"Is Wal-Mart Good for America?" Correspondent Hedrick Smith examines the power of Wal-Mart and other mass retailer chains, as the world's gateway to the American consumer.

Washington -- For me as a reporter, the most startling discovery of six months of reporting was how much our major mass retail chains call the shots in today's global economy, with a powerful impact on the decline of manufacturing in America and the rise of manufacturing in China and Asia.

"Wal-Mart is one of the key forces that propelled global outsourcing -- off-shoring of U.S. jobs -- precisely because it controls so much of the purchasing power of the U.S. economy," says Gary Gereffi, a Duke University professor who studies global supply chains.

"Wal-Mart," Gereffi continues, "has life-or-death decision over [almost] all the consumer goods industries that exist in the United States, because it is the number one supplier-retailer of most of our consumer goods -- not just clothes, shoes, toys, but home appliances, electronic products, sporting goods, bicycles, groceries, food."

At first blush, this seems a stark assertion. It comes as a shock because this isn't the way most of us think the global economy works. We don't imagine that retail chains are deciding whether goods should be produced in the U.S., China, Mexico or Bangladesh.

This is because global economics is a bit like geology: Massive subterranean shifts take place below the surface, and we discover them only when our world is shaken. So we notice U.S. jobs migrating overseas as we see factory lights go out from Ohio to the Carolinas to California. We're generally aware of job losses since the early 1980s to waves of imports from Japan and the Asian tigers that hit one industry after another -- steel, autos, electronics, textile, apparel and toys.

So when it comes to cause and effect, we attribute our woes primarily to the export boom in China -- and before that, in Japan, Korea, Hong Kong and Taiwan. But scholars now explain that since Japanese cars and electronics swept into America in the late 1970s and '80s, most of our job and industry losses didn't happen primarily because of Asia's aggressive export policies.

Instead, the experts tell us, these are self-inflicted wounds. American companies played a central role in the rise of China and the Asian Tigers. The seismic shifts in the global economy, they say, have been largely driven by American companies -- not just by multi-national manufacturers like GE or Hewlett Packard moving production overseas, but by giant American retailers like Wal-Mart, Target, Kmart, Toys "R" Us and Home Depot, and brands like Nike or Liz Claiborne galvanizing Asians to export to the U.S.

The Americans, they say, have gone well beyond merely hunting for bargains already being produced in Asia. In fact, both academics and business executives report, American retailers have actively driven outsourcing -- teaching East Asians how to design and manufacture products for American consumers, creating their own house brands in league with Chinese and Asian producers, and then bluntly warning beleaguered U.S. manufacturers that they'd better move their American plants to China and Asia if they want to survive.

Years of extensive interviews with Asian and American manufacturers, as well as study of trade flows, have persuaded Professor Gary Hamilton of the University of Washington, that the big box retailers, epitomized by Wal-Mart, have been "driving a massive restructuring of production worldwide; moving jobs from the U.S. and Europe to Asia. They do it by setting price points and forcing suppliers to meet their targets. Only lowest-cost labor can meet their targets, and that means producing in Asia."

Case in point: Bill Nichol, CEO of Kentucky Derby Hosiery, a sock manufacturer that has supplied Wal-Mart for 40 years. He credits Wal-Mart with forcing his company to be more disciplined and efficient, but he adds: "Their message to us, surprisingly, is, 'There's a broad market out there. If you want to focus on the lowest-cost part of the market, it's obvious that you can't do that in the United States'." So half of Nichol's 1,500 U.S. employees will soon be out of work and he'll have to open plants in China and other low-cost countries to hang onto his Wal-Mart account.

We heard that story again and again from American manufacturers in sectors as diverse as electronics, apparel, bicycles, furniture, and textiles. They expressed private dismay at the relentless pressure from the likes of Wal-Mart and Target to cut costs to the bone in America and then, when that did not satisfy the mass retailers, more pressure to move production to China or elsewhere offshore. But most did not dare to go on camera and tell their story publicly for fear of jeopardizing their remaining sales to Wal-Mart.

Wal-Mart -- Changing the Economic Balance of Power

What lies behind this surprising story is the largely unnoticed shift in the balance of power in American business. This world has been so dramatically transformed in the past 15 years that academic analysts say we now live in what they call a "buyer-driven" global economy.

Nelson Lichtenstein, an economic historian at the University of California, Santa Barbara, draws a colorful analogy to medieval times: "The power of Wal-Mart is such, it's reversed a hundred-year history in which the manufacturer was powerful and the retailer was sort of the vassal," he says. "It's changed that. It turned that around entirely. Now the retailer, the mass global retailer, is the center, the power, and the manufacturer becomes the serf, the vassal, the underling, who has to do the bidding of the retailer. That's a new thing."

