November 24, 2003

The High Water Mark of Free Trade?

The high-water mark of free trade in the old days was reached in the first decade of the twentieth century: the years from 1905-1935 or so saw a steady retreat from free trade toward various forms of protection, with damaging effects on the world economy (although no one is really sure how damaging).

Now Stephen Roach fears that we have reached the high-water mark of free trade for this cycle of globalization:

Morgan Stanley: The first is a new and powerful global labor arbitrage that has led to accelerating transfer of high-wage jobs from the developed world to lower-wage workforces in the developing world. Enabled by the Internet and the maturation of vast offshore outsourcing platforms in goods and services alike, labor has become more "fungible"? than ever. In a world without pricing leverage, the unrelenting push for cost control gives a sudden urgency to this cross-border arbitrage. The outcome is a new and potentially lasting bias toward jobless recoveries in the high-wage developed world. That brings the second major force into play -- a political backlash against the trade liberalization that allows such cross-border job shifts to occur. It is the politics of this trend that disturb me the most as I peer into the future.

Insecure and scared workers tend take out their fears and frustrations on incumbent politicians. To the extent that the IT-enabled global labor arbitrage represents a new and lasting threat to job security in the developed world, this political backlash is understandable -- albeit deplorable. This backlash has now taken on a life of its own -- giving rise to what I believe is a "perfect storm" in global trade policy. This storm is an outgrowth of five major setbacks on the global trade front -- the first and most worrisome being the breakdown in the WTO ministerial negotiations last September in Cancun, Mexico. Tensions between poor developing countries and the wealthy industrial world came out in the open on such long-standing issues of agricultural subsidies, competitiveness and investment rules, and financial market transparency. This failure is on a par with the WTO fiasco in Seattle in 1999 and all but rules out successful completion of the so-called Doha Round of multilateral trade liberalization originally slated for 2004.

The second is the mounting risk of a global trade war over steel. Motivated largely by domestic political considerations, the Bush administration raised tariffs on selected steel imports by up to 30% in March 2002, drawing justification from the WTO's so-called Safeguard Agreement. The WTO has since found these measures to be illegal and has given the United States until December 15 to rescind them. The European Union has warned of the imposition of $2.2 billion in retaliatory measures should that not occur. Others, including most recently, Japan and Norway, have announced that they will follow suit.

Third, China bashing has taken an ominous turn for the worse. The Japanese fired the first rhetorical salvos in this trade battle well over a year ago, accusing China of exporting deflation and hollowing out the Japanese economy. America has taken the blame game to a new level. The Bush administration has just imposed quotas on imports of selected Chinese textile products, and legislation has been introduced in both houses of the Congress that would impose huge tariffs on all Chinese imports into the US -- 27.5% in the case of the Senate version and most likely even a higher tax in the House version. The most worrisome aspect of these legislative threats is the broad bipartisan and ideological support they enjoy in the Congress. Moreover, there is no effective political counterweight to America's onslaught of China bashing. The White House has put its protectionist cards on the table by actions on steel and Chinese textiles. Nor have trade-intensive US multinationals spoken up -- hardly surprising in this post-Enron climate of political vindictiveness.

Fourth, trans-Atlantic trade tensions between the United States and Europeseem to have taken on a life of their own. It's not just steel. It's also disputes over genetically modified beef and other food products, agricultural subsidies, and a broad array of services. Particularly contentious is America's Foreign Sales Corporation tax law (FSC), some $4-5 billion annually of export tax subsidies. The WTO has also ruled the FSC arrangements illegal, granting the EU up to $4 billion in remedial damages if these measures are not lifted by the start of 2004. Cross-border US-European trade currently amounts to some US$400 billion annually, hardly a trivial mater.  With Europe and the US both facing intensified structural pressures on the job front, one of the pillars of the world trading system is at risk of crumbling.

