August 26, 2003

1100 Words on Service-Sector Outsourcing

We economists don't spend enough time pushing the political arguments for freeing-up trade and accelerating the development of poorer countries. We feel that the economic case alone is so strong that that should be sufficient.

FT.com / Comment & analysis: ...On the political side, does anybody really want Indians and Chinese in 50 years' time - the 3bn educated citizens of what will then be industrialised economies and proud countries - to remember that western Europe and North America took whatever steps they could to slow Indian and Chinese economic growth in the first half of the 21st century? Democratic politics will produce strong pressures to compensate and assist those who work in industries that will be battered by foreign competition. But, please, let the compensation and assistance take the form of social insurance rather than trade protection.

Ivory, apes and peacocks: that is what the international trading fleet of Solomon, son of David, imported 3,000 years ago. But did Ye-Shua, herding sheep in the hills of Samaria, or Ish-Baal, farming in the shadow of the hill of Megiddo, care? No. Until after the industrial revolution, international trade barely touched the lives of farmers and workers. Before 1500 it was just too costly to ship anything other than slaves, silks, spices, perfumes and other precious items. Even the commercial revolution added only a few things to the list of traded goods: guns, tobacco, rum, high-quality cloth, fine porcelain, coffee and a few others.

International trade became a big deal for ordinary people only with the arrival of the iron-hulled, steam-powered, ocean-going cargo ship. Cheap transport made it profitable to trade the staple manufactured and agricultural commodities of the industrial age: US wheat, Australian wool, Argentine beef, British machines, German steel, French luxuries, Swiss precision instruments, Italian pottery, Brazilian coffee, Malaysian rubber, African palm oil and so on.

By 1900, people everywhere knew that if they grew crops or worked in factories they were competing with workers two continents away - and if the dynamics of comparative advantage shifted, they could lose their jobs, their incomes and their livelihoods.

So, a century ago, they organised. They sought protection against that age's globalisation. American steel-masters and steelworkers sought (and got) protection against British producers, boosting steelworkers' standard of living and helping to enlarge the fortunes of J.P. Morgan and steel magnates Andrew Carnegie and Elbert Gary. But protection came at a price: it was more expensive to construct America's railroads, so America's farmers and ranchers paid higher shipping costs and some of what would have been their incomes went instead to subsidise rich New Yorkers' tickets to Carnegie Hall.

The Junker military-service nobility of Germany was horrified when Hamburgers made their bread from American wheat. They allied with German steelmasters seeking protection against British competition in the "marriage of iron and rye". Higher grain prices and lower living standards for Germany's urban workers meant more wealth and political power for the army-officer class, and that class's added weight played a role in driving Germany down its disastrous 20th-century political course.

Now we have another turn of the wheel. The internet, the submarine fibre-optic cable and the communications satellite are cast in the role played last time by the iron-hulled, ocean-going steamship. Now it is not just atoms but bits that are traded across oceans in rapidly increasing volumes. Customer support, medical analysis, technical work, computer programming, form-filling and claims-processing - all these jobs can now move around the globe in the same way that farming and factory jobs could a century ago.

This global reallocation of jobs promises to be a powerful source of world economic growth over the next two generations. But, as happened a century ago, those workers who face new competition from people a hemisphere away are not happy about it. Large-scale international trade has hit the service sector and, as a result, foreign competition is no longer merely a phenomenon that affects blue-collar workers and gives white-collar workers the opportunity to buy manufactured goods more cheaply. The political system is beginning to respond: New York City no longer dares to digitise tickets and send them to Ghana for processing; New Jersey politicians want public sector contracts limited to US-based processing centres and in return the government of India wants to add a provision securing market access for service sector professionals to the Doha round of world trade talks.

The current wave of concern about service-sector outsourcing is overblown. It is more a reaction to macroeconomic distress than to a shift in the world distribution of employment; if the post-industrial core were closer to full employment, few would care. There are still seven US jobs in software and systems design for every four such jobs that existed when Netscape launched its initial public offering in 1995.

Trade, after all, does not destroy jobs but shifts them elsewhere. If central banks succeed in keeping the advanced post-industrial economies near full employment, for every job that moves out to an Indian call centre another job moves in. If Indians spend the harder currencies they earn on developed countries' exports, it will be a job making machine tools or new kinds of hybrid seeds, or managing the construction of an Indian factory. If Indians use the harder currencies they earn to invest in the developed world, it will be a job in construction. There are more and bigger winners from the demand created by a job's shift to an Indian call centre than there are losers.

