August 21, 2003

No Free Traders in Import-Competing Industries

The Angry Bear reads my comments section and discovers that people who work in industries where they fear foreigners are about to become internationally competitive lose all their commitment to free trade:

Angry Bear: There an interesting discussion going on on Brad DeLong's blog about outsourcing to foreign countries. DeLong discusses international trade in general in a nice way, and tries to convince people that trade is good for them. For the record, I generally agree with him about the benefits of international trade. What I find really interesting about the discussion, though, is that there are so many comments from blog readers who are up in arms about international trade -- now that it's hitting them for the first time.

What I conclude is that outsourcing to India and China of IT services, programming, call-centers, etc. is actually affecting internet users, who I think have only benefited from trade up to now. All of a sudden they've started to worry about international trade, as they see their own jobs potentially moving overseas. It's a natural reaction, of course, and I don't at all blame anyone for feeling nervous about losing their job -- I would, too. But I would guess that most of those anti-trade commentators would have felt very differently (and much more pro-trade) just a few years ago.

I wonder if this phenomenon could breathe new life into the forces of protectionism in the US?

The interesting thing is that the United States still has an overwhelming comparative advantage in IT services in general: it can be cheaper to run a call center in Delhi than in North Dakota (let alone San Francisco), and there are some parts of programming and development where low wages outside the U.S. promise substantial cost savings, but cutting world trade in IT services to zero would reduce exports from the U.S. more than it would reduce U.S. imports--and that will be true as far into the future as I can see. The objection appears to be not that the U.S. has a negative trade balance in IT services, but that the U.S.'s balance is not as positive as it used to be.

And even that is not the real objection: the real objection is that we have a recession-style job market, in which IT jobs are not easy to find and pay significantly less than they did during the boom and the bubble...

Will this breathe new life into protectionism in the United States? It might.

Posted by DeLong at August 21, 2003 04:12 PM | TrackBack

Comments

It is no accident that the two professions most enthusiastic about free trade, college professors and editorial page editors, are entirely insulated from slave labor competition.

Posted by: Robert Clark on August 21, 2003 06:12 PM

I was unaware that college professors in the States were protected from international trade. All of my non-citizen or new-citizen profs at Indiana University will have to be informed...

And editors of newspapers like the Chicago Sun-Times and the NY Post will be surprised to learn that they are unaffected by int'l economic actors--Murdoch must have become an American while I wasn't looking.

In reference to Brad's post: Isn't there a scence in Ferris Buehler where Ben Stein discusses a similar anti-trade provision in response to a major recession?

Posted by: Paul on August 21, 2003 06:36 PM

Comparative advantage is quite a bit more slippery than just cost of living and wage costs. Didn't we masticate this notion here not too long ago?

Yes we did:

http://www.j-bradford-delong.net/movable_type/2003_archives/001787.html

The problem seems to be that iterative individual reinvention is such a drag.

Posted by: Russell L. Carter on August 21, 2003 07:42 PM

Brad,

You say that cutting world trade in IT services to zero would reduce exports from the US more than it would reduce US imports and that this would be true as far into the future as you can see.

How far into the future is that? And why do you believe this is true? What sustainable elements of competitive advantage do we have in IT services?

Posted by: Anurag on August 21, 2003 07:53 PM

The US imports graduate student, some of whom become professors (at American salaries), but we don't (so far) have any classes that are taught by people in Bangalore lecturing over closed circuit for $10 a class and grading by e-mail. So yes, professors are currently insulated from foreign competition.

I actually wouldn't be entirely shocked to see some schools start outsourcing teaching in this way. It's technically feasible and budgets are being squeezed. Already, more and more classes are taught by non-tenure track profs even at the best schools. And, if it does happen, I predict Economics professors will become less enthusiastic about free trade.

Posted by: Alex on August 21, 2003 10:54 PM


Alex: classes that are taught by people in Bangalore lecturing over closed circuit for $10 a class and grading by e-mail


Hm...sounds like my first two years at Berkeley!

Posted by: Chad on August 21, 2003 11:43 PM

I agree with Brad that a lot of this protectionist sentiment is really a classic case of protectionism rising during downturns in the business cycle. But this is a new group of people feeling protectionist for the first time, and one that (as is noted by Angry Bear) could wield some greater-than-average political power. That's why it bears watching, I think. No pun intended. Really.

