Trade in Trouble

Tyler Cowen notes research by the Program on International Policy Attitudes showing that the bottom has fallen out of public support for free trade.

Comments

[The Lonewacko Blog]

Who knew the American populace would object to the destruction of their jobs, however creative? I'm serious. I thought people would just be all gung-ho about this.

As I reported a while back, here's what administration representative Margaret Spellings had to say:

"We do envision that [the Bush amnesty/guestworker plan] would be open to any type of employee and any type of employer, such as nurses, teachers, high-tech workers, low-skilled workers. This is a concept that can apply broadly"

In other words, nearly all jobs - even those that currently pay a high wage - are at risk from Bush's proposal. Those jobs will be offered to Americans first. But, with bidding on those jobs open to millions in India and China, at what wage rate?

How much less will you make under the Bush plan?

[Eric Hanneken]

Raymund,

I think your recollection of international trade figures before WWI is probably correct; thanks.

You left imports off of your list of the benefits of free trade. Without barriers to trade, consumers and businesses have more choices in goods and services, some of which are better or cheaper. And when businesses in other countries are allowed to exploit their comparative advantages, domestic resources are freed to exploit the comparative advantages in this country. The result is greater abundance.

[Eric Hanneken]

[N]early all jobs - even those that currently pay a high wage - are at risk from Bush's proposal. Those jobs will be offered to Americans first. But, with bidding on those jobs open to millions in India and China, at what wage rate?

Approximately the same. Don't forget that Americans are also competing with other Americans for high-wage jobs. If a job has a particularly attractive wage relative to its costs (education, lost leisure, stress, etc.), then other Americans will sign up for it until the wage is bid down to equilibrium.

As for international wage differences: If American programmers earn, say, three times as much as Indian programmers, then one or some combination of three things must be true:

• Indian programmers have an absolute advantage at writing code. That may not mean they have a comparative advantage, but if they do, then Americans would benefit if they imported code from India, and shifted resources to producing things according to their own comparative advantage.
• Indian programmers are paid less for the same code. This is an unstable condition. Indian programmers will bid wages up, or Americans will bid wages down. Since Americans have been competing with each other for a long time, the former is more likely.
• American programmers are three times as productive as Indian programmers. If this is true, they are capable of competing with Indian programmers while being three times as expensive.

[joe]

The problem, in my opinion, is not a lack of understanding of trade's benefits among the public. It's a lack of understanding and concern about globalization's costs among its supporters. Even though trade may raise GDP and have all sorts of other net benefits, there are local disruptions that cause real pain to real people. And libertarians/conservatives basically have nothing to say to these people, except to reject any proposal to mitigate the problems they face.

[Eric Hanneken]

joe,

What would you say to those people? Or would you not advocate free trade?

[SM]

Kevin,

"They need to understand that most of the job exports don't come from "free trade" and "free markets," but from massive government subsidies to the export of capital."

You keep saying this. I've never seen you actually defend it.

[joe]

Eric,

I'd support local economic development/education program in targetted areas. Support a better safety net (health insurance, for example) to allow people in a bad position for whatever reason to muddle through better.

Basically, do what's worked since the 30s - put some padding on the floor, so the rough and tumble can continue without hurting as much. Liberalism.

[Joe]

I really envy all you enlightened and evidently very financially secure idealists. You spout out the same crap day after day after day that if people like myself don't support something we don't understand it. I do understand free trade. I also understand biased and government tax break supported trade. We've come to the point that all we have for export is our jobs. Our government is absolutely horrible at negotiating trade treaties. People like you only care about their stock portfolioes and how many cheap electronic gizmoes they can buy now at a chep price. I have no use for economists or politicians. Most of them never had a real job. Now they want me to work longer til retirement...at what????? I don't see a whole lot of enjoyment and job satisfaction to be had from 'manufacturing' Big Macs.

