Skip to comments.Notes for free traders
Posted on 03/05/2003 12:24:33 PM PST by A. Pole
In a recent cover story Business Week magazine observed (http://www.businessweek.com/magazine/content/0305/b3818001.htm) that economists havent begun to fathom the implications ( http://www.townhall.com/columnists/paulcraigroberts/pcr20030226.shtml) of outsourcing for the U.S. economy. Economists dont understand globalism because they dont think about it. They simply assume globalism to be the beneficial workings of free trade.
Most economists take for granted that the benefits of free trade offset its costs. For example, the lower prices consumers pay for imports give more benefit than the harm done to the workers who lose their jobs in inefficient domestic industries. Any questioning of globalism raises the specter of protection--the prevention of resources from flowing to their highest valued use.
If a New York company can outsource its 1-800 call center to a lower wage state, why not to India (http://www.wired.com/news/business/0,1367,55799,00.html)? If a Floridian can freely trade with a Georgian, why not with a Chinaman (http://olimu.com/WebJournalism/Texts/Commentary/WhiningMinority.htm)?
If a person can run an indefinite trade deficit with his local supermarket, why does it matter if a country runs the same endless deficit with its trading partners ( http://www.calnews.com/archives/guzzardi17.htm)?
All of these rhetorical questions (and many more) can be found in the Economists Book of Mantras. Economists use these questions to reassure themselves so that they dont have to think.
Lets ask a new question: Is outsourcing trade?
What is being traded when a U.S. firm or industry relocates its capital and technology in China, where it employs Chinese labor to produce goods for the U.S. market?
Adam Smiths argument for free trade is an argument against self-sufficiency in all goods and services. It is not an argument for exporting a countrys productive capability to countries with the lowest labor costs.
In the Smithian model, countries have different endowments. Differing climates give advantages to the production of different crops. Differing histories and inclinations result in different advantages in finance, skills and manufacturing.
If each country specializes in areas where its advantages are greatest or disadvantages are least, the gains from trade will make each country better off than it would be if it remained self-sufficient.
But, if there are no given endowments because business know-how, capital and technology are globally mobile, the advantage lies with countries with untapped pools of educated and skilled low-wage labor. The advantage increases with the absence of tort lawyer extortions and harassing and fining IRS, EPA, OSHA, EEOC and other regulatory bureaucracies, whose budgets demand a never-ending supply of wrongdoers to be penalized.
To return to the question: Where is the trade in outsourcing?
Trade implies reciprocity. It is a two-way street. There is no reciprocity in outsourcing, only the export of domestic jobs. Thats why the U.S. is currently running a $125 billion trade deficit with China alone, a third world country. Thats why the U.S. is turning over $1.5 billion per day in its accumulated wealth to pay for all the outsourced goods and services that return to our markets as imports.
One reason that trade between countries is not the same as trade within a country is that more than one currency is involved. A country that runs persistent trade deficits dispossesses itself of its wealth and the future income that flows to the new owners of that wealth.
A second blow falls when foreigners find themselves satiated with dollars, or overweight U.S. investments. Then the dollar devalues, and the outsourced goods and services on which the U.S. is import-dependent become expensive.
An economy can, of course, stand some outsourcing.
But when goods and services in general are outsourced, where is the economy?
The enormous untapped labor pools in China, India, Indonesia and the Philippines exceed in size the U.S. population. They are sufficiently large to hold down living standards and wages in those countries until all U.S. manufacturing and information technology jobs have been outsourced in order to boost corporate profits.
A country devoid of high productivity jobs is a poor country. Is the U.S. on the outsourced path to becoming a third world country?
The Bush administration should think about this question before it gratuitously attacks Iraq. The consequences of war in the Middle East are unknown.
The Bush administration should also think about the rapid rate at which outsourcing is dispossessing the U.S. of its accumulated assets, including the domestic supply chains that are the backbone of American productivity.
How long will foreigners accept an annual outpouring of $500 billion before they force a devaluation of the dollar?
What becomes of the living standard of a people whose jobs and careers have been outsourced, people who are dependent on imported goods and services, and whose currency loses its value?
Protection is not a solution. Protection is a strategy to protect domestic producers from foreign ones. But U.S. global firms and firms whose profits benefit from outsourcing are not domestic producers. Protection would require the U.S. to erect tariff and quota walls against the products of U.S. firms who use foreign labor to produce for U.S. markets.
Do Americans possess enough national identity to have a shared national interest?
Are government and economists capable of recognizing that the global labor market is a threat to U.S. living standards and political stability?
COPYRIGHT CREATORS SYNDICATE, INC. ( http://www.creators.com)
Excerpted and condensed from:
Of Restraints upon the Importation from Foreign Countries
of such Goods as can be produced at Home
"There seem, however, to be two cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry...
As there are two cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry, so there are two others in which it may sometimes be a matter of deliberation; in the one, how far it is proper to continue the free importation of certain foreign goods; and in the other, how far, or in what manner, it may be proper to restore that free importation after it has been for some time interrupted....
- The first is, when some particular sort of industry is necessary for the defence of the country....
- The second case, in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry is, when some tax is imposed at home upon the produce of the latter. In this case, it seems reasonable that an equal tax should be imposed upon the like produce of the former....