But there are losers and they are articulate and potentially angry. For the moment, they are relatively few in number, and the tide of their concern will ebb as the business cycle turns. But it will come back, for there will be more and more losers over the next two generations. The next wave of concern over service sector outsourcing will be bigger, and the one after that bigger still.

Nearly a century ago, the political systems of Germany, France, Italy, America and even Britain accommodated protectionist pressures as the domain of commodities traded across oceans grew. Such accommodation was almost certainly a mistake then and would almost certainly be a mistake now.

On the economic side, more people would suffer from a backlash against globalisation than from an increase in free trade and foreign competition. Such a backlash would also slow the economic growth of developing nations such as India and China.

On the political side, does anybody really want Indians and Chinese in 50 years' time - the 3bn educated citizens of what will then be industrialised economies and proud countries - to remember that western Europe and North America took whatever steps they could to slow Indian and Chinese economic growth in the first half of the 21st century? Democratic politics will produce strong pressures to compensate and assist those who work in industries that will be battered by foreign competition. But, please, let the compensation and assistance take the form of social insurance rather than trade protection.

Posted by DeLong at August 26, 2003 09:18 PM | TrackBack

Comments

Extremely well chosen 1100 words! The US do manintain a lead in producing texts like this one. Is that why the WSJ is so much bigger than Financial Times?

Posted by: Mats on August 27, 2003 12:38 AM

This is absurd. If the Indians and Chinese of 50 years hence will base their policies of that time on whether or not we tried to hamper their (assumed) eventual ascendency then it follows that they would be likely to also base their policies on lingering resentments of Western Imperialism.

Although the vindictive asshole strategy can often lead to some successes I doubt its continued usage would be likely to keep a nation great, or lead to greatness in the long term, thus if we foresee a time that these proud nations would be pursuing that strategy we are in fact foreseeing a time that these proud nations will be decreasing in power and ability.

There are not enough hours in the day for me to sit and poke holes in the argument presented in this article. Although one should always think ahead in planning, not pursuing a presently advantageous plan of action because to do so might make people not even born yet angry is not thinking ahead, it is not thinking in any form whatsoever.
The reasoning becomes even more ludicrous when one remembers that the argument is against hampering these future angry citizens of other lands in the acquisition of economic might with which they can punish anyone that has bothered to hamper their acquisition of economic might.

In closing I will just say that if you don't give me a nuclear weapon right now I will remember how you tried to stop me getting a nuclear weapon, and when I have my nuclear weapon I will retaliate. So you would do well to keep on my good side.

Posted by: bryan on August 27, 2003 02:02 AM

Bryan,

I'm not a specialist in that field, but your last para sounds pretty darn like a summary of Sino-Soviet relations between 1955 and 1975.

Ian Whitchurch

Posted by: Ian Whitchurch on August 27, 2003 02:41 AM

Try this argument then: bright, capable people in China and India can do the sorts of jobs I've done in the last eight years, and they can do those jobs more cheaply. These are people that are poor in ways that are unimaginable to those of us in the West; and these jobs are certainly much better than the other sorts of jobs (sweatshops) that we've been exporting overseas. I've benefited in innumerable ways merely by having been born in the USA and whatever advantage now I've lost as a result of jobs moving to India or China is but a drop in the bucket of advantages I still enjoy in my life relative to the average Indian or Chinese.

My arguments for supporting trade have always been based upon social justice principles and I support trade no less when it's my job that's "endangered" than when it was a steelworker's. Another liberal I know of took the opposing position on the basis of "taking care of our own". I don't think that's a liberal principle.

Don't support the creation of new, good, high-paying jobs in the world's poorest countries because "they'll be mad at us later if we don't". Support it because it's *right*.

Posted by: Keith M Ellis on August 27, 2003 02:50 AM

Try this argument then: bright, capable people in China and India can do the sorts of jobs I've done in the last eight years, and they can do those jobs more cheaply. These are people that are poor in ways that are unimaginable to those of us in the West; and these jobs are certainly much better than the other sorts of jobs (sweatshops) that we've been exporting overseas. I've benefited in innumerable ways merely by having been born in the USA and whatever advantage now I've lost as a result of jobs moving to India or China is but a drop in the bucket of advantages I still enjoy in my life relative to the average Indian or Chinese.