Brink Lindsey, an economist at the Cato Institute, a liberterian Washington think tank, agrees. "We've definitely seen a shift in the balance of bargaining power between manufacturers and retailers," Lindsey says. "Back in the old days, manufacturing was a high-productivity endeavor; retailing and distribution was fairly low-productivity. And manufacturing was big and consolidated; retailing was small-scale and decentralized. And so manufacturers called the shots.

"Now, things are very different. You have large-scale retailing that's very high-productivity, that has a lot of bargaining power. And they can go to smaller manufacturers and call the shots and say, 'If you want to be on our shelves, you have to do it our way.' …Wal-Mart -- they're very demanding, and they've got a lot of bargaining clout to back up their demands."

So how did the world of business get turned upside down?

In part, as Lindsey says, power shifted because the mass discount chains consolidated the retail industry. At Rubbermaid, for example, former CEO Wolf Schmitt recalls that in the early 1980s his company used to make products for thousands of different retailers, but within a few years, Rubbermaid was selling two-thirds of its output to just half a dozen big chains.

Today, many manufacturers sell 20-30 percent of their output to just one big box retailer -- Wal-Mart, which represents the consolidated buying power of 100 million customers who shop in its 3,500 stores every week.

But there are other secrets to Wal-Mart's leverage in the marketplace. One is that, far better than its competitors, Wal-Mart understood the power of information. It revolutionized the retail industry by blazing a new trail with information technology.

David Glass, who succeeded founder Sam Walton as Wal-Mart's former CEO, helped persuade Walton to invest in IT and computers. Bobby Martin Jr., for a long time Wal-Mart's chief information officer, pushed the retail trade to adopt the universal barcode, forcing manufacturers to adopt common labeling in place of their own labels. That helped put retailers in the driver's seat.

Then Wal-Mart exploited the magic of the information hidden in the barcode. That put Wal-Mart ahead of the curve, and ahead of its suppliers, in terms of understanding exactly what consumers want and are buying.

"You can track sales on specific items specific weeks, specific days, specific hours of the day," former Wal-Mart store manager Jon Lehman told me. "You can find out what size of toothpaste is your best seller, what times of the year you sell that toothpaste. You can track sales spikes during the year, during certain seasonal periods -- clothes, sizes, colors, flavors -- all of those things. It's really incredible."

By accumulating information from year to year, Wal-Mart can foretell seasonal trends. From current sales, it can jump on hot new items. From detailed data gathered at each individual store, it can tailor the product mix to the demographics of local shoppers -- young or old, rural or urban, civilian or military, warm climate or cool, boot-cut jeans or straight cut, chunky peanut butter or smooth.

Wal-Mart's use of IT gave it another leg up -- undisputed mastery of the arcane but vital world of logistics. It has fine-tuned its supply chain from factory floor to store shelf, insisting on just-in-time deliveries from its suppliers to cut waste and down-time in warehouses.

Sam Walton -- Going Global for Bargains and Profits

As a world leader in logistics, Wal-Mart has taken its logistical genius around the globe and made the most of it.

Back in the late 1970s, Sam Walton, Wal-Mart's founder, first began scouring the globe for cheap imports. But Sam Walton was not the first. Sears, Montgomery Ward, JCPenney and Kmart got to Asia ahead of Walton, and for several years Wal-Mart lagged behind them in global sourcing.

But as Wal-Mart gained competitive advantage through its computerized supply chains, it overtook its rivals and became the most efficient global sourcer of all. Today, it is a massive conveyor belt to the U.S. consumer of $15 to $30 billion a year in products from China. By the estimate of Retail Forward, Wal-Mart now imports more than half of its non-food products.

"They were more single-minded in terms of global cost cutting and internal efficiency than any other U.S. retailer," says Professor Gereffi of Duke. "And that helps us understand how and why they were able to pass companies like Kmart and Sears that were the early leaders in U.S. retailing and offshore sourcing."

For a long time, Wal-Mart soft-pedaled its growing dependence on low-cost Asian imports, especially during the late 1980s and early 90s when Wal-Mart was touting Sam Walton's "Buy American" campaign. In fact, in several highly publicized examples, Sam Walton did help out some U.S. companies by buying their products when imports were on the verge of driving them out of business.