- The case in which it may sometimes be a matter of deliberation how far it is proper to continue the free importation of certain foreign goods is, when some foreign nation restrains by high duties or prohibitions the importation of some of our manufactures into their country. Revenge in this case naturally dictates retaliation, and that we should impose the like duties and prohibitions upon the importation of some or all of their manufactures into ours....
- The case in which it may sometimes be a matter of deliberation, how far, or in what manner, it is proper to restore the free importation of foreign goods, after it has been for some time interrupted, is, when particular manufactures, by means of high duties or prohibitions upon all foreign goods which can come into competition with them, have been so far extended as to employ a great multitude of hands. Humanity may in this case require that the freedom of trade should be restored only by slow gradations, and with a good deal of reserve and circumspection. Were those high duties and prohibitions taken away all at once, cheaper foreign goods of the same kind might be poured so fast into the home market as to deprive all at once many thousands of our people of their ordinary employment and means of subsistence. The disorder which this would occasion might no doubt be very considerable....
Adam Smith endorses use of tariffs for purposes of National Security AND in cases where domestic industries are burdened by domestic taxation (and by extension, other forms of domestic regulation.)
Free trade deity David Ricardo asserts that labor is driven to the subsistance level.
IOW, the standard of living for blue collar Americans declines to Third World levels.
Bush's embrace of Klintonomics is disastrous for the future of our nation.
Good link for the Business Week article is http://www.businessweek.com/magazine/content/03_05/b3818001.htm . Sorry
The long run ends on Election Day when people vote on the political economy. They vote to support those who will provide more funds for them. An eventual self-defeating political scenario for job outsourcing 'free trade'.
Unfortunately for American conservatism, the neo-cons have taken over the direction of the Republican party as their parents had taken over the Democrat party. Their bent is world-wide influence. Their internationale vehicle first was through Communism (mostly in Democrat Party) and when that failed, the jumped ship and embraced 'one world thru free trade' (Republican Party).
What we should have is 'BALANCED TRADE'. That means WE BUY FROM YOU - YOU BUY FROM US.
The two are not related. We began the nanny state not long after we passed Smoot-Hawley.
What we should have is 'BALANCED TRADE'. That means WE BUY FROM YOU - YOU BUY FROM US.
Are you saying that a foreign country would be forced to buy American goods in dollar amounts equal to how much money Americans spend on goods from that country?
Yes, at least as much, unless we could get them to pay more than we do. Adam Smith supported tariffs in the case to offset tariffs imposed on exports, as well as to offset taxes.
Yes, at least as much, unless we could get them to pay more than we do.
OK, let's see if this works on the micro level.
A man spends $4,800 at his local grocery store each year. Therefore, the grocery store should be required to purchase at least $4,800 worth of goods and services from that customer each year.
Do you think that will work?
This isn't one of my hot topics and I haven't paid much attention to trade in the past, but the more I think about it it's tough to see the benefit of cheap foreign goods if Americans can't afford them because thir jobs have all gone overseas. I don't see how manufacturing jobs can remain here without some protection, because there's no way to compete with places like china when it comes to low production costs. They don't have to worry about the EPA, OSHA, unions, layers and layers of taxes and market wages.
OTOH, however.. If you toss up trade barriers the unions step in and artificially inflate the price of goods by demanding more in wages and benefits than their labor is worth. So, yeah Americans have jobs now, but their dollar doesn't go nearly as far as it did before. Plus we will have trade barriers imposed on us in retaliation and our exports will fall.. Eventually leading to layoffs.
I don't know what the answer is, but it sure looks like a big problem is brewing from where I sit.
This is the kind of thing where I would just like to see a list of options, pick the least painful one and get it over with.
Wouldn't that be what "trade" is closer to meaning? Trade means something is given, something is taken. We're not getting much from all these so-called free trade deals being made.
You may have just inadvertently suggested the solution right there--and it's not protectionism.
Trade means something is given, something is taken.
And that's the problem with the protectionst mantra: they demand that if Joe buys 12 imported apples, we must export 12 apples--not oranges, they MUST be apples--to "balance the books."
We're not getting much from all these so-called free trade deals being made.
Then they'll frickin' collapse on their own, now, won't they?
I know what you're saying.. But it strikes me that one man might become rich and the other poor in your scenario depending on the margins of the goods/services that are sold back and forth.
I wonder how margins would affect trade on a global scale, if at all? The only figures I ever hear about are the raw dollar amounts.
I admit that I don't follow this topic, but when it has come up, I have never heard margins mentioned at all. Ever..
Is it possible that: (BS Numbers here for simplicity's sake)
$100.00 of American goods, to be sold at $125.00 on the foreign market (profit of $25.00) is worth less in the grand scheme of things than $50.00 of Chineese goods sold on the American market? (sold for $100.00, profit to US companies of of $50.00)
Could their lower (total) trade figures actually be worth more to us after the margin is taken into account?
(I don't know if that all makes sense, I am hoping you can see what I am getting at here..)
Well, the grocer, given the razor-thin margins in that business, would go bankrupt in short order. The customer would then have the small problem of not being able to get food anymore, unless he can personally grow it--and if he has enough food in the larder to last him until the crops come in.
Maybe the grocer and the customer can both get by, depending on their profit margins.
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