My arguments for supporting trade have always been based upon social justice principles and I support trade no less when it's my job that's "endangered" than when it was a steelworker's. Another liberal I know of took the opposing position on the basis of "taking care of our own". I don't think that's a liberal principle.

Don't support the creation of new, good, high-paying jobs in the world's poorest countries because "they'll be mad at us later if we don't". Support it because it's *right*.

Posted by: Keith M Ellis on August 27, 2003 02:51 AM

By the way, I heard an interestingly intellectually incoherent quote this afternoon on NPR. It was something to the effect of "wait till the CEOs start finding their jobs outsourced to India". And I thought in response: "Hmm. So if the CEOs become protectionist in order to stop themselves from losing their grossly overpaid jobs, that would be a *good* thing from the liberal perspective?"

Of course it's not really possible, but isn't it a lovely thought to imagine "outsourcing" CEO jobs to talented-but-reasonably-paid Indians?

Posted by: Keith M Ellis on August 27, 2003 03:03 AM

Of course it's not really possible, but isn't it a lovely thought to imagine "outsourcing" CEO jobs to talented-but-reasonably-paid Indians?

Why not? Why is it not possibal? Are there not successful Asian companies who's CEOs make significantly less money? Companies are already incorporating in Bermuda for the tax advantages? Why not offer these Asian CEOs a split between what they make to run their companies and what the over paid American CEOs get? I'm sure this would be agreeable to the stockholders.

But there is another point to be made. My experience with the outsourcing of many jobs like help desk functions is that the capable Indians are not all that capable. In many situations workers at large corporations are simply not getting computers fixed because interfacing with a help desk a half a world away is a waste of their time. Many people opt to order a new PC to forgo getting minor repairs done on their current machine. This is progress?

The reason many jobs are getting outsourced is because the Indian Government is demanding that a percentage of their citizens get hired or else they will not buy GE's power turbines this is a form of protectionism itself. So the Indian Government is using their leverage as a consumer to force companies to make business decisions based not on the utility and savings but on the Indian Government flexing their economic muscle. If they have this ability now what is going to happen in 50 years? The US will be slaves to markets that are three times the size of ours. Not only that but we are essentially selling American expertise at below market prices.

What is happening now is not global competition it's American companies roaming the planet in search of cheaper and cheaper labor pools like the Native Americans followed the buffalo herds. True global competition would be the India economy producing their own power turbines, computer operating systems, and automobiles and selling them on the world market. That is not what is happening, and when it does happen, accelerated by the American companies teaching them how to do it at below market prices then the CEO's won’t be so keen on the "miracle" of globalization, that is true globalization. Then you will see American corporations singing a different tune. American corporations do not desire competition. They want to buy in open markets and sell in closed markets, that is what they seek to do.

Until then the current trend of outsourcing to India which is being called globalization is really nothing more then using India as a colony. The corporations will leave the nano second they find a cheaper source of educated workers. So please spare me the idea about how its the "right" thing to do.

Posted by: Rick DeMent on August 27, 2003 04:18 AM

I am all for free trade, but I am not convinced that the free trade agreements without the social insurance are worth the costs.

Posted by: theCoach on August 27, 2003 04:30 AM

One glaring omission is the effect of China's artificially low exchange rate, making relative salaries cheaper and Chinese-made goods far more
competitive than they would be if their currency were allowed to float freely.

Normally, there are many benefits that would encourage China to properly value their currency. Is China so large and so inwardly focussed that it can ignore them? What's in it for China if they were to reset the exchange rate?

Posted by: Eric H. on August 27, 2003 05:44 AM

Where to start...? Bryant's argument, if pushed a little bit, is that once my forebearers have done something to irritate the citizens of another land, there is no sense in my trying to do better, to behave more fairly. In no way could my behavior overcome earlier behavior, so why try? Stupid Marshall Plan! Turning the G7 into the G8? Rubbish!

If the Indian government is demanding jobs in return for contracts, as Rick D notes, is it possible that represents a second-best approach to technology transfer, trade and development? If India is up against its US textile quota, for instance, then it responds with its own non-tariff trade barrier, demanding export of labor services in return for imports of turbines.