Posted by: Kash on August 22, 2003 07:04 AM

Paul probably knows by now that Murdoch *did* become an American while he wasn't looking. Much ownership of US media is restricted to Americans due to protectionist laws that America has succeeded in getting the UK to abolish.
I doubt however that Murdoch, or his businesses, pay tax in the US. Or anywhere, come to think of it.

Posted by: dave heasman on August 22, 2003 07:25 AM

I wouldn't take it for granted that all of us engineers that were involved in the previous discussion were necessarily advocates of protectionism. Pointing out potential problems in a policy does not necessarily indicate that we are incapable of abstract thought, as some had suggested ( I guess years of study of advanced mathematics doesn't qualify ). I think that there are serious problems in the way we educate and employ some of our brightest people in technical professions, and the potential long-term costs of these problems to society merits serious discussion among all parties. Dismissing these concerns as sour grapes or economic ignorance just doesn't cut it as far as I'm concerned.

Posted by: Michael Jones on August 22, 2003 08:57 AM

Michael Jones: I get the sense that your last comment was directly mainly at me. I certainly don't think that everyone involved with the earlier discussion was advocating protectionism. And I agree with you that there are serious potential problems with current policy. I was simply remarking on what I found to be a notable trend among a surprisingly large number of the contributors to that discussion. (At least I found it surprisingly large -- maybe other people didn't.) And I do not at all dismiss the concerns of those people as ignorant, or sour grapes. Quite the contrary, in fact -- I think (as I mentioned in my posting on Angry Bear) that such concerns are completely understandable and justifiable. My point is simply that the surprisingly common protectionist sentiment among this sample of well-educated internet-users strongly suggests that economists and policy makers should probably pay more attention to what's happening here.

Posted by: Kash on August 22, 2003 11:11 AM

Kash: My last post was not directed at you, but I do appreciate your response. One of my concerns is what I percieve to be the increased risk in pursuing technological fields of study. Areas that were seen as prudent career choices 5 years ago are looking much dicier today. Today's hot field is tomorrow's dead end ( I fully realize that this goes well beyond the issue of outsourcing and into the nature of technology itself ). I don't know what the aswer is, but the current system where the most of the risk is bourne by the individual strikes me as unsustainable. Pursuing five years of expensive study for a ten year career may make sense for the society, but it may not be prudent from the standpoint of the individual.

Another ugly little secret that techies have to contend with, assuming they make it that far, is age discrimination. Bob Cringely does a good job of explaining that reality in this recent article:

http://www.pbs.org/cringely/pulpit/pulpit20030807.html

"The only real result of all this job-shifting will be tens of thousands of older engineers in the U.S. who will find themselves working at Home Depot. You see, "offshoring" is another word for age discrimination. "

Posted by: Michael Jones on August 22, 2003 12:37 PM

Interesting point about age discrimination. And in general you raise a very valid point about adjustment costs (the term trade economists use to describe retraining and education). By the way, it's been well established in the theoretical international trade literature that trade protection can IMPROVE national welfare in situations with high adjustment costs. (Despite what many people think about economists, we're not all classical ogres - some of us do consider the effects of real-world imperfections in markets.) I don't think we're there with the IT industry in this country right now, but trade economists do recognize that adjustment costs matter, can sometimes be a valid reason for trade protection, and certainly need to be taken into account.

Posted by: Kash on August 22, 2003 12:50 PM

You simply can't have one country that has created a moral component in economics--minimum wages, the right to associate, anti-discrimination laws, anti-child labor laws and environmental standards competing with countries that don't have such standards and justify it under the banner of comparative advantage.

We saw what happened during the Industrial Revolution when the economic sector was given free rein. We are creating the same milieu internationally. As tariffs are removed industries can and do seek out low wage labor which is really just another name for powerless labor.

Without an international political component to keep the economic sector in check through rules and regulations (economic morality) all we are doing is restarting a race to the bottom for most people in society and repeating some rather nasty industrial history.

Every nation has a political economy. I don't want to combine ours with Mexico's which is what happens by default when we remove tariffs and leave the political out of the equation. Mexico simply doesn't have the resources to enforce our economic laws even if they wanted to. That is why if we are going to avoid the race to the bottom when it comes to political economies there has to be tariffs or international government.

We have a working example of the latter in the EU where political and economic standards must be met before admittance. (By the way, they are admitting Eastern Europe countries too soon. Wages in the EU and Eastern Europe are just too far apart They should continue modernizing Eastern Europe and getting wages up before admitting select countries.)