Fifth, a darkening outlook for multilateral trade breakthroughs is being compounded by deteriorating prospects for less ambitious bilateral and regional agreements. The just-concluded negotiations in Miami for the Free Trade Association of the Americas are a case in point.  The meetings adjourned with nothing of great substance accomplished other than an agreement to meet again next year. The same snail-like progress has been evident with respect to the US-Central America Free Trade Agreement, as well as one with Australia. In a jobless recovery that is now moving into the full force of the election cycle, the US Congress seems to have little appetite for either the large or the small milestones on the road to trade liberalization.

We all know the dark lessons of protectionism.  The odds of falling into that abyss remain low, in my view. But support at the other end of the spectrum -- accelerated trade liberalization -- is slipping rapidly...

Posted by DeLong at November 24, 2003 11:21 AM | TrackBack

Comments

"Insecure and scared workers tend take out their fears and frustrations on incumbent politicians. To the extent that the IT-enabled global labor arbitrage represents a new and lasting threat to job security in the developed world, this political backlash is understandable -- albeit deplorable"

Deplorable? Maybe. Undestandable? Yes. All these folks have families to care for and bills to pay. It's unreasonable to assume they won't take steps to protect their jobs, and further, to demand that the government take steps to protect them.

When we've outsourced away enough folks' jobs, the economy will collapse again. And not recover.

Posted by: Chuck Nolan on November 24, 2003 11:40 AM

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The basic conditions (i.e., the theoretical assumptions) under which the theory of comparative advantage describes genuine bilateral benefit from free trade are not met. As one example, labor is not freely mobile, while capital is. One condition, namely the infinite adjustability of wages, is never met. Indeed, it is over this principle that free trade is breaking down: people have to eat.

If the free trade movement fails, regenerating protectionism, it can be written down as the result of outrageous greed. Paying 50 cents an hour in Haiti, rather than the reported 10-15 cents, would have made all the difference.

Posted by: Charles on November 24, 2003 11:54 AM

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Chuck is right on here.

Free trade may be pareto optimal but the losers aren't being compensated and given our tax policy there are large segments of working people without much chance of benefiting directly from increased trade in the short term ('short-term' defined here as the time unemployment insurance covers).

Every person has to calculate their own risk of falling into such a category and respond accordingly. From many peoples point of view a vote for protectionism is simply short-term risk minimization.

Even if the absolute number of people affected by job loss (or stagnation) is small the consequenses of such loss can be big and so the risk is large as well. As a result a vote for protectionism by the majority of people in some constituencies is quite rational.

The 'solution' is to minimize the effects of job loss so that the costs and benefits of trade growth can be more equitably redistributed. But redistribution means taxes so don't hold your breath.

Posted by: Michael Carroll on November 24, 2003 11:57 AM

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I'm not sure I understand the "albeit deplorable" aside in this document.

The author is making a value judgment on the appropriateness of tarriffs as a mechanism for job protection. Tarriffs have been used for centuries. Why on earth would he expect them to go away now?

Posted by: p mac on November 24, 2003 12:27 PM

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http://www.nytimes.com/2003/11/22/opinion/22KRIS.html

Death by Dividend
BY NICHOLAS D. KRISTOF

COATEPEQUE, Guatemala

In this impoverished corner of southwestern Guatemala, lush with jungle and burbling brooks, you can just about see people dying as an indirect result of America's trade agenda.

Even now, some governments in Central America choose to let their people die rather than distribute cheap generic AIDS drugs, which would save more lives but might irritate the U.S. And now America is trying to make it more difficult for these countries to use generic drugs.

That's why I decided to write about the Free Trade Area of the Americas, or F.T.A.A., not from Miami, where the negotiations were under way this week, but from rural Guatemala. Here it's easier to appreciate the stark choice that we Americans face: Do we want to maximize profits for U.S. pharmaceutical companies, or do we want to save lives?