Nonetheless, Wal-Mart kept steadily expanding its low-cost Asian imports through the '80s and '90s, according to Jay Moates, chief U.S. accountant for PREL (Pacific Resources Exports, Ltd.), Wal-Mart's exclusive global buying agency from 1989 to 2002. "I think it's one thing to have those sentimental thoughts and values and another to short your shareholders," said Moates. "I mean if you can get the [imported] product cheaper and sell it, I think you're obligated to do that."

Imports helped fatten Wal-Mart's profits, Moates told me, because he estimated Wal-Mart's profit margins were four to six times higher on Asian imports than on American-made goods.

A Global Procurement Center in China

Wal-Mart ramped up its global sourcing even further in 2002, when it took over the global buying operation from PREL and set up its own global procurement center in Shenzhen, the "miracle city" and hub of South China's export industries.

Wal-Mart prefers to deal directly with the Chinese and other suppliers, Ray Bracy, Wal-Mart Vice President for Federal & International Public Affairs, told me. "If there's a middleman in our process, even if it's a Wal-Mart middleman," Bracy said, "we try and eliminate those." From PREL's long work, Wal-Mart inherited a massive list of global suppliers, now winnowed down to 6,000 global suppliers, 80 percent in China.

Lee Scott, Wal-Mart's current CEO, and other top Wal-Mart executives make the point that Wal-Mart is serving American consumers by getting imported goods at the lowest possible prices. Some economists even credit Wal-Mart with lowering the U.S. rate of inflation by its aggressive cost-cutting and raising U.S. productivity through its supply chain efficiencies. But when Lee Scott and Tom Schoewe, Wal-Mart's chief financial officer, talk with Wall Street analysts, they also point to global sourcing as vital to maintaining and increasing Wal-Mart's bottom-line profits.

Moreover, both scholars and U.S. manufacturers describe Wal-Mart's role as much more pro-active in pushing U.S. production overseas. Professors Gereffi and Hamilton contend that Wal-Mart's global procurement operation has the power to decide not only what to buy but where and in what countries goods will be produced.

"Wal-Mart gets its economic power because it is a gateway to the U.S. consumer," says Duke's Professor Gereffi. "The demand for Wal-Mart stores is what provides China and other countries in Asia with their access to the most powerful capitalist economy in the world."

What's more, the analysts say, the power of Wal-Mart -- and competitors like Target -- is increasing, as they reduce their dependence on well-known American brand names by developing their own in-house brands. According to Wal-Mart Vice President Bracy, Wal-Mart has significantly stepped up development of house brands "because there [are] supply chain efficiencies to gain by working directly with the factories." And also, more profit for Wal-Mart.

Chinese entrepreneurs describe how Wal-Mart presses them to integrate their operations into Wal-Mart's business plans and supply chain. Frank Ng, a partner in Force Electronics, which makes radio-controlled toys and other high-tech gadgets for Japanese toy firms to sell to Wal-Mart, told me Wal-Mart requires his firm to send managers for training to Wal-Mart's center in Shenzhen, makes the firm use Wal-Mart's computer software, and then monitors its production.

Collaboration with its firms now extends to joint efforts at creating, designing, and producing products for the American market. "Wal-Mart gives Chinese suppliers the specifications for Wal-Mart products," says Professor Gereffi. "And they teach those suppliers how to meet those specifications. They have to do with price. They have to do with quality. They have to do with delivery schedule. So, in a sense, Chinese suppliers learn how to export to the U.S. market through large retailers like Wal-Mart."

"It sounds like a commercial marriage made in heaven," I suggested.

"Wal-Mart and China are a joint venture," Gereffi replied. "And both are determined to dominate the U.S. economy as much as they can in a wide range of industries."

This hand-in-glove partnership increases the squeeze on U.S.-based manufacturers to outsource or shut down. Privately, they report that Wal-Mart house brands, made in China, are undercutting their American-made products. Some add that Wal-Mart buyers "advise" and push them to move a certain share of their production abroad, up to 30 percent, and then periodically check to see whether American firms are meeting Wal-Mart's quota for overseas production.

When I asked Wal-Mart's Ray Bracy about the complaints of U.S. suppliers that they were being pressured to shift production overseas, he said he could not confirm that happened but added, "I suspect that this is a legitimate occurrence that you're citing and, and there may be some validity to that."

Bracy concluded by citing the economic facts of life, as Wal-Mart sees them: "The sad truth is because of, perhaps, the pressure on price … and because the pressure of costs on the other side [for American suppliers], that it's difficult to make ends meet -- if you're a business -- by staying here. It's a sad, if you will, situation."

Hedrick Smith is the correspondent for "Is Wal-Mart Good for America?" His most recent FRONTLINE reports include "Tax Me If You Can," "The Wall Street Fix," and "Bigger Than Enron,".