Two other arguments I like to take exception with since they seem to be resurrected every time we want to expand, so called, free trade.

A mystical belief of people like Carol Moseley Braun that American workers will be saved by the next wave of industrialism. This is the stuff of fairy tales. Even Krugman doesn't think that new industries grow like funguses in the night. Just because society has need of something doesn't mean it will automatically materialize.

And I'm really tired of people like NY Times editorial writer, Tom Friedman, calling people who oppose free trade as it is practiced today, Luddites. American workers have been displaced by machines for years and accepted it as progress. However, it's not progress when they are replaced by the powerless.




Posted by: Dailey on August 22, 2003 01:03 PM

You simply can't have one country that has created a moral component in economics--minimum wages, the right to associate, anti-discrimination laws, anti-child labor laws and environmental standards competing with countries that don't have such standards and justify it under the banner of comparative advantage.

We saw what happened during the Industrial Revolution when the economic sector was given free rein. We are creating the same milieu internationally. As tariffs are removed industries can and do seek out low wage labor which is really just another name for powerless labor.

Without an international political component to keep the economic sector in check through rules and regulations (economic morality) all we are doing is restarting a race to the bottom for most people in society and repeating some rather nasty industrial history.

Every nation has a political economy. I don't want to combine ours with Mexico's which is what happens by default when we remove tariffs and leave the political out of the equation. Mexico simply doesn't have the resources to enforce our economic laws even if they wanted to. That is why if we are going to avoid the race to the bottom when it comes to political economies there has to be tariffs or international government.

We have a working example of the latter in the EU where political and economic standards must be met before admittance. (By the way, they are admitting Eastern Europe countries too soon. Wages in the EU and Eastern Europe are just too far apart They should continue modernizing Eastern Europe and getting wages up before admitting select countries.)

Two other arguments I like to take exception with since they seem to be resurrected every time we want to expand, so called, free trade.

A mystical belief of people like Carol Moseley Braun that American workers will be saved by the next wave of industrialism. This is the stuff of fairy tales. Even Krugman doesn't think that new industries grow like funguses in the night. Just because society has need of something doesn't mean it will automatically materialize.

And I'm really tired of people like NY Times editorial writer, Tom Friedman, calling people who oppose free trade as it is practiced today, Luddites. American workers have been displaced by machines for years and accepted it as progress. However, it's not progress when they are replaced by the powerless.




Posted by: Dailey on August 22, 2003 01:05 PM

You simply can't have one country that has created a moral component in economics--minimum wages, the right to associate, anti-discrimination laws, anti-child labor laws and environmental standards competing with countries that don't have such standards and justify it under the banner of comparative advantage.

We saw what happened during the Industrial Revolution when the economic sector was given free rein. We are creating the same milieu internationally. As tariffs are removed industries can and do seek out low wage labor which is really just another name for powerless labor.

Without an international political component to keep the economic sector in check through rules and regulations (economic morality) all we are doing is restarting a race to the bottom for most people in society and repeating some rather nasty industrial history.

Every nation has a political economy. I don't want to combine ours with Mexico's which is what happens by default when we remove tariffs and leave the political out of the equation. Mexico simply doesn't have the resources to enforce our economic laws even if they wanted to. That is why if we are going to avoid the race to the bottom when it comes to political economies there has to be tariffs or international government.

We have a working example of the latter in the EU where political and economic standards must be met before admittance. (By the way, they are admitting Eastern Europe countries too soon. Wages in the EU and Eastern Europe are just too far apart They should continue modernizing Eastern Europe and getting wages up before admitting select countries.)

Two other arguments I like to take exception with since they seem to be resurrected every time we want to expand, so called, free trade.

A mystical belief of people like Carol Moseley Braun that American workers will be saved by the next wave of industrialism. This is the stuff of fairy tales. Even Krugman doesn't think that new industries grow like funguses in the night. Just because society has need of something doesn't mean it will automatically materialize.

And I'm really tired of people like NY Times editorial writer, Tom Friedman, calling people who oppose free trade as it is practiced today, Luddites. American workers have been displaced by machines for years and accepted it as progress. However, it's not progress when they are replaced by the powerless.




Posted by: Dailey on August 22, 2003 01:06 PM

You simply can't have one country that has created a moral component in economics--minimum wages, the right to associate, anti-discrimination laws, anti-child labor laws and environmental standards competing with countries that don't have such standards and justify it under the banner of comparative advantage.