[Joe]

I really envy all you enlightened and evidently very financially secure idealists. You spout out the same crap day after day after day that if people like myself don't support something we don't understand it. I do understand free trade. I also understand biased and government tax break supported trade. We've come to the point that all we have for export is our jobs. Our government is absolutely horrible at negotiating trade treaties. People like you only care about their stock portfolioes and how many cheap electronic gizmoes they can buy now at a cheap price. I have no use for economists or politicians. Most of them never had a real job. Now they want me to work longer til retirement...at what????? I don't see a whole lot of enjoyment and job satisfaction to be had from 'manufacturing' Big Macs.

[Looking in from the outside]

It's funny how the cast of characters here talk at each other day after day after day, repeating the same arguments over and over, none of whom will ever change their world-views or philosophies. Yet they keep trying to convince each other of the righteousness of their ideas. Is it vanity or boredom?

[Don]

"And specifically about armies crossing borders, I'd guess Germany in 1914 exported more than France did."

The point being what?

WW1 began when Autsria punished Serbs for killing the Archduke. The Russians responded with war. Germany, due to treaty, had to declare war on Russia. France and England then had to declare war on Germany. France, England and Germany didn't want WW1--they were bound by treaty to enter it.

[Pavel]

Joe,

In the immortal words of Buzz Lightyear: You are a sad, strange little man. You have my pity.

[Andrew]

joe

Why is unemployment "caused" by Free Trade more painful than unemploymnet which arises from any other "cause"? (And how, in any given instance, can you assign such a cause?)

Sin taxes are always kind of popular...I am surprised there is ANY popular opposition to taxes on beer, cigarettes, "luxaries" etc. I suppose it might be possible to pass some low and income-generating tax on ALL imports-- it would really just be a flat sales tax, which on net would raise the cost of everything you buy by the same amount...but it might satisfy some sort of "primal" protectionism.

Assistance programs to "displaced" workers should apply equally to ANYBODY who loses a job...and we already have them. There is a recession on, but there is little reason to believe Trade has caused most of the job losses.

[Pavel]

To be fair, Joe. I tend to sympathize with your working class capitalist wasteland blues.

Why don't you just move to a foreign country where your current savings are enough to live on for the rest of your life?

You're only as trapped as you want to be.

[JimInNoVA]

Joe - That's a pretty broad brush you're using there buddy, might want to back off a bit. I'm making over $30k in salery this year for the first time ever, I've worked "shit jobs," and I still support free trade. Knock down all the walls, kick out all the subsidies free trade. Violent creative destruction free trade. Last time I checked, no one has the "right" to retire, least of all on an ever-increasing slice of MY paycheck. If you would start increasing your own portfolio (mine is mostly real estate, index funds, and metals, not stocks BTW) and take some responsibility for your own well being then maybe you wouldn't have to worry about what the "retirement age" was. You'd be able to set your own, lift a middle finger to the world, and sit here and bitch with the rest of us to your heart's content.

[Lonewacko]

Eric has apparently never seen an Indian train. The vast majority of Indians live worse than our Appalachian-Americans. $10/hour to them is like $100 or more/hour for us. The situation is similar when they come here for jobs. Some of them are willing to live 12 to an apartment.

If you open the U.S. economy to millions of Indians and Chinese, you'll reduce many Americans to living like those in India and China. Most U.S. citizens don't want that.

[joe]

Those of you telling Joe to pull himself up by his bootstraps come off as snide, spoiled Monday morning quarterbacks, mouthing off about a situation you aren't qualified to comment on.

"Why is unemployment "caused" by Free Trade more painful than unemploymnet which arises from any other "cause"?"

It's not. The point of my post was that broad, universal safety nets that apply to everyone can diffuse the pain of trade-based dislocations.

On the other hand, when a town of 40,000 loses 700 jobs because the factory closed when those jobs went overseas, it doesn't take Miss Cleo to notice that that town is suffering from severe trade-based disruption. Is it good that people can pay less now the good is less expensive? Of course. But the diners, banks, and lawn care services in that town are going to disappear shortly, and the place could very well enter a death spiral. Do you think having that happen all over the country is good for the economy?

