Is free trade failing?

Great Debates
1

I am an economic conservative. I usually like deregulation, lower taxes, free trade, etc… I don’t like federal welfare (individual or corporate), social security, nationalized health care, or federal involvement in K-12 education. I believe SMALL deficits are sometimes necessary to stimulate economies, and sometimes big deficits are needed in times of major crisis, ex. World War II. I also think that supply side economics can work, not because idle rich will spend more on yachts and fancy cigars, but that it increases the available monies for small businesses that make up about 98% of the US economy.

However, I am begining to believe that free trading is failing.

Free trade is based on the ideas of David Ricardo, Adam Smith, and J.S. Mill. The idea is that if countries have different ratios of unit costs of two commodities, then specialisation and trade are advantageous even if one has an absolute advantage (i.e. can produce more efficiently) in both commodities.

The theory was later modified by J. S. Mill to reflect gains being greater where demand for a country’s exports is strong relative to its demand for imports, leading to improved terms of trade.

Neo-classical economists use comparative advantage not only to justify the removal of tariffs and non-tariff barriers to trade, but also to argue for export orientated manufacturing and cash crop production. Trade liberalisation, they say, creates increased competition, economies of scale, and boosts technological progress.

However, after hearing a speech by Senator Schumer (D - NY) at the Brookings Institution, I am reconsidering my reverence for free trade as it now stands.

Basically, they argue that in our time, capital, technology, AND labor move so freely, that the underlying assumptions of Ricardo can no longer be assumed.

Whats your take on their argument?

"Manufacturing job losses to foreign countries with low labor costs are now being compounded by the loss of jobs that the United States once thought were secure—in health care, computer software, and traditional “back offices” that handle personnel and payroll.

Policymakers must review current policy, Schumer and Roberts say, because the nature of the new global economy has changed the core assumption of free trade. In their view, it entails not just the movement of goods, but also the movement of production capability between nations. As a result, American workers face competition at almost every level."

2

The benefits of free trade are essentially the same as the benefits of specialization and division of labor generally. It’s easier to mine coal in Pennsylvania (because of easier access to, among other things, coal, and workers who know how to mineit) and easier to grow cotton in Georgia. So, Pennsylvania does not try to be self sufficient in cotton production, and Georgia does not attempt to be self-sufficient in coal production. Instead consumers in Georgia buy coal from producers in Pennsylvania, and consumers in Pennsylvania buy cotton from producers in Georgia.

A trade barrier, such as a tarrif, is erected by a government to prevent such a cross border exchange from happening. Often (always?) the main effect of this barrier is to benefit one small group of producers, such as American steel producers. American buyers of steel (including American car companies) want to get steel as cheaply as they can. But the government, under pressure from the steel industry, a small determined special interest, erects a trade barrier. This makes the market less efficient. Market efficiency is not the only virtue in this world, but it is an important virtue. And the end result is that a small group of Americans in the steel business wind up doing better while everyone else winds up doing worse.

But what about jobs? That’s what the issues always seems to come down to: the “giant sucking sound” that Ross Perot referred to. I am concerned about this. I am concerned about the 50 year old steel worker who can’t (or can’t easily) just go back to school and learn to be a website designer or an intellectual property lawyer.

But in my view the solution is not to make preserving existing jobs the be all and end all. If we want to do that, we should get rid of the Internet (which makes threatens jobs in all kind of industries, e.g. travel agents), and for that matter, the automobile (which, to cite a hackneyed example, put the buggywhip manuracturers out of business). Instead, the focus should be finding ways to ease the dislocation suffered by those who are out of work. But not to prop up dying industries that can’t compete.

3

"Manufacturing job losses to foreign countries with low labor costs are now being compounded by the loss of jobs that the United States once thought were secure—in health care, computer software, and traditional “back offices” that handle personnel and payroll.

Policymakers must review current policy, Schumer and Roberts say, because the nature of the new global economy has changed the core assumption of free trade. In their view, it entails not just the movement of goods, but also the movement of production capability between nations. As a result, American workers face competition at almost every level."