We saw what happened during the Industrial Revolution when the economic sector was given free rein. We are creating the same milieu internationally. As tariffs are removed industries can and do seek out low wage labor which is really just another name for powerless labor.

Without an international political component to keep the economic sector in check through rules and regulations (economic morality) all we are doing is restarting a race to the bottom for most people in society and repeating some rather nasty industrial history.

Every nation has a political economy. I don't want to combine ours with Mexico's which is what happens by default when we remove tariffs and leave the political out of the equation. Mexico simply doesn't have the resources to enforce our economic laws even if they wanted to. That is why if we are going to avoid the race to the bottom when it comes to political economies there has to be tariffs or international government.

We have a working example of the latter in the EU where political and economic standards must be met before admittance. (By the way, they are admitting Eastern Europe countries too soon. Wages in the EU and Eastern Europe are just too far apart They should continue modernizing Eastern Europe and getting wages up before admitting select countries.)

Two other arguments I like to take exception with since they seem to be resurrected every time we want to expand, so called, free trade.

A mystical belief of people like Carol Moseley Braun that American workers will be saved by the next wave of industrialism. This is the stuff of fairy tales. Even Krugman doesn't think that new industries grow like funguses in the night. Just because society has need of something doesn't mean it will automatically materialize.

And I'm really tired of people like NY Times editorial writer, Tom Friedman, calling people who oppose free trade as it is practiced today, Luddites. American workers have been displaced by machines for years and accepted it as progress. However, it's not progress when they are replaced by the powerless.




Posted by: Dailey on August 22, 2003 01:06 PM

Job availability and job security are terribly important matters to most of us. It is all well and good to know economic theory and wish for globalization and trade with no limits, but what of my job or your job? Economists can be flip about globalization, but I will do all I can to resist competion from abroad unless I feel otherwise protected.

Now, I am completely protected but there are many who are not so fortunate and I worry for them. Why are we giving work visas to foreign software specialists at this time? If we can battle for agriculture subsidies, why not battle for other trade protections?

Yes, I know the theory and agree with it. But, theory alone will not protect me and my family.

Posted by: anne on August 22, 2003 01:06 PM

You simply can't have one country that has created a moral component in economics--minimum wages, the right to associate, anti-discrimination laws, anti-child labor laws and environmental standards competing with countries that don't have such standards and justify it under the banner of comparative advantage.

We saw what happened during the Industrial Revolution when the economic sector was given free rein. We are creating the same milieu internationally. As tariffs are removed industries can and do seek out low wage labor which is really just another name for powerless labor.

Without an international political component to keep the economic sector in check through rules and regulations (economic morality) all we are doing is restarting a race to the bottom for most people in society and repeating some rather nasty industrial history.

Every nation has a political economy. I don't want to combine ours with Mexico's which is what happens by default when we remove tariffs and leave the political out of the equation. Mexico simply doesn't have the resources to enforce our economic laws even if they wanted to. That is why if we are going to avoid the race to the bottom when it comes to political economies there has to be tariffs or international government.

We have a working example of the latter in the EU where political and economic standards must be met before admittance. (By the way, they are admitting Eastern Europe countries too soon. Wages in the EU and Eastern Europe are just too far apart They should continue modernizing Eastern Europe and getting wages up before admitting select countries.)

Two other arguments I like to take exception with since they seem to be resurrected every time we want to expand, so called, free trade.

A mystical belief of people like Carol Moseley Braun that American workers will be saved by the next wave of industrialism. This is the stuff of fairy tales. Even Krugman doesn't think that new industries grow like funguses in the night. Just because society has need of something doesn't mean it will automatically materialize.

And I'm really tired of people like NY Times editorial writer, Tom Friedman, calling people who oppose free trade as it is practiced today, Luddites. American workers have been displaced by machines for years and accepted it as progress. However, it's not progress when they are replaced by the powerless.




Posted by: Dailey on August 22, 2003 01:06 PM

Sorry about the repeated posts. Everytime I'd try to post a message came up to try again that the web site wasn't responding.

Posted by: Dailey on August 22, 2003 01:12 PM

Dailey (repeatedly) nails what is wrong with "free trade." WE have minimum wages, worker safety regulations, etc. "They" don't. And, suspiciously, the very same crowd that in the US is pushing to get rid of those protections here is pushing "free trade."