[Jason Ligon]

joe:

You are being inconsistent. How can we be in danger of having nothing to export when we have, by a good margin, the highest GDP in the world? If you agree in so blase a fashion that trade increases GDP, aren't you saying that DOMESTIC productivity is higher than it otherwise would be? What is happening to all that productivity? Someone who used to have a couch can now have a couch and a chair, yet you insist on seeing that as some sort of elitism. It is a real benefit to real people, as is the increase to GDP and the availability of non local goods.

I thought the good liberal view was utilitarianism, anyway. How can a liberal in conscience argue that local disruptions should trump overall societal benefits?

[Jason Ligon]

"Do you think having that happen all over the country is good for the economy?"

You are breaking windows to keep the glass maker employed, joe.

[joe]

Joe is not joe. joe is not Joe.

You've confused us. Me. Us.

[Jason Ligon]

Sorry! I didn't know you were so case-sensitive ...

[Eric Hanneken]

Lonewacko,

It sounds as if you're saying that if an Indian worker adds $100 to the value of what he produces, he'll still settle for a $10 wage. Why would he do that?

[JimInNoVA]

joe (little j) - I suppose that, opposed to our remarks, your comments are the extremely well-informed musings of a professional economist with years of experience and deity-like clairity of foresight? Please.

Lots of steel towns died when the steel industry went under in PA. Guess what? People moved, got the best jobs they could, and got by. Was it painful for some, maybe even most of them? Sure. Change happens. Get over it, and get on with life.

[Somebody had to say it]

Looking In,

It's boredom.
And vanity.

[Dink]

I often answer my own posts under a different name. Is that bad?

[Dink]

Dink,

Yes.

[A different name]

I disagree.

[Eric Hanneken]

Do you think having that happen all over the country is good for the economy?

I think stopping it from happening would be worse. When a town dies, that doesn't mean the people in it all perish. Instead, most of them find work that adds more value to the world. If the government had kept the factory in business when it otherwise would have operated at a loss, then scarce, valuable resources would have been converted to lower-value products, and the world would have been poorer. That's what "operating at a loss" means.

[Raymund]

"And specifically about armies crossing borders, I'd guess Germany in 1914 exported more than France did."

The point being what?

-->That I think Bastiat's meaning, in the passage Eric first quoted, is incorrect. International trade doesn't prevent wars from starting.

WW1 began when Autsria punished Serbs for killing the Archduke. The Russians responded with war. Germany, due to treaty, had to declare war on Russia. France and England then had to declare war on Germany. France, England and Germany didn't want WW1--they were bound by treaty to enter it.

-->Weren't the Austrians emboldened to make onerous demands on Serbia because Germany promised to support them no matter what? Would England have entered the war if Germany had not invaded Belgium? While Germany doesn't deserve 100% of the blame for WWI, it deserves a lot.

[dj of raleigh]

I would love to read the survey questions
to compare my responses to the conclusions.

Made up sample:
Union Jobs and wages are hurt by free trade.
Would you be willing to pay more for goods to prevent this?
Strongly yes yes ?? no strongly No

[SM]

Good point. If so many people are against free trade then why is WalMart making so much money ?

[Eric Hanneken]

I can't help but think of a quote from Frederic Bastiat: "When goods are not allowed to cross borders, armies will." Are we entering a new age of nationalism, similar to the years before World War I?

[SM]

Eric,

I think it means that the champions of Free Trade are going to have to do better than just sing "Every little thing gonna be all right in the long run". And that's a good thing. To be quite frank, the articles in defence the free trade i've seen around here lately have been mostly boilerplate.

[Raymund]

Eric, I don't have a cite off-hand, but IIRC, international trade as a percentage of gross world product peaked just before WWI, and didn't recover until well after 1945. And specifically about armies crossing borders, I'd guess Germany in 1914 exported more than France did. While Bastiat made a lot of good points (tariffs on sunlight to protect candlemakers, for example), I don't think this is one of them.

[Raymund]

SM, you raise a good point. I'm not an economist, but I can see several ways free trade has benefited, and lack of it has hurt, the US; hopefully free of boilerplate.