American trade negotiators, in both the Clinton and Bush administrations, have pushed U.S. interests in a narrow economic sense by making it difficult for poor nations to use cheap generic medicines. In front of the television cameras, the U.S. has made some concessions to public health needs, but the compassion usually vanishes in trade negotiations.

The public drafts of the F.T.A.A. clearly place the priority on patents over public health, and the word is that the (still secret) draft text of a Central American Free Trade Agreement should also embarrass us.

Posted by: anne on November 24, 2003 12:46 PM

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http://www.nytimes.com/2003/11/22/opinion/22KRIS.html

"An F.T.A.A. agreement with strong I.P. [intellectual property] provisions threatens to have a catastrophic impact on the lives of millions of people living with H.I.V./ AIDS and other diseases," warns Doctors Without Borders, the Nobel Peace Prize-winning aid group.

I know, I know. Mention "intellectual property" and eyes glaze over. But meet the people whose lives are at stake.

Juan Emiliano Sánchez, 51, may be too far gone to be saved. A farmer with a son in San Rafael, Calif., Mr. Sánchez has advanced AIDS and is so frail that he can barely walk. "I really want to fight this as long as I can," he said, his face glistening with a feverish sweat, but it looks as if that won't be long.

María Gloria Gerónimo is a different story. A 27-year-old hotel maid, she was infected with H.I.V. by her husband, and she in turn passed the virus to their son, Rony, during childbirth. Desperate to save Rony's life, Ms. Gerónimo trekked around Guatemala until she found an AIDS clinic where Doctors Without Borders uses generic antiretrovirals to treat AIDS. Both she and Rony, who is now 5, are strong again.

Should drug company profits be more important than the lives of Mr. Sánchez, Ms. Gerónimo and Rony?

"I don't understand how it's in the interests of Americans to pursue policies that are going to lead to the deaths of tens of thousands, maybe even millions," says Robert Weissman, an intellectual property lawyer in Washington who is co-director of Essential Action, which monitors trade agreements....

Posted by: anne on November 24, 2003 12:48 PM

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The analysis raises several questions. 1) In what way does Roach’s training as an economist make him adept at political analysis – which is what this piece is? For the purposes of his firm, he is the guy you put out front on issues like this, because you don’t have a high-profile political scientist on staff to do the job and because trade sounds like economics. For the rest of us, without any prejudice toward Roach, I’d rather know what a seasoned political journalist has to say on this issue. 2) Why is political vindictiveness somehow related to Enron? 3) Bush is doing what ya do when ya’ve got a mixed set of domestic interests, and foreigners trying to put their finger on the scale to tip the domestic debate – and its all your fault for imposing steel tariffs to begin with. He is trying to play for time so that he doesn’t seem to have capitulated entirely to domestic steel users and the Europeans (and Japanese, etc), when the policy decision initially ignored their interests. Why should we think that this is the path to ruin? Why do we think Bush won’t eventually move to placate the Europeans and his domestic steel users? 4) The dire warnings about nothing much getting done in the Americas on trade ignores that we are closer to getting something done in the non-Nafta Americas than at any time since Nafta was signed. What evidence is there that this is more than simply the normal glacial pace of motion toward the next trade deal? They rarely happen fast.

I’m not saying that Roach is wrong. I just want to know how the analysis he is offering is more than an educated view-from-a-barstool on trade. To repeat my earlier point, this side of trade analysis isn’t what economists do best.

The ethical balance here is not so clear, which is probably why there is such disagreement over the rightness of trade liberalization. The massive skew in living standards between us and the majority of residents in developing economies makes a rapid shift of earning capacity to the poorer nations seem fair enough. Happiness, though, is at least partly dependent on things turning out as hoped or better. Wouldn't a slower pace of outsourcing disappoint us rich folks less, while still offering lots of opportunity for better-than-expected outcomes elsewhere? Very unclear on this one.