Science is supposed to measure what happens. It is supposed to be DEscriptive not PREscriptive. Free trade economists are telling us what would happen "if only" people would act a certain way. But it looks to most people like a downward spiral - we lose jobs to Mexico and get poorer. Mexico loses jobs to Thailand and gets poorer. Thailand loses jobs to China and gets poorer. China might be getting richer but that isn't going to benefit ANY of us in our lifetimes. And if China isn't playing the game by the same rules as all the free traders, it's not only never going to benefit the rest of us, we're going to be REALLY sorry for handing the world's prosperity to a communist dictatorship.

Here's the deal -- we can see with our own eyes that people are losing health insurance and pensions, and working longer hours, and getting deeper into debt while a very few rich people get vastly richer. It LOOKS like part of this is because jobs are being sent offshore. But it might be that the benefits of that free trade aren't being shared, and wealth is being concentrated. Anyway, free trade is going to be blamed.

I'm NOT advocating protectionism. I think most people who currently oppose free trade want to see minimum wages, workers rights and unions for our trading partners so they BENEFIT and can afford to buy things from us, instead of the obvious downward spiral to the bottom that is OBVIOUSLY occurring now.

Posted by: Dave Johnson on August 22, 2003 02:05 PM

Dailey: Yeah, you can't believe that "Web site not responding message". If that happens to me, I check in another window to see if the comment got posted.

Posted by: Walt Pohl on August 22, 2003 02:23 PM

"I'm NOT advocating protectionism. I think most people who currently oppose free trade want to see minimum wages, workers rights and unions for our trading partners so they BENEFIT and can afford to buy things from us, instead of the obvious downward spiral to the bottom that is OBVIOUSLY occurring now."

There's a remarkable lack of evidence for something that's so obvious.

Posted by: Jason McCullough on August 22, 2003 06:12 PM

Kind of funny actually. The historically libertarian hi-tech-ers that have been prattling on about the benefits of the "free market" are now getting bitten by it. Sort of like the ultimate hypocrisy--the tenured econ professor who tells the rest of us how great it is that we are subjected to the "discipline of the wage auction."

For me it is hard to see how artificially pegging your currency low, dumping your sludge in a river and murdering labor organizers is a valid "comparative advantage". And as long as our economic system refuses to help people whose lives are disarrayed by "free trade" I'll vote against it every chance I get. After all, if the rewards of "economic efficiency" only accrue to the to top 5%, then remind me again why I should care about "efficiency"?
-marku

Posted by: MarkuMyDog on August 22, 2003 08:25 PM

I'll try to post only once this time.

I don't believe that in pursuing our own self interest that the invisible hand of economics guides the individual to do what is ultimately in the interest of society. Individual interest and social interest often conflict and there is no logical necessity that reconciles them--at least not in the real world. What reconciles them are laws and regulations of the state.

Economics as an autonomous science presents us with facts and correlation but not values. Once I start opining on what should or shouldn't be done I'm in the realm of art not science. I can bolster my recommendations with facts and logic but a value judgment isn't science. We're not asking what are the facts but how we should act. There is necessity in science, not values. There is no invisible hand that is a substitute for human judgment when it comes to serving the needs of society.

I'm for intervening in the economic sphere with laws and regulations when individual interests are being served as the expense of social interests.

All of which brings me to my argument about free trade and the need for international governments. How can the interests of society be protected against the interests of international corporations without the regulating hand of the political sphere?

Posted by: Dailey on August 22, 2003 10:47 PM

Say's Law implies that supplying is also demanding; that supply creates its own demand. But how am I to buy if I have no power to insist that the value of my labor be compensated. The investor class will end up with the ability to create demand, while the working class will end up in poverty. That seem to be what is happening today more and more workers are sinking toward the bottom while the privileged few get richer.

It also seems to me that what we have today is exactly what Say said couldn't happen an oversupply of goods with weak demand. And I don't see any equilibrium point in sight, at least not in my lifetime. When it does come will we have created an aristocracy of wealth at everyone else's expense.

I suppose we could have a radical redistribution of wealth through the tax laws to allow everyone to participate more fully in society. But that's a social solution not an economic one and its not what say was predicting.

Posted by: Dailey on August 22, 2003 11:47 PM

All competition is unfair. And still: competition can and does bring us lots of good stuff.
It's not the "unfair" competition that brings problems (in rich and poor countries): it's the speed of change and the lack of policies aimed to make transitions acceptable.

Posted by: Frans Groenendijk on August 24, 2003 03:45 PM
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