I know people claim that free trade is good for all Americans but I don’t see how it helps blue collar people who lose their jobs when the factory shuts down. Can anyone give me a simple explanation of how that guy without a good job is now better off?
BTW I am not blue collar , I write software for a living.
People who study trade for a living generally conclude it is good for Americans. That doesn’t mean it’s good for each individual American.
You are counting only one cost of trade - lost jobs in, let’s say, an air conditioning factory. Closing that factory hurts perhaps 1,000 people. But, every American that buys an air conditioner benefits if they can get an air conditioner for less money from a foreign source. That means more jobs for dockworkers to unload those air conditioners from ships. There will be fewer new dock workers than there are lost air conditioner factory workers, but that’s only the start of our benefits.
Perhaps originally 1,000,000 people per year but air conditioners. They all benefit if they can get cheaper ones. Maybe they use the extra money to buy newer cars, hire math tutors, go to the movies, take a vacation, etc. and all those industries benefit. Maybe they just save the money, lowering interest rates, so every person and business that borrows benefits. Plus, there are other benefits. If you are an air conditioner installer, maybe cheaper foreign air conditioners means that 5% more customers can afford air conditioners, so you get to install 5% more air conditioners. Since maybe half of those new air conditioners require additional electrical work, maybe residential electricians get 2% more work upgrading wiring for air conditioning. Maybe air conditioners delivery accounts for 1% of over-the-road cargo, and so truck drivers get a small boost delivering all the extra low-cost air conditioners.
In the end, the benefits of trade are diffused across millions of people in basically every industry. The losses from trade tend to be concentrated in certain industries so they are easier to count. It’s easy to talk to the air conditioner workers the day the plant shuts down. It’s really hard to figure out what 1,000,000 air conditioner buyers did with the extra money they saved and talk to the 1,000,000 different people who benefited when they spent the money they saved on something else instead.
There’s another side to this I didn’t bother to mention. If we buy our air conditioners from overseas, we create jobs over there and we send those people dollars. Once they have dollars to spend, they want to buy things with them. The natural place to spend dollars is in the the U.S. Maybe those foreign air conditioner workers wind up buying new U.S. cars, seeing U.S. movies, or just buying food grown in America. Maybe the foreign air conditioner factory still needs U.S. machines to make them and U.S. engineers to design them. This helps to restore the balance of trade. Again though, it doesn’t mean that the people in the U.S. who benefit are the same people who lost their jobs.
But are the AC units really cheaper if they are made in China , etc? The company can charge the same price and just make more profit right? What is there to prevent that from happening?
For example I find it really hard to find clothes made in the US. (like most people) Not only are the $30 shirts made in China, so are the $200 shirts.
And I guess people who study trade for a living never had their job sent to China, India, etc. right?
The AC manufacturer could charge the same amount and increase its profit margins. While it does so, it makes more money. One obvious thing to do is to pay bonuses to current workers based on higher profits and dividends to stockholders. Those people spend that money generally like the people above who save on air conditioners. Maybe they buy cars, houses, and the executives buy private jets. The company could also invest the money it saves in research and development to learn to make better air conditioners so it can better compete with foreign manufacturers. Or it could invest extra profits the new-to-it-business of streaming videos. These all result in more economic activity in the U.S. whose benefits accrue to many people. Again, the benefits of trade are broadly diffused even as the costs are concentrated.
After a while, other air conditioner sellers realize they can buy cheaper foreign-made air conditioners and capture market share in the U.S by selling them to consumers at a lower price. In the long run, air conditioner costs drop as described above, and consumers benefit.
Note that this can happen even if the U.S. air conditioner company never chooses to close a plant in the U.S. and move manufacturing overseas. If the overseas competitors are cheaper, new foreign manufacturers can just start making air conditioners to sell in the U.S. If U.S. consumers buy them, the American competitor’s sales drop. If the U.S. company doesn’t respond in some fashion, it will just lose business until it stops selling air conditioners altogether, likely going bankrupt in the process. The U.S. plant still closes but instead of U.S. shareholders benefiting, the foreign company shareholders benefit instead.
This was roughly what happened to the U.S. auto industry. Japanese competitors entered the market selling cheaper and better cars. U.S. automakers had a hard time competing and they kept closing plants and reducing output in the U.S. One U.S. automaker, AMC, couldn’t respond adequately and it was bought out by Chrysler rather than going bankrupt. Eventually, Chrysler was sold to Daimler-Benz, then to a private equity firm, and finally to Fiat dodging bankruptcy liquidation once or twice along the way. GM went bankrupt once but was reorganized. Ford held on and is doing okay.
I’m not sure what to make of your last question. There are plenty of people in China and India studying trade. They are helping to fill global demand for economic analysis. They just haven’t cornered the market because people in the U.S. and many other countries can still provide valuable services at a cost people are willing to pay.
Nothing can be good for all Americans. But many economists seem to think the benefits outweigh the cost.
The most obvious benefit is that free trade makes American-made products cheaper to buy in other countries. This helps American manufacturers. Some manufacturers will move their production overseas where labor is cheaper, but not all.
Maybe it’s a media bias thing, but I see lots of stories about blue collar people who used to make $20 an hour at a factory, and now they are either out of work or at WalMart making $10 / hour. Now I know some of them can be retrained for another job but not sure how many of them can do that. Don’t know how many people are in that situation.
Of course starting January 20th, all of those jobs are now coming back so I guess this is a moot point now.
There is media bias. As I noted, it’s easy to talk to the 1,000 people at the closed factory but hard to talk to the millions who benefited from free trade.
There are some people who are, on net, hurt by free trade. Even those people who are making $10 at Walmart instead of $20 at the factory aren’t considering that the goods they are buying are probably cheaper because of free trade so their $10 at Walmart might be equal to $12 in the absence of free trade. It doesn’t make up the whole gap but it makes up more of it than the workers are considering.
We could adopt policies that help to make free trade beneficial for everyone. We could, for example, tax the corporate earnings of companies that benefit from free trade to provide job training, medical insurance subsidies and longer-term unemployment to laid-off workers. Since the benefits of free trade exceed the costs of free trade, for companies and consumers to benefit even more from free trade than the taxes necessary to mitigate the harms. Historically, the business interests that are the strongest promoters of free trade do not support these other redistributionist policies.
There is a news bias: 1000 people losing their job is news; 10m people buying a/c’s for $10 cheaper is not.
Free trade also means that our products no longer face tariffs and it’s easier to sell in foreign markets. Right now the agricultural and beef industries are livid about losing $4 billion a year that they expected to make if TPP had passed and are getting antsy that the $38 billion they make a year from NAFTA may be lost.
No one who understands economics says that. That is, its not good for all Americans at all times.
There’s a third side, and that involves the set of people who couldn’t afford the more expensive air conditioners and did without, but who can buy the cheaper ones, thereby adding that incremental boost to everything else in the chain.
Cold comfort for the guy out of a job at the A/C factory, but the nation as a whole benefits.
It’s like having a serious infection in some part of the body and amputating the limb. It’s not good for the toes that weren’t infected on that limb, but it’s better for the body as a whole. That may be an extreme analogy, but it’s not terribly far off in concept.
Don’t confuse offshore manufacturing with “free trade”.
Offshoring has been going on for 50-60 years - well before free trade agreements like NAFTA. Did the USA have import tariffs on Mexican made cars in 1970?
No. We didn’t.
Free trade can also be a misnomer. If the bureaucracy in country B makes it much harder for companies from country A to do business than vice versa, there may be no obvious tariffs, but the effect is the same. Likewise, if country B has next to no environmental regulation, or minimal enforcement, its producers have a leg up vs those from country A. In order for free trade to benefit more than harm, it needs to be both free and fair. Even then, any trade by necessity displaces production from somewhere where it could conceivably have ocurred were there no trade.
That said, I believe that rarely has sustainable wealth been created by long term protectionism which under free and fair trade would not have been a multiple thereof.
There’s no more economic validity to that statement than one simply saying free trade is a net benefit: ‘fair’ is subjective and in the realm of politics not economics.
Of course subject to some limit in the extreme, but statements or assumptions the $ benefit is cancelled out or even necessarily reduced if trading partners have ‘interfering bureaucracies’, lower environmental or labor standards, and the like have no more validity economically speaking than a general condemnation of free trade. They leave out the fundamental fact that currency values adjust. If the trading partner simply refuses to buy any good or service from the free trading country, the value of the free trading trading country’s currency falls until it’s irresistible bargain to deal with the free trading country and/or the protectionist exporter’s goods become prohibitively expensive.
To run a consistent trade (or broader current account) surplus you have to be willing to continuously accumulate the currencies of the other countries. Which can be the case to some degree, and is particularly the case wrt the US$ as de facto world reserve currency. This capital flow relationship explains why the US has a consistent current account deficit. That wouldn’t be changed by instituting protectionism in the US without also currency controls which no one speaks of. Likewise all the (real, imagined as a political excuse, and somewhere in between) ‘unfair’ trade practices of other countries could be ended and the US current account deficit would not narrow if the monetary/currency environment remained the same.
‘I’d be happy to lose my job if my industry can’t compete globally, as long as the competitions is fair’. Who actually says and really means that? Or, every US industry would win with freer trade if it was really ‘fair’? ‘Fair’ is ultimately defined as ‘it benefits me and people like me’ just like every other application of that word in politics. And as various posts have correctly noted, free trade doesn’t benefit everybody, and contrary to the straw man the OP sets up, nobody who is serious says so. It’s a net benefit on a $ basis. That’s all one can claim categorically, though it’s likely to benefit a much larger number of people, in a diffused sort of way, than it hurts in a typically more concentrated way.
+1 on the comments of “fair” trade.
To address the OP, the short answer is those factory workers will have a very hard time finding replacement work at similar pay rates, especially if there isn’t like demand for their skill set.
Some ways the person may be better off is that he is now able to pursue other interests or the leaving of his job has caused a spike in demand for someone with his skill set. Yes, not great examples, but as stated previously, the real benefit is to society as a whole.
The elephant in the room that no one has mentioned is that free trade agreements and manufacturing overseas are not much to blame for the loss of blue collar, American manufacturing jobs. Mechanization is.
Many repetitive-task manufacturing jobs have been replaced – and will continue to be replaced – by robots. They don’t require raises, never need family leave, sick leave or vacations, don’t form unions and never bitch about unsafe conditions.
American companies love to blame workers overseas for killing their jobs. Why wouldn’t they? If people actually paid attention to what has had the biggest impact on losing those jobs, we might actually be angry with them.
What has truly changed the American workplace has been our reluctance to lead on innovation, except through the private sector, chiefly in the areas of leading the fight against climate change by creating new technologies to deal with it. Instead of competing for scraps of industries long past their prime or usefulness and that other countries can do more cheaply, why have we not created the new technologies that would lead to new, high-paying jobs for Americans?
Guess it’s just easier to blame TPP and NAFTA. Those jobs are not coming back and they never can come back, free trade agreements notwithstanding.
Is this true? I mean, I assume it’s true, sorry. Do you have any links for further information on it?
And they’re happy to work continuously, 24/7, for free!