Posted by: K Harris on November 24, 2003 01:00 PM

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November 14, 2003

U.S. Trade Law Gives Africa Hope and Hard Jobs
By MARC LACEY

BUGOLOBI, Uganda

Uganda is banking its future on 1,400 girls young women, really -- plucked from their villages around the country and plopped down in front of row upon row of sewing machines at a vast factory here outside the capital.

Every time they stitch a pocket, attach a button or hem a skirt, the leaders of the land tell them, they are performing acts of patriotism that will help transform this country's economy.

These are the AGOA girls, as the Ugandans call them, named for the American trade legislation that lured their employer, Tri-Star Apparel, from Sri Lanka to Uganda.

To hear President Yoweri Museveni tell it, AGOA, the African Growth and Opportunity Act, approved by Congress in 2000, is the best thing the West has done for Africa since independence.

AGOA, which reduced or eliminated tariffs and quotas on more than 1,800 items, has drawn similar factories across Africa as foreign investors, mostly from Asia, seize upon its incentives to give this underdeveloped continent a chance.

For workers the job can be as grueling as a day in the fields, still Africa's most common way of making a living. The Tri-Star workers, all new to formal employment, say their shoulders ache and their feet swell by quitting time, which bosses sometimes extend into the evening if a big deadline looms.

But at least they have work. Job creation has been dramatic. For the first time in some African countries, the largest employer is no longer the federal government but a private enterprise. Kenya has projected 50,000 AGOA-related jobs. Lesotho estimates it has created 10,000 new jobs in the last year, most of them going to young women....

Posted by: anne on November 24, 2003 01:02 PM

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NYTimes - 11/14/03

"Made in Uganda," say some of the tags on clothing sent to Target, Mervyn's and the Children's Place. "Made in Lesotho," say others bound for stores like the Gap and Limited.

The labels, representing a tiny percentage of apparel imports to the United States, give tremendous pride to countries that have long been at the margins of the global trading system.

Although products from oil to umbrellas to fresh yams are included under the trade law, clothing exports appear to be giving stagnant African economies the biggest stimulus.

Foreign apparel manufacturers, mostly from Asia, have made a beeline to Africa, mostly because the trade law allows them to sidestep quotas that limit the apparel they may export from Asia to the United States. By shifting to Africa, manufacturers can operate quota free under the law.

Uganda has seen its exports to the United States increase from a minuscule $32,000 in 2002 to $909,000 in the first nine months of this year, an increase that will widen by year's end....

Posted by: anne on November 24, 2003 01:05 PM

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Understand that trade means work to people who are in desperate need of work, trade can mean life for millions of AIDS sufferers in poor countries. These issues are of paramount importance to poorer peoples in Latin America or Africa. There are more than 25 million people in southern Africa with HIV/AIDS. Trade in cheap generic drugs is life!

Posted by: anne on November 24, 2003 01:12 PM

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According to Stephen Roach " The first is a new and powerful global labor arbitrage that has led to accelerating transfer of high-wage jobs from the developed world to lower-wage workforces in the developing world"
Is cost of management issue raised by the following article will cause additional problems down the road ??

http://www.upi.com/view.cfm?StoryID=20031114-052912-7678r

Posted by: rk366 on November 24, 2003 01:13 PM

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it is not just a question of jobs....

the way "trade liberalization" has been playing out includes anti-democratic, anti-environment and anti-human rights rules such as chapter 11 of nafta.

fix that and you might have more support for the trade policies you want to see....

p.s. i am also concerned about a return to damaging protectionism....

Posted by: selise on November 24, 2003 01:21 PM

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Agreed. Trade openings insure winners and losers, and we must be sure to protect the losers from displacement.

http://www.nytimes.com/2003/11/19/international/americas/19NAFT.html

Report Finds Few Benefits for Mexico in Nafta
By CELIA W. DUGGER

As the North American Free Trade Agreement nears its 10th anniversary, a study from the Carnegie Endowment for International Peace concludes that the pact failed to generate substantial job growth in Mexico, hurt hundreds of thousands of subsistence farmers there and had "minuscule" net effects on jobs in the United States....