1) A lot of why the US is as rich as it is comes from exports: agricultural products and raw materials from colonial times till the present, industrial products since about 1900, and today, the heavy machinery for those new Chinese factories, innovation in the form of CDMA phone technology and new pharmaceuticals, etc. If trade in the past had been more free, it seems a reasonable assumption the US would have exported more and be even richer today.

2) Increased tariffs, in an effort to protect US industrial jobs, led other countries to retaliate, hurting US exports and deepening the 1930 recession into the Great Depression.

3) The more good jobs in Mexico, the fewer illegal immigrants looking for economic opportunity here.

[Kevin Carson]

There's a good reason public support for "free trade" is dropping: they have no idea what free trade really is. They see their jobs being exported overseas by giant corporations on the public tit; and the politicians and media keep falsely referring to this neoliberal mercantilism as "free trade."

They need to understand that most of the job exports don't come from "free trade" and "free markets," but from massive government subsidies to the export of capital.

[Shannon Love]

I think part of the problem in public perception lays in the way the media reports the story. The stories all present some contextualess numbers like "300,000 jobs outsourced" without explaining how much a percentage of the total job market that is.

The media also doesn't provide information on how many U.S. jobs are enabled by cheaper overseas labor. For example, in most computer products, research, design, and chip fab are done in the U.S. The gross components are then sent overseas for labor intensive assembly then shipped back to states for marketing and distribution. Without cheap assembly labor, computers would cost a lot more and every American job that depended on computer sales would be far more fragile.

[joe]

Well put, but by combining "welfare" with "tarrifs," you miss an important distinction I make. Tarrifs are about preventing the creative destruction from happening, or delaying it. Welfare spending (unemployment insurance), and economic development efforts (community colleges, infrastructure upgrades) are about letting the creative destruction happen, but cushioning its results.

[M. Simon]

I'm against free trade.

Cheap Saudi oil imports have ruined the American oil industry.

[Kevin Carson]

SM,

You've got to be kidding. I've repeatedly described exactly the kinds of subsidies the government supplies to the export of capital. Below are some comments from a couple of threads just three days ago. Be sure and forget this immediately, so I have to cut and paste this shit all over again in a few days, OK? 🙂

"In Defense of Offshoring"

I'd also add that the U.S. government (and the World Bank) need to stop subsidizing the export of capital through loans and foreign aid to build infrastructure. Same goes for transportation subsidies to those shipping the goods back to the U.S. If it weren't for forced "public" (i.e., taxpayer) investment in the facilities needed to make private foreign investment profitable, there'd be a lot less of it....

Those anti-worker governments in the Third World aren't there because of benign neglect from Uncle Sam. They're there because of a century of U.S. fraternal aid to death squads and military juntas to make the world safe for ITT and United Fruit Company. As the song goes, "those Washington bullets again."

To take just one example: You know why sweatshop employers are so drawn to Indonesia? Because, until recently, organizing an independent labor union was a criminal offense. For the background to that, you might check out the history of the CIA-backed Suharto coup back in the '60s.

Or another example: sweatshops also find Central America a hospitable environment. What they've done to union organizers and peasant activists down there over the last fifty years, (starting with the overthrow of Arbenz in 1954, right up through the Contras and Salvadoran death squads) isn't pretty. And if you check the resumes of the officers in those death squads, you'll find that an awful lot of them were "foreign exchange students" at a little college at Ft. Benning. --Feb. 23 @ 2:25 PM.

"Finding Jobs"

Subsidies to the export of capital refers to financing of road, utility, etc., projects with government funds through the World Bank or U.S. foreign aid, whose main purpose is to make the countries in question a more hospitable environment for U.S. capital looking for overseas outlets.

For example, according to Gabriel Kolko, about 2/3 of World Bank loans went to promote transportation and electric power infrastructure needed to support local investment by American capital.

Kolko, Confronting the Third World (New York: Pantheon Books, 1988), p. 120.

A U.S. Treasury report wrote in positive terms of the effect of such taxpayer-financed projects, which "often yield high external economies in the form of lower costs of production, distribution, and/or marketing in a wide range of industries."