Insisting that India manufacturing its own turbines and cars is evidence of free trade ignores a good bit of trade theory. If India's comparative advantage is in exporting math skills and cheap labor services, then free trade would allow India to do just that.

Posted by: K Harris on August 27, 2003 06:36 AM

Good luck getting any form of social insurance out of the U.S. Republican Party. No wonder they are turning to protectionism.

As for moving software related jobs to India, I'm all for it. Each laid-off console potato is eventually one less annoying Internet libertarian. Maybe they'll start to see the value of a social contract after all.

Posted by: Rich Puchalsky on August 27, 2003 06:43 AM

"What is happening now is not global competition it's American companies roaming the planet in search of cheaper and cheaper labor pools like the Native Americans followed the buffalo herds. True global competition would be the India economy producing their own power turbines, computer operating systems, and automobiles and selling them on the world market. That is not what is happening, and when it does happen, accelerated by the American companies teaching them how to do it at below market prices then the CEO's won’t be so keen on the "miracle" of globalization, that is true globalization. Then you will see American corporations singing a different tune. American corporations do not desire competition. They want to buy in open markets and sell in closed markets, that is what they seek to do."

This has been an issue that has been on my mind quite a bit lately. Of course, I don't claim to be an expert on international trade theory (or economics in general) just a lowly undergrad who has taken a bunch of econ courses.

However, the big issue I see, that is not addressed in this article or in trade theory (as I remember it) is this:

What are the effects on the question of who benefits from trade when the producers in both countries are primarily owned in one of the countries? It's all well and good to say that India benefits from job growth, but what about the profits and capital buying potential that those factories or service call centers generate? If they are multinationals or U.S. corporations, are those benefits not accruing to *them* instead of India?

Why is it that at the time of realizing the comparative advantage of the third-world in manufacturing goods was the precise time when U.S. corporations and their owners began demanding free investment? Could it be so that *they* and not those countries could accrue the profits and capital ownership? Could this be why they pushed so hard for various institutions to cram free investment policies down the throat of every third world nation they had debt leverage over?

I'm not saying this is necessarily so, but the timing of these developments is striking, and I've yet to see a good answer as to what the effects of foreign direct investment are on the winners and losers columns.

Posted by: Lorenzo on August 27, 2003 07:10 AM

Rich,

The social insurance point is the one folks should really be giving Brad grief over. Not because he is insincere. Rather because, this economists' standard answer to the dislocations caused by liberalization is so rarely (ok, never) undertaken in the real world. Economists readily note that the "gains from trade" are enough to raise the general level of welfare and compensate those who soffer dislocations from more liberal trade policies. What they sometimes neglect to mention is that policy makers are rarely willing to levy the tax on winners required to compensate losers. The idea of social insurance to compensate losers is mostly a textbook notion, at least in the US.

Posted by: K Harris on August 27, 2003 07:15 AM

Ok, as a (former) software programmer and a (former) resident of India and a current US Citizen, I have the right to speak with some authority on this.

"These are people that are poor in ways that are unimaginable to those of us in the West;"

Presumably, I am one of 'these people', or at least, I was. But the condescension that we were 'poor in unimaginable ways' is appalling. Middle class life in India in the 70's was nothing to be ashamed of. we had plentiful food, good friends, relatively cheap housing (the rent to market value ratio in India is ridiculously low!) low crime and superb education.

Next we have "the capable Indians are not all that capable"

Uh.Huh. Just how capable do you have to be to answer a call center, for, say, Macy's? The transfer of 'call center' jobs to India was always about cheaper not necessarily better labor. The transfer of Programming jobs (by the likes of IBM, TI and Oracle) is a different matter altogether. Having worked with American (British, Russian...) programmers for many years, I can unhesitatingsly say that the Indians who were in programming roles were usually better then their 'native' counterparts. But that also has something to do with the self selection of the Indians such as myself who did these jobs - we were trained engineers while the many americans I worked with had 'drifted' into programming from other disciplines.

Sort of like matching a key selection of people from Stanford, Berkeley and MIT against a group of people selected at random. Many companies have been seduced by this 'brain power' and have moved their operations to India willy-nilly and are finding out that the average Indian programmer is about the same as an average American programmer, only cheaper. Other things being equal, lower cost will win every time.

So for those who are lamenting the 'loss' of 'good-paying jobs' to India, ask yourself: would you buy 'organic' vegetables if they were three times as expensive and tasted just the same?