Posted by: anne on November 24, 2003 01:30 PM

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It seems clear that free trade benefits the participants' countries as a whole, but can hurt some indviduals in those countries. The benefits for consumers generally could be redistributed to the hurt workers, leaving everyone better off. The problem is that benefits are not redistributed, leaving an aggregate increase, but many individual decreases.

Does anyone disagree with this analysis?

Posted by: richard on November 24, 2003 01:32 PM

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"It seems clear that free trade benefits the participants' countries as a whole, but can hurt some indviduals in those countries. The benefits for consumers generally could be redistributed to the hurt workers, leaving everyone better off. The problem is that benefits are not redistributed, leaving an aggregate increase, but many individual decreases."

The need is to truly protect those who are displaced, whether in Africa or Mexico or America, but trade is essential for many many of the poorest peoples.

Posted by: anne on November 24, 2003 01:44 PM

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Richard,

That analysis is the standard one offered by economists, who have an "answer" for the political and economic costs of job losses due to trade. The problem is that it almost never happens. It is, by this time, rather a tainted solution to offer. It has been the easy thing to say because the gains from trade are (should be, anyhow) sufficient to recompense the losers while still allowing the winners to remain winners. The government involved, however, has a delicate bit of work to do. Delivering compensation to workers (which rarely happens, remember) could have secondary consequences (like discouraging relocation to better job markets, limiting wage flexibility, discouraging retraining) that could mount over time.

I'm willing to hear a strong argument in favor of the standard trade economists line, but for now, I think any compensation beyond a few months of unemployment benefits and some relocation and retraining money could have serious undesired consequences.

To conclude - On the one hand it is callous (not on your part, but on the part of the guys who say this stuff for a living) to argue that a solution that is rarely used is available for workers displaced by trade, so job losses from trade are not a big issue. On the other, the solution, in the real world, could have efficiency-deadening consequences that could make trade with remedies not much better than limits on trade.

Posted by: K Harris on November 24, 2003 01:46 PM

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Anne, it's true that trade has the potential of improving people's lives.

But there are two problems with the reality of so-called "free trade". First is that of distribution, as others have mentioned above (and of which I see you are aware). Greater income to a nation does not necessarily mean greater income to the workers who produce the export goods. Second, as was pointed out very astutely by Worldwatch, export jobs often mean bringing people from rural areas, where their housing and their subsistence are obtained without the exchange of cash, into cities, where food and housing must be bought. The rise in GDP does not necessarily mean a rise in income.