US Department of the Treasury, "United States Participation in the Miltilateral Development Banks in the 1980s" (Washington, 1982). --February 23 @ 7:10 PM

[Kevin Carson]

joe,

On this "creative destruction" thing, there's a lot more of it, and it's a lot more destructive, because the people making such decisions don't internalize all the effects. The people who profit from it aren't the ones who bear the destructive consequences. One class gets the "creative," and the other gets the "destruction." Government, more than anything else, is a mechanism for externaling costs.

I'd prefer to stop subsidizing the cost of stuff like R&D and technical education that fuel change in the first place, and have a much less volatile pace of technical change. If the government hadn't subsidized most high-tech R&D, funded student loans and technical education, provided a market for high-tech output through government procurement, etc., the economy would probably be a lot lower-tech and the job market would be a lot more stable.

The government shouldn't be in the business of protecting buggy whip manufacturers; but it shouldn't be helping to drive them under, either.

[Joe]

dj : Yes, I'd be willing to pay more and I'm not all that pro-union.

Pavel : I think free trade is completely free of subsidies at both ends of the 'trade'. Once either party receives any financial incentive from any goverment, it loses that status. Once we realize that the rest of the world might not possibly be as upfront in negotiating treaties as we are, maybe we can get some real trade treaties and enforce them.

All : Sorry for using the 'broad brush' and being case sensitive (for joe)

Some of you obviously think I'm a dumb redneck. That's OK...I might be. But when I see complete communities wasting away because all the jobs are gone and the younger, more socially active, tax paying citizens have pulled up stakes, it bothers me. And no matter how many economists and politicians come on CNN and tell me what a great thing this is, I still can't find the mindset to see it so.

Maybe my state is the dumbest of all when it comes to business progress. Over the last 20 years we've given tax break after tax break to business who move in, employ a few workers at 'prevailing area wages', bring the higher paid personnel with them, stay in place just long enough to use up all their tax breaks, then announce the facility is closing and the jobs are going to New Dehli.

This is what I've seen happen and it's affected too many of my friends and neighbors for me to believe it's a good thing. I don't like seeing people lose their property and their dignity for the sake of some foreign country. Guess I take this a bit more personal than most of you.

[joe]

"If the government had kept the factory in business when it otherwise would have operated at a loss, then scarce, valuable resources would have been converted to lower-value products, and the world would have been poorer."

Agreed, and I am against such initiatives, like Bush's steel tarrif, for the reason you cite, and because they don't work. In Massachusetts a couple decades ago, the government put a lot of money into propping up the metalworking industry in western Mass. The companies took the money, stayed for two years, then left anyway. It's a bad idea to try to bribe companies into doing buisness in a place they don't want to be.

I prefer programs that change the conditions, so that those communities become attractive to companies. What I'm proposing are programs, like Community College funding, transportation enhancements, rehabbing vacant buildings for housing, and subsidized incubator space, that turn the community is question into a place that is attractive for private investment.

[joe]

"If the government hadn't subsidized most high-tech R&D, funded student loans and technical education, provided a market for high-tech output through government procurement, etc., the economy would probably be a lot lower-tech and the job market would be a lot more stable."

And there would be a lot less money to go around.

[Jim]

joe,

I basically feel that free trade will benefit everyone in the long run, but I am upset also by the short term dislocations it causes. However I am not in favor of social safety nets or tarriff subsidies to help out this situation, because I feel that these things just in the end delay the inevitable. And when it comes, that is when you see the hometown factory shut down and region-wide economic problems. I don't have any specific studies or such to argue this position, it is just my opinion, but in my experience these types of changes do happen gradually enough that people can foresee them in the market pricing conditions and begin to react to them accordingly. Unfortunately when the safety net is there (union job protection, tarriffs, welfare, etc.) it delays people from acting in the short run to prevent the long term predictions from comming true. The result is then a catastrophic collapse that affects many localized individuals seriously.

The best way to mitigate 'creative destruction''s downside is to not interfere with it so that it happens gradually.