Posted by: Suresh Krishnamoorthy on August 27, 2003 07:22 AM

I'm not even sure that it's a textbook notion. Are economists in general even half as assertive of social insurance as they are of free trade? One quarter? One tenth?

Posted by: Barry on August 27, 2003 07:42 AM

Eric H. - "Is China so large and so inwardly focussed that it can ignore them? What's in it for China if they were to reset the exchange rate?"

Just as an increased exchange rate is an advantage for consumers in the US, the Chinese consumer would benefit from a rise in their currency. It's very difficult to afford much of anything imported or which has imported components when you only make a handful of dollars a day. Sure there are some jobs which would not be transferred to China if they allowed their currency to rise, but it would free up workers to work for the benefit of other Chinese.

But since when are communists concerned that production isn't leading to the satisfaction of consumers? Communism is all about making workers produce things whether they want those things or not. So I am not surprised that the Chinese government believes that turning their citizens into slave laborers is the way to achieve prosperity.

Posted by: snsterling on August 27, 2003 07:42 AM

Coach, with so many convinced that "its their money" I'm not sure the U.S. is ready for the kinds of social insurance that could potentially be necessary. The various reactions and denials to the increased wealth disparity over the last half of this century aren't positive signs.

Posted by: Stan on August 27, 2003 07:52 AM

Good comments all. What I have yet to see (and what many others have been clamoring for) is some hard data about this outsourcing trend, which until now has been anecdotal in nature of its reporting. The main questions are- is it really important in any sense as a part of our economy, and -is it likely to become one in the future if not already.

If so, and the trend will be seen to continue and widen to become a major factor causing increased unemployment and decreased quality of employment in the US, then what shall we do? I can forsee the US becoming a lot more like a latin american style third world economy, with a small fraction of educated elites gaining first world salaries, with the middle and lower classes gaining virtual subsistence wages (or even less so given the exorbitant cost of housing).

Posted by: non economist on August 27, 2003 09:19 AM

"But the condescension that we were 'poor in unimaginable ways' is appalling."

Oh, please. It is a statement of fact, not condescension. Anyway, I was not assuming that the benefits of an increase in skilled, relatively high-paying jobs would accrue only to the Indian "middle-class".

I am completely baffled by the comment above that sees trade in services as less "real" than trade in goods. Considering that our wealthy economy is most powerful in services and that we export quite a few of them, I'm inclined to assume that doing so is as much a benefit to China and India, as well. And, after all, in the case of India with nearly a billion people and proportionately relatively few natural resources, exporting relatively highly skilled, high-value services is obviously going to be their greatest asset.

CEO services cannot be similarly imported because a very big part--perhaps the largest part--of the job is social and is intimately connected to the social context in which the corporation operates. That social context could and probably will shift East, but many of the same forces that are leading to grossly inflated CEO salaries would exist there, as well. This is because American corporations have governance made up from the same pool of people. That's the problem that needs to be addressed: the market for CEO labor is badly broken because of this relationship.

Posted by: Keith M Ellis on August 27, 2003 09:21 AM

Kieth,

So move the social context, they do it for tax reasons, why not go all the way?

Posted by: Rick DeMent on August 27, 2003 12:03 PM

"Where to start...? Bryant's argument, if pushed a little bit, is that once my forebearers have done something to irritate the citizens of another land, there is no sense in my trying to do better, to behave more fairly. In no way could my behavior overcome earlier behavior, so why try? Stupid Marshall Plan! Turning the G7 into the G8? Rubbish!"

darn that Bryant, never liked him anyway, anyway my argument is somewhat different.

I don't argue that one shouldn't behave more fairly, or shouldn't 'do the right thing', although I'm not sure that any government attempting to curtail the power and well-being of its citizens in deference to the power and well-being of another government's citizens is not being in some way absolutely bonkers (of course I know the government in the present instance does these things because they believe in them, and would anyway argue that they are to the benefit of their citizenry), but you know, the issue that was taken was not with any stated need to behave fairly it was with a statement, presented seriously as though deeply thought about, that people fifty years from now will be holding a grudge because of trade regulations undertaken now, if those trade regulations are not (take your pick)

1. fair and equitable
2. to the advantage of the as yet unborn's parents to be
3. to the advantage of some corporation who will sponsor think tanks to write position papers detailing said regulations as fair and equitable.