There's a further problem, which I saw in a (I think BBC) report from Thailand. Once at the jobs, conditions may resemble (or be) slave labor. Workers are placed under debt burdens they cannot repay. They are sometimes not paid. If the company goes under, too bad. Since many are forced to leave their homes, sometimes to be sold into indenture, one cannot treat this as a choice.

~~~~~~~~~~~~~~~~~~~

Richard, focusing on distribution is correct but incomplete as an analysis. If the income earned by the country in which the labor is done were fairly distributed, it would be a good start. However, it's not clear that even if all the income received by the sweatshop owners (for such is what most of these enterprises are) were given to the workers that it would be a net gain for the society. In the example above, the sweatshop went bankrupt even though it stopped paying its workers.

That means that the price charged for labor must be raised, and there must be adequate labor and environmental standards to prevent spillover costs.

When all is said and done, it's not entirely clear that the wonderful gains to the consumer are not simply a mirage obtained by avoiding resting one's gaze on the overall effects. If so, we shall pay for trusting that mirage for decades to come.

Posted by: Charles on November 24, 2003 01:58 PM

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Free trade is fine and its a pity having to see it being reduced. But isn't immigration the stronger tool for global output maximization? Unrightfully limited by "Festung Europa"?

If only immigration could be less restricted. Then people could move in their own pace to were tools and equipment and other people's skills are in order to improve their living conditions. I don't think that all countries even could expect tools equipment and skill to finally move accross their borders. From purely growth theoretical considerations.

Consider towns/countrysides. Would there have been any towns at all if people were not allowed to continuosly move in there from the countrysides? Would there have been any industry without towns? The whole growth thing is driven by people moving to where the human/production capital is. Not the reverse. Europe's immigration policies are catastrophic in this respect. My guess is that the USA has a much brighter future.

Posted by: Mats on November 24, 2003 02:01 PM

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Charles and Mats

Fine comments. I can only agree, but the point is the bring to the bargaining those who are threatened as the threats appear and to allow for and encourage freeer labor movement.

Posted by: anne on November 24, 2003 02:17 PM

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Anne:

Since you repeatedly have posted the story about Uganda, perhaps you should check out the story about the same Uganda program at Nathan Newman's website, on about Nov. 12 or 13. No time for more. Off to work...

Posted by: john c. halasz on November 24, 2003 02:22 PM

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Mats,

I never understand why people do not see that the situation of Europe and the USA are not similar. Which means that situations that are tolerable in the USA are not so in Europe, and that actions that are needed in Europe are not so in the USA. Immigration can be useful in Europe, but it is not as easy to accept immigrants: there is not the same physical space, and Europeans have not as much wealth as inhabitants of the USA. Still the number of immigrants in recent years has been quite important. I work as a teacher in a secondary school in Spain, and I've a 10% of my pupils who are foreigners recently immigrated, that means that there are quite a few more that are adults, children do not tend to move alone.

DSW

Posted by: Antoni Jaume on November 24, 2003 03:04 PM

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K. Harris writes: To conclude - On the one hand it is callous (not on your part, but on the part of the guys who say this stuff for a living) to argue that a solution that is rarely used is available for workers displaced by trade, so job losses from trade are not a big issue. On the other, the solution, in the real world, could have efficiency-deadening consequences that could make trade with remedies not much better than limits on trade.
Underpinning both of these positions is an unspoken assumption: that the paramount issue is economic efficiency, which is translated into the crudest of measures, money. Issues about fairness of a society, overcompensation of capital brought on by the purchased influence of its holders, rapacious asset grabs in every area of life, and maltreatment of individual members of society are simply not addressed.
Straight utilitarian theory says that benefits to the rest of us justify the immiseration of some. The interests of the damaged can safely be ignored. This notion, that it is justifiable for some to suffer so long as there is a net gain in human happiness, underlies scientific materialism, and a host of its evil offspring. It is the result of the implacable logic of the theories of everything created by some philosophers. Free-market capitalism, as taught in business schools, is just another of these theories of everything. Its implacable logic is just as useful to the current administration as Marxism was to Lenin. Histories of the Russian Revolution gush over Lenin’s ability to argue down his opponents with the power of his logical explication of Marx.
