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Originally published March 5, 2008 at 12:00 AM | Page modified March 5, 2008 at 8:01 AM

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On the Economy

Boeing tanker loss shows everyone's in the game now, so anyone can lose

Everybody from pragmatists to conspiracy theorists has an opinion about Boeing's unexpected loss of a $40 billion tanker contract to Northrop...

Special to The Seattle Times

Everybody from pragmatists to conspiracy theorists has an opinion about Boeing's unexpected loss of a $40 billion tanker contract to Northrop Grumman and EADS.

Here are some lessons that might fly below the radar:

International supply chains are a fact of life.

People outraged by Northrop Grumman's partner must wrestle with Boeing's history of using global partners, going back to at least the 767, and most recently with the 787.

Boeing also partners with subcontractors in some countries where it has won defense contracts. For example, it boasted in January that it contributes $1 billion annually to the Canadian economy and employs 1,400 there.

These arrangements, pioneered in the auto industry, arose largely as a way to lower costs and enhance expertise, particularly on sophisticated products. In many case, they also become political carrots, when a foreign company wants to gain a foothold in a domestic market.

(Europe's subsidies to Airbus may complicate the argument somewhat, but Airbus defenders would consider U.S. military spending to be the world's biggest subsidy for aircraft makers.)

Whether these supply chains are good for national security is open to debate, but the tanker deal is not without precedent. The new F-35 Joint Strike Fighter has been a multinational effort, including Britain's BAE Systems.

Meanwhile, Boeing sells aircraft to air forces around the world, despite being an "American" company. Economic nationalism can cut unpleasantly both ways.

Any Southern advantage risks being oversimplified or misunderstood.

It's true much of the South has used targeted economic-development incentives to lure auto plants and other major manufacturing. These bets can pay off handsomely, but they can also fail and come at the expense of less-sexy investments in schools and infrastructure.

A 50-year investment by North Carolina nurtured the rise of Research Triangle Park, and favorable laws helped make Charlotte the nation's second-largest banking center.

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Alabama enjoys an old aerospace cluster thanks to NASA's Marshall Space Flight Center in Huntsville.

The most successful parts of the South have also been outward-looking, actively seeking foreign investment. And the region has seen a huge rise in population, especially from the Midwest and Northeast, bringing benefits and costs.

Still, much of the South lags in competitiveness and quality, including education funding and the ability to attract talent, capital and high-tech entrepreneurship.

Alabama ranked 48th among the states in the Beacon Hill Institute's survey of economic competitiveness, which tracks such yardsticks as technology, human resources, business incubation and infrastructure. (Washington ranked seventh.)

Alabama's median household income and per-capita income are well below the national average. Its poverty rate is higher than average. Washington state ranks better than the national average in all those measures.

In addition, the South's perceived advantage in lower wages is more complicated on closer inspection. Lower wages can translate into lower economic mobility.

Meanwhile, the South is facing tough competition from Asia and Eastern Europe, which can now marshal technological sophistication and well-trained workers in addition to even lower wages.

The first wave of this phenomenon has been seen with the loss of hundreds of thousands of textile and apparel jobs to China and elsewhere. Many of these jobs were lost at mills with the world's best technology and most productive workers. Ironically, they moved south for cheaper, nonunion labor decades ago.

The educational deficit doesn't necessarily deter the manufacturers. They often provide training or partner with community colleges.

Higher-skilled employees tend to move there — although it's been a challenge for Nissan to get some of its Los Angeles-based managers to move to Tennessee, when the U.S. headquarters relocated.

The larger social and educational challenges coexist with these big economic catches, causing big divides between the areas doing well and those struggling.

That's not to say BMW or Northrop Grumman will abandon the South anytime soon. It is to say that the region must move beyond a dependence on low wages and incentives to compete in the long term.

• States and regions are competing against each and the world more than ever.

Critics have pointed to a Seattle and Boeing smugness and sense of entitlement. To the extent that they are correct, it's in our forgetting this relatively new economic calculus.

Talent and capital are the mobile prizes of the 21st-century economy and they can move. It doesn't mean they will move anywhere.

Regions such as Silicon Valley and even Seattle — with the capacity to draw the most talented people, create entrepreneurial clusters and to continually reinvent themselves — have a distinct advantage. But it's important to remember the Silicon Valley of a century ago was arguably Dayton, Ohio, with leading tech prowess in aviation and automobiles. Things change.

In this fast-changing environment, Seattle — with such a recent history of innovation — also has several big, mature companies.

We tend to think of "mature companies that can lose" as being back in Detroit or Cincinnati. No wonder critics of Boeing, Microsoft and Starbucks are quick to say they were smug when they stumbled, or failed to "wow." Yet giants are always vulnerable. They always have more to lose.

The conspiracy crowd may eventually be shown to be correct. Was a red state favored over a blue state in an election year? For now, it appears Boeing was knocked down by a fair punch, thrown by a rival that had been underestimated.

You may reach Jon Talton at jontalton@yahoo.com

Jon Talton is a journalist and author living in Seattle. For more than 20 years he has covered business and finance, specializing in urban economies, energy, real estate and economics and public policy. Talton has been a columnist for The Arizona Republic, Charlotte Observer and Rocky Mountain News, and his columns have appeared in newspapers throughout North America on The New York Times News Service.

Copyright © 2008 The Seattle Times Company

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Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest
jtalton@yahoo.com

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