And the citizens of this future will be able to get even with the government of the country that is unfair to them now, because in the future their government although weak now, will be powerful. Why is their government weak now, because it does not have fair trade regulations offered by the government which should be ...urk, I'm getting dizzy just thinking about the twists.

Anyway it made me angry, and with I feel good reason; argue that I should do something because it is right, fine, argue that I should do something because it will get me laid, even better, but argue that I should do something because someone not born yet will be mad if I don't and they will get even with me using the increased means at their disposal once I do the thing I am being urged to do, Uhnng?

Posted by: bryan on August 27, 2003 01:03 PM

"But since when are communists concerned that production isn't leading to the satisfaction of consumers? Communism is all about making workers produce things whether they want those things or not."

I think the main concern of the communists are the unemployed in North Eastern China. A drastic change in the exchange rate would not help the transition of state-owned enterprises into modern industries, or get the laid-off workers back into employment. Actually service sector jobs are also being exported to China. But this isn't a one-way movement. I heard that many German call centers are located in Atlanta because many German companies cannot operate 24hrs/day.

What the fixed exchange rate was able to do in China was stablize the currency problems in South East Asia in the late 1990's. It would have been much worse to have China experience the kind of currency collapse that occured in Thailand, Malaysia, DPRK than to put up with its current fixed exchange rate. Eventually, the pressure for China to adjust its exchange rate will become too strong to resist, but you have a gradualist regime now in charge and they'll probably adopt a gradualist policy toward the exchange rate when it happens.

As for a social contract (I'm rereading Karl Polanyi's 'Great Transformation'), it seems we manage enough of a social contract for society to exist in times of change. In a liberal society I don't think you can stop these changes. So just as the export of manufacturing jobs has hurt a part of our society so will the export of service jobs. Although economists will say that overall, the free trade in service jobs are beneficial, everyone has questions about the distributional impacts. No one knows for sure how beneficial or costly the outcomes will be for you, you and you. I'll just go with it. I mean, if we made all companies that move jobs overseas pay into a big government piggybank to redistribute the benefits, it'll probably get sucked into wars overseas or tax breaks for the already wealthy. Afterall, if the people losing their jobs had the political muscle to get the redistributional benefits, they'd get subsidies in the first place instead of losing their jobs. Maybe the export of programing jobs will put pressure on increasing our investment into childrens' math skills?

Posted by: teddy on August 27, 2003 03:09 PM

Surprised to hear Teddy's comment that "many German call centers are located in Atlanta because many German companies cannot operate 24hrs/day." and most German insomniacs speak English ? :) .

Posted by: George Colpitts on August 27, 2003 06:29 PM

I think Krugman put it best: there would not be as much of a backlash against free trade and outsourcing if the economy were creating new jobs to replace outsourced ones. After all, free trade policies were in full effect throughout the late '90's, a time of unparalleled prosperity.

Posted by: Bradley Reed on August 27, 2003 06:42 PM

Teddy, isn't there some functioning mechanism in China which increases domestic demand for labor? (monetary policy, fiscal policy, or perhaps government decree is also an option there???)

I agree with the US gov't stance that the current situation of China eager to trade on crappy terms favors the US and hurts China, and China stands to benefit from letting their currency rise. However, when the exchange rate is mispriced, bad decisions get made on both sides. It would be less messy for the US in the future if the situation stayed a bit closer to equilibrium.

Posted by: snsterling on August 27, 2003 07:30 PM

"Surprised to hear Teddy's comment that "many German call centers are located in Atlanta because many German companies cannot operate 24hrs/day." and most German insomniacs speak English ? :) ."

The reason for Atlanta is because many German speakers live there. I believe many came when their families moved here along with the German auto manufacturers. Well, enough to staff call centers anyway.


"Teddy, isn't there some functioning mechanism in China which increases domestic demand for labor? (monetary policy, fiscal policy, or perhaps government decree is also an option there???) "

In a period of transition in such a large economy, even the best policies will not close the gap quickly enough. You're still going to have displaced workers. Part of the Chinese remedy is geared toward getting those workers into manufacturing that serves international markets. Fixed exchange rates help. But this is also a two part problem. On the one hand you have a weak yuan, on the other you have a strong Dollar. The U.S. could devaluate the dollar and it'd lessen imports, raise exports, and as a bonus, it would help out other countries that hold debt in dollars. But we wouldn't do anything that stupid, would we? We knows what the true equilibrium is anyway? By purchasing parity, I could get a haircut for about 1/8 of what it costs in the U.S. so to some, it seems the exchange rate is about right.