There are many other ways to think about society. Apparently none of them have any currency in the transcendent and triumphant society of homo economicus.

Posted by: Masaccio on November 24, 2003 03:37 PM

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I have sat through the econ classes arguing for free trade and am still not convinced. Surely free trade is good between industrialized countries who are competing over non-labor advantages. But I fail to see the benefit of pitting our workers against the third world masses.

The biggest fallacy of economics is that workers are paid based on their productivity. Workers are paid based on suppy and demand. Productivity merely imposes a cap on wages a company is willing to pay. I will continue to believe we should impose minimum wage standards, environmental standards, and human rights standards until I hear a more convincing argument. And I have an MBA so you know I wasn't being taught by a bunch of lefties.

Posted by: Sparks on November 24, 2003 04:01 PM

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A note on biology. There is no genetically modified beef. The issues are beef from steers treated with estrogen and genetically modified plants.

Posted by: robert on November 24, 2003 04:04 PM

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Roach is right that cost control is pushing IT-based labor offshore. But he begs the question by assuming that the loss of domestic jobs is the cause rather than a co-occurring symptom of offshoring.

Consider the enterprise software industry, which is at the heart of the offshore phenomenon. Software license sales for the top app vendors (SAP, Oracle, Peoplesoft, Siebel) declined 33% in the past 3 years. Result: the whole software ecosystem has been crushed (big vendors, small vendors, consultants, service providers, in-house IT staff, IT trade pubs, investment bankers, everyone). Many tens of thousands of jobs lost in California alone.

Why did this happen? Simple. Corporations stopped buying enterprise software because the benefits no longer justified the costs. And what do those costs consist of? Turns out labor is 2/3 of the cost of a typical ERP project vs. only 15% for the software itself. Even more if you consider the software vendor's own cost is mostly people too (no raw materials here, not much energy either).

The software industry grew explosively in the 1990s as organizations found lots of new ways to make themselves more efficient with software. As the industry grew, it hired every warm body it could find. New technology made the software possible, but skilled labor was need to do the complex work of implementing it in customer organizations.

What's happened now is that the industry has scaled up as far as it can go on its present labor-intensive cost basis. Customers are finding that new uses of software at the margin just aren't worth the current asking price. So they're not buying. In response, the industry is attacking its labor costs.

Roach and the other miss the point by assuming that if somehow offshore weren't a factor then the displaced domestic IT workers would still have their jobs. This is false. Most of the job losses were going to occur anyway as the late 90s bubble deflated. Like I said, at these prices customers just don't need any more software.

Cutting the labor cost component of software is the industry's only hope of returning to growth. And by the way, offshore is only a temporary fix. The real fix is automated software configuration, which all of the vendors are working overtime to develop.

No, reducing labor costs won't bring back jobs to unemployed Silicon Valley programmers (who drive Toyotas and BMWs and live in houses whose concrete was poured by Mexican day laborers). But it will allow the software ecosystem to recover, and that will drive growth and jobs for lots of other people.

Posted by: Jeff Gould on November 24, 2003 04:13 PM

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--snip--

Roach and the other miss the point by assuming that if somehow offshore weren't a factor then the displaced domestic IT workers would still have their jobs.

--snip--

Jeff,
Are you seriously arguing that offshoring hasn't contributed the weakness in the US IT labor market? I think there's a job at the ITAA with your name on it:) Clearly, the late 90's saw IT salaries rise to unsustainable levels, and some job losses and salary declines were inevitable. But the severity and duration of the job slump have been worsened substantially by American firms' substitution of offshore firms for in-house and onshore IT workers.

Posted by: Dave on November 24, 2003 05:00 PM

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Really, what's the big deal about compensating losers anyway? Sure, it's possible, but is that really the best policy for social justice? Trade, like technological change, generates losers and winners, (usually) making a net (Kaldor-Hicks) improvement, but does that mean there's an imperative to compensate those losers?

Let's take this example: suppose that tariffs in some country are abolished, shifting the supply and demand for different types of labor. 50% of people are in labor-sector H, and 50% are in labor sector L. Before trade liberalization, people in sector H were paid $100,000 a year, and people in sector L were paid $30,000 a year. Then, trade is liberalized so that now people in sector H are paid $90,000 a year, and people in sector L are paid $50,000 a year.

