-and an export model for the rest of the developing world. 'This is the need of the day in India-a people's car,' says Ratan Tata, chairman of the $12.5 billion Tata Group. Indians are increasingly demanding better products and services at an affordable cost. Strong economic growth this year will only enlarge that demand. The phrase 'Made in India' may come to represent low-cost innovation in the new global economy” (October 11, 2004).

Raghuram Rajan, the director of research for the International Monetary Fund, sits on the board of a company that puts Indian students to work tutoring students in Singapore. The students, from the Indian Institute of Technology in Madras, go online to help students in Singapore, from grades six to twelve, on their math homework. They also help teachers in Singapore develop lesson plans and prepare PowerPoint presentations or other jazzy ways for them to teach math. The company, called Heymath.com, is paid for by the schools in Singapore. Cambridge University in England is also part of this equation, providing the overall quality controls and certifying the lesson plans and teaching methods.

“Everyone wins,” says Rajan. “The company is run by two Indians who worked for Citibank and CSFB in London and came back to India to start this business... Cambridge University is making money from a company that has created a whole new niche. The Indian students are making pocket money. And the Singapore students are learning better.” Meanwhile, the underlying software is probably being provided by Microsoft and the chips by Intel, and the enriched Indian students are probably buying cheap personal computers from Apple, Dell, or HP. But you can't really see any of this. “The pie grew, but no one saw it,” said Rajan.

An essay in the McKinsey Quarterly, “Beyond Cheap Labor: Lessons for Developing Economies” (January 2005), offers a nice example of this: “In northern Italy's textile and apparel industry... the majority of garment production has moved to lower-cost locations, but employment remains stable because companies have put more resources into tasks such as designing clothes and coordinating global production networks.”

It is so easy to demonize free markets-and the freedom to outsource and offshore-because it is so much easier to see people being laid off than being hired. But occasionally a newspaper tries to dig deep into the issue. My hometown paper, the Minneapolis Star Tribune, did just that. It looked at exactly how the Minnesota economy was being affected by the flattening of the world, actually daring to run an article on September 5, 2004, headlined, “Offshore Jobs Bring Gains at Home.” The article, date-lined Wuxi, China, began like this: “Outside the air is dank, dusty and hot as tropical fever. Inside, in an environment that's dry, spotless and cool, hundreds of former farm laborers covered head to toe in suits looking like something out of NASA are performing work for Bloomington-based Donaldson Co. Inc.... In Donaldson's case, the company has twice as many workers in China-2,500-as the 1,100 it has in Bloomington. The Chinese operation not only has allowed Donaldson to keep making a product it no longer could make at a profit in the United States, it also has helped boost the company's Minnesota employment, up by 400 people since 1990. Donaldson's highly paid engineers, chemists and designers in Minnesota spend their days designing updated filters that the Chinese plant will make for use in computers, MP3 players and digital video recorders. The falling disk-drive prices made possible by Chinese production are feeding demand for the gadgets. 'If we didn't follow [the trend], we'd be out of business,' said David Timm, general manager of Donaldson's disk-drive and microelectronics unit. In Minnesota, Global Insight estimates that 1,854 jobs were created as a result of foreign outsourcing in 2003. By 2008, the firm expects nearly 6,700 new jobs in Minnesota as a consequence of the trend.”

Economists often compare China's and India's entry into the global economy to the moment when the railroad lines crossing America finally connected New Mexico to California, with its much larger population. “When the railroad comes to town,” noted Vivek Paul, the Wipro president, “the first thing you see is extra capacity, and all the people in New Mexico say those people-Californians-will wipe out all our factories along the line. That will happen in some areas, and some companies along the line will go out of business. But then capital will get reallocated. In the end, everyone along the line will benefit. Sure, there is fear, and that fear is good because that stimulates a willingness to change and explore and find more things to do better.”

It happened when we connected New York, New Mexico, and California. It happened when we connected Western Europe, America, and Japan. And it will happen when we connect India and China with America, Europe, and Japan. The way to succeed is not by stopping the railroad line from connecting you, but by upgrading your skills and making the investment in those practices that will enable you and your society to claim your slice of the bigger but more complex pie.