Posted by: teddy on August 27, 2003 08:14 PM


At the bottom of this article is a chart of labor rates, labor productivity rates, and unit labor costs of many countries. According to the chart a haircut should cost about 1/50 the US level if you converted your dollars (that the PPP is 1:8 while the wages are only 1:50 might be significant) . The relative unit labor costs suggest a 30% rise of the Yuan (which is the number I always hear analysts give), but how long is labor productivity going to remain 35x lower than the US level if modern factories are being built there?

http://www.rieti.go.jp/en/china/02083001.html

This article below I just used to confirm the wage level in the above article is correct. Informative article though.

http://news.bbc.co.uk/1/hi/business/2415241.stm

Posted by: snsterling on August 27, 2003 09:36 PM

It would be to the benefit of us all and the detriment to hair stylists everywhere if haircuts were tradeable. In China, you can usually expect a free massage with your haircut if you pay the 1/8 price. At 1/50, no such perks, but hey, it's 1/50th the cost of the haircut you could get at supercuts (if you don't mind getting trimmed by a man on the sidewalk with a stool, a light strung across the sidewalk, and a box of styling paraphernalia).

So at least these types of service jobs aren't trade-able...

Posted by: teddy on August 28, 2003 02:02 AM

"So at least these types of service jobs aren't trade-able... "

Last night, as I pondered this issue, I recalled something a professor once mentioned to me.

http://neasia.nikkeibp.com/nea/200212/alert_219581.html
http://www.lauralee.com/news/internethandshake.htm

If they can do this, internet haircuts and a massage can not be far behind :-)

Don't forget the automatic language translator over the link, you'll need that too. But if that isn't invented in time I guess you can just show up with an old photo of one of your haircuts, or a photo of some celebrity you wish to look like. Or pass on the haircut and take the massage only.

Posted by: snsterling on August 28, 2003 04:26 AM

Casting aside the question of the right and wrong of limiting
outsourcing I think it's ironic that we are even contemplating
"nation building" Iraq. Why? Because Iraqis are fairly well
educated in a modern secular environment. One of the most
likely consequences of a successful nation building of Iraq
is that US high tech jobs would go to Iraq to be outsourced.
Doesn't that say how nice Americans are? We are willing to
build a country up so that it can take away our high paying
jobs from us. Heh.

Posted by: Dan the Man on August 28, 2003 11:12 AM

If labor has to compete with people that are forbidden the right to association it will weaken labor's right of association everywhere. More and more labor will have the right to association in name only, it will have little substance. Hence you have a spillover cost to labor rights in our nation.

For blue collar jobs it means employers can dictate terms. It's not negotiations but an ultimatum when employers can say, "Take our offer or we'll move to China." They don't have any worries about the Chinese employees forming unions--or at least not ones that aren't controlled by the state. After a while, you'll have a right that sounds good but means little.

Employers will say, and rightly so, that they are forced to do this if they are to compete in a global economy. However, they will soon find that the initial increase in their profit margins gained by lowering the cost of labor will once again be squeezed by even cheaper labor--which is happening in Mexico today as corporations move from there to China.

Cut throat competition will lead to more and more consolidation. At this point it will be easy for industries to come to a tacit understanding about prices. This will make the job of negotiating labor contracts easier for unions--that is if labor is allowed to associate throughout the global economy.

But lets return to the national front. I've already explained how blue collar unions are being squeezed. Now let's look at domestic municipal worker and white collar workers.

Municipal jobs, which are heavily unionized, will soon find their ability to negotiate weakened as the poor get poorer and the rich richer. Those falling out of the middle class will refuse to pay more taxes to support wages that are not in line with their decreasing wages. The rich along with corporations will be sending money to lobbyist and the campaign coffers of politicians to keep the tax man away from their door. Union municipal workers will soon find they are being squeezed from the bottom and top.

White collar workers in the private sector of our economy are already finding their jobs increasingly being outsourced. Free traders will argue that they will be replaced by bigger and better jobs. Just what jobs are those, the ones we over invested in before our bubble economy popped.