Now, the question: do you think the government should tax $10,000 away from each L worker, and distribute it to an H worker, bringing thing to a nice, Pareto-improved (over pre-trade liberalization) condition of $40,000 for Ls and $100,000 for Hs?

If your answer is "no," then what you really want is not compensation for losers, but a general societal effort to limit inequality. I think a societal effort against inequality would also be easier to implement (unless I'm terribly mistaken) than an attempt at piecewise, specific attempts to compensate losers who find themselves on the wrong side of international trade or technological progress.

Sparks, I have no MBA, nor any other degree but a high school diploma, and as a rule, I respect education in such matters, but in spite of that, I must ask you: if there are significant difference between productivity and wages paid, why wouldn't workers be hired, ESPECIALLY in conditions of free movement of goods and capital? Is there any evidence that, in reality, there ARE significant differences between (marginal) productivity and wages paid? Of course, there are specific instances of productive factories or call centers with poorly paid workers, but, excepting extraordinary circumstances (like, say, a heavily statist economy), are there instances of whole labor markets with wages out of step with productivity?

Posted by: Julian Elson on November 24, 2003 05:04 PM

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"Immigration can be useful in Europe, but it is not as easy to accept immigrants: there is not the same physical space, and Europeans have not as much wealth as inhabitants of the USA."

1. Physical space is irrelevant. Immigrants to the US overwhelmingly come to the major urban centers, and indeed the US population as a whole is increasingly moving into the cities. The US simply is not a country based on filling up vast empty plains like it was a hundred years ago. The empty spaces in the US are in fact becoming more empty.

2. Wealth is also quite irrelevant. Immigrants overwhelmingly pay their own weight - they're not an expense. And what would per capita income have to do with it anyway? Average Europeans today are richer than Americans were at some arbitrary point in the past (like say, 20 years ago) when the US still had a much higher immigration rate.

There is exactly one barrier to European nations accepting higher immigration, and that's simple unwillingness.

Posted by: Ian Montgomerie on November 24, 2003 05:21 PM

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Julian,
I am not in a research facility so I am not prepared to address the more quantitative part of your question. But as far as why a firm wouldn't just hire more workers, of course the ability of owners to keep wages below productivity depends on the elasticity of demand for a product and the market power of the firm, and thus their incentive to keep quantity artificially low.

I'm not saying it exists in every industry, and certainly not in high skilled jobs, but to say that an excess supply of labor doesn't depress wages is to ignore the realism I would expect of a succesful non-college grad. And please no circular logic about productivity equals wages because wages equal productivity. Wages are a supply and demand issue and productivity merely establishes a reservation price, above which firms are not willing to pay.

Posted by: Sparks on November 24, 2003 05:53 PM

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"Jeff, Are you seriously arguing that offshoring hasn't contributed the weakness in the US IT labor market?"

Dave, yes, that's exactly what I'm arguing. The resort to offshore is not the cause of the IT job slump, but a co-occurring symptom. The cause of both symptoms is the refusal of corporate customers to keep buying stuff at the rate the IT industry desires. I mean, how many industries can you name that have declined 33% in three years? (Big 4 app vendor software license revenue in Q3-2000 was $1.3 billion, in Q3-2003 it was $860 million.)

This has nothing to do with offshore. The US economy as a whole didn't decline that far that fast in the Great Depression.

Company X fires a team of programmers in San Jose on Monday and hires a team to replace them in Bangalore on Tuesday. Sure, I know, that's how it works. But the point is that company X (in the aggregate) was going to fire lots of people anyway as it was forced to shrink or shut down. Nothing could have saved those US jobs, not even protectionism. Because the selfish customers (i.e. the rest of corporate America) were no longer willing to pay the premium for US labor.

This really sucks for the honest, hardworking, family-rearing US IT workers who lose their jobs. I agree. But the jobs in Bangalore do not take away the jobs in San Jose. They merely represent the best the industry can do right now.

If offshore can significantly knock down the cost of deploying big software (together with automation), then the industry has a shot at coming back. Let's hope so. Because the only thing that's realistically going to drive domestic hiring in the IT ecosystem is a really big, sustained surge of growth in customer spending.

Posted by: Jeff Gould on November 24, 2003 06:00 PM

____

Regarding the steel industry and tariffs-

There are a lot of unanswered questions about the steel industry. Is there overcapacity worldwide in steel production? What are the reasons that the steel industry in US is not producing what the buyers in this country want?

A few years ago I worked at a Great