I assume the OP is really asking: “Is free trade failing the USA?”

4

The USA has relatively low unemployment and the job losses might seem big… but its the price of globalization. Some lose and some win… but overall the US benefits.

Unless americans are willing to work for less they better get higher degrees or specialize in areas that other countries cannot compete in. Eventually India will gain a measure of prosperity and wages will go up there… and they will be less competitive vis a vis versus Americans. Thats the theory at least…

I don't think free trade is failing... its just not only benefitting the US like before.
5

The U.S. jobless rate last I checked was 5.9%, which is lower than most industrialized nations. It’s down a bit from the beginning of 2003. Where is the evidence in support of the OP’s premise?

6

Free Trade is a good thing. The trouble is, we don’t have Free Trade. Government always regulates, and breaks up monopolies, creating preferential treatment for some companies and industries over others. The excuse for more government is always equality and fairness, but it always translates to the same thing: people are too stupid to run their own lives. In a true free market system, consumers cause monopolies to break up naturally, and prices and availibility is most efficient.

Here read this and watch the big-government Socialists scream.
http://www.gnt.net/~jglas/libertar.htm

MFitz

*“The germ of destruction of our nation is in the power of the judiciary, an irresponsible body- working like gravity by night and by day, gaining a little today and a little tomorrow, and advancing its noiseless step like a thief over the field of jurisdiction, until all shall render powerless the checks of one branch over the other and will become as venal and oppressive as the government from which we separated.”

—Thomas Jefferson*

7

MFitz… love you Thomas Jefferson quote !

8

The unemployment figures cited do not tell the story of high skill jobs leaving to India and China, and being replaced by lower skill service sector jobs.

But, that isn’t my main argument.

That would still fit with Ricardian free trade.

Let me use an example:

The demand for radiologist in this country will continue to decrease markedly for the next decade. Why? Because the new trend is to go an x-ray technician, transmit the digital x-ray to China, India, etc., and have a equally competent foreign doctor examine the x-ray for a reduced cost.

The reduced cost is do in part to demographics.

India and China realized decades ago, that education was the key to competition with the US, Japan, and Europe (“the first world”. But, the difference between the opening of trade barriers between the “the first world” nations and the current situation is the huge numbers of highly skilled workers available.
50 million high skill workers is not a large percentage of India or China’s workforce. But compared to the American workforce it is a tremendous amount.

Basically, comparative advantage no longer stays in one geographic location.

The solution is probably not tariffs or old style protectionism. Americabs might just need to invest more resources in education.
I should have titled the OP “Is free trade failing the United States?”

9

In your radiologist example it is obvious to see how radiologists are hurt, but think about who is helped. Everyone who has insurance is helped because of the lower cost of the visit. Everyone who has a business in which people spend money they would have spent for the radiologist. Also the radiologist just does not go home to starve to death. He gets a job producing something which would not have been produced had he stayed a radiologist.
Every economic policy has good and bad things associated with it and they all fail if you only look at the bad and ignore the good.

10

This is an excellent piece which looks at the Schumer-Roberts article and explains why they are wrong:
http://tnr.com/etc.mhtml?pid=1155

11

That is a great article.

12

Not that I disagree with the concept of free trade, but what happens to the T-shirt/Software argument in the article if it costs Indians $50 to produce a computer program. Does that not give them a relative and an absolute advantage? How much of their argument depends on the specifics of the (somewhat arbitrary) costs they assumed for the two goods?

13

Another good article is this op-ed piece by Stiglitz that is linked to in the TNR article.

14

“How much of their argument depends on the specifics of the (somewhat arbitrary) costs they assumed for the two goods?”
In general not at all. Pretty much whatever the costs the US will have a comparitive advantage in something. Say India produces softeware at 40 then the US has the compartive advantage in T–shirts. If India produces software at 60 then the US has the CA in software. Exactly 50 is tricky because neither country has the comparitive advantage in either good but that is just a freak case.