Hence the race to the bottom. We need international governments, that can make and enforce international economic laws and regulations to help insure that workers aren't increasingly at the mercy of international corporations and cut throat global markets. Competition that might be fierce but is hardly fair.

Posted by: Dailey on August 30, 2003 03:52 AM

What is free trade as practiced today is doing to the social structures of countries?

Political sociologists when studying the proper balance between conflict and consensus believe that certain conditions are necessary to maintain democracy. It's generally though that Unions strengthen democracy because it gives workers an economic and political voice--a stake in the system.

Political sociologists also generally believed that a condition for democracy is a strong middle class. Without it you get a condition where a proper balance of conflict and consensus can't be maintained--democracy tips toward extremism.

Free trade has been weakening unions and widening the gap between the haves and have not's. It's leading to extremism.

Free trade without standards is bad for democracy. Which is the ultimate social spillover cost of free trade today.

And let me reiterate my position: Trade has led the way in internationalism, it's time the political component caught up to insure that free trade works for the benefit of society.



Posted by: Dailey on August 30, 2003 03:58 AM

What is free trade as practiced today is doing to the social structures of countries?

Political sociologists when studying the proper balance between conflict and consensus believe that certain conditions are necessary to maintain democracy. It's generally though that Unions strengthen democracy because it gives workers an economic and political voice--a stake in the system.

Political sociologists also generally believed that a condition for democracy is a strong middle class. Without it you get a condition where a proper balance of conflict and consensus can't be maintained--democracy tips toward extremism.

Free trade has been weakening unions and widening the gap between the haves and have not's. It's leading to extremism.

Free trade without standards is bad for democracy. Which is the ultimate social spillover cost of free trade today.

And let me reiterate my position: Trade has led the way in internationalism, it's time the political component caught up to insure that free trade works for the benefit of society.



Posted by: Dailey on August 30, 2003 04:01 AM

By the way, Krugman isn't right about Americans not complaining about free trade, as practiced today, if the economy were at full employment.

There were plenty of Americans complaining in the '90's that they were loosing income and benefits. That we were widening the gap between the have and have not's here in the United States. They were complaining, evidently Krugman wasn't listening.

Posted by: Dailey on August 30, 2003 04:10 AM

By the way, Krugman isn't right about Americans not complaining about free trade, as practiced today, if the economy were at full employment.

There were plenty of Americans complaining in the '90's that they were loosing income in benefits. That we were widening the gap between the have and have not's here in the United States. They were complaining, evidently Krugman wasn't listening.

Posted by: Dailey on August 30, 2003 04:12 AM

Mexican pig framers are demonstrating in the streets because they are afraid that when the NAFTA trade agreements removes the tariff on pigs that the same thing that happen to Mexican corn farmers will happen to them: they wouldn't be able to compete with products subsidized by our government.

Maybe those farmers can get a job in industry. But there is a problem. The very same industries that moved to Mexico ten years ago and supposedly offered Mexican poor a chance at a better life are now moving from Mexico to China where labor is even cheaper. What will happen is that Mexican pig farmers will be added to the ever rising number of illegal Mexican immigrants crossing our boarders and looking for work here. Which means that Americans at the bottom of the wage scale here will find life that much harder.

Which leads me to the "ought implies can" of ethics? One can't do the right thing ethically if it isn't within ones power. Overburden our social system and what we can do will become less and less.

Has anyone noticed how the poor in Latin America are turning against free trade as it is practiced today. The recent election of Lula in Brazil brings to mind a government that ran on a platform that was less than enthusiastic about the benefits of free trade to the poor of Brazil.

My point here isn't that we really don't have a system of free trade but that we need international standards to make free trade work for everyone. In his attempt at social psychology, Dr. DeLong believes that in fifty years three billion educated citizens of an industrialized India and China will resent Europe and the United States if they slow down free trade now. My guess is that it won't even be a consideration for most--they will be too busy hanging on to their own status or keeping workers from forming unions.

Maybe by slowing free trade down now and getting it right societies will be better off in the future.

If you trade within the EU, you are not subject to national laws but EU laws. For instance EU laws that forbid discrimination against woman in the work place are stricter than any of its member nations. Free trade there enhances the civil rights of woman. Where are civil right enhanced by NAFTA or the WTO?

Posted by: Dailey on August 30, 2003 10:19 AM
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