15

CyberPundit’s answer was right on the money, but I wrote this already and if I wrote it, then by golly I’m gonna post it.

The argument doesn’t depend on the specific numbers chosen; they just affect how wealth is distributed. Incidentally, what you’ve just done is to make it so there’s no relative advantage by either side–for either group, one program costs ten shirts. In your example, Americans become relatively poorer, because they’re less productive. In the example in the article, in a closed American economy one program is worth ten shirts. In a closed Indian economy, one program is worth nineteen shirts. When borders open, Americans can get more than ten shirts per computer program and Indians can get a computer program for less than nineteen shirts. Under your example, productivity is exactly the same on both sides, so it really doesn’t matter. People live exactly the same with or without free trade. The odds for this happening with two products are small; the odds for thousands of products, nil. If the Indians can make a computer program for less than $50, then a computer program costs them less than ten shirts. Thus, by trading they can get more shirts per computer program, and we can get a program for fewer shirts.

16

Thanks. Sorry I was too lazy to do the math myself.

I’ll start brushing up on my sewing and logo printing skills.:slight_smile:

17

Cyberpundit: Excellent article. Mike Kinsley also had an article in Slate taking the two to task.

18

Even in The Pit I’m not allowed to say.

However, you might enjoy this book chapter:

http://www.landsburg.com/about2.html

19

I see how outsourcing leads to greater production efficiency and probably creates more wealth overall, but I still feel it is has negative effects on America.

America has been able to withstand trade imbalances for some time, because of the dollar’s status as an international reserve currency. Foreign money was invested in to Wall Street offsetting the trade imbalance. Now, with the Euro rising as a competitor to the dollar as a reserve currency, foreign investors are retreating from the American economy.

At the same time, the ratio between imports and exports continues to grow. Partly due to businesses seeking out cheaper labor in foreign markets, which used to be limited to lower skill job and is now impacting high skilled jobs.

Furthermore, the American government is spending money like there is no tommorow. We just passed a huge new entitlement program (Medicare drug coverage) without fixing the real root of the problem. The war in Iraq looks to be without an exit strategy, and not many nations (props to UK, Spain, Poland, Australia, Japan …) are eager to help us out due to some undimplomatic actions on our part.

I just think this outsourcing of highly skilled jobs is adding to a long term downfall of the US.

Going back to the example of the radiologist/software engineer vs. the textile worker. puddleglum argued that radiologist (or software engineer) will not just starve, he will produce something else in another job.

Radiologist and software engineers spend a great deal of resources training for their careers. Are you saying we should encourage the establishment of retraining programs for radiologists and software engineers, so they can become t-shirt factory workers?

Americans have been on the forefront of R&D and higher education for a long time. And, India and China may still be lagging in the percentage of literate persons. But, with a combined population of nearly 2.5 billion, comparing percentages doesn’t really mean much. India and China will be able to “pump out” highly skilled workers in numbers that dwarf the production of highly skilled workers in the United States.

I am not an economist and I understand that every policy has good and bad effects. But, maybe studying the bad effects of this phenomena is worthy of our time and resources.

20

rp3:
You are correct in that India and China can pose a threat to higher skilled jobs in the US that have historically been “safe” from that kind of competition. But also keep in mind that as those two countries enter the economy of higher value-added jobs, their wages will rise and their competitive advantage will decrease.

You also need to look at the proposed “solutions” and decide if they are better or worse than the “problem”. You simply cannot protect your way to preservation of prosperity.

The key to American competitiveness is to stay ahead of the curve in educatoion and innovation. Protectionism impedes innovation, it does not encourage it. Workers do need to understand that it’s a new world and you can’t rely on a cushy union job for life. (And now that applies to tech jobs, too. Most Si Valley engineers have known that for at least a decade.) That world is gone, and it can’t be brought back. It was based, to a large extent, on a Europe devasted by WWII and an Asia mired in war (China) and/or economic systems that posed no threat to the US (Marxism in China and Socialism/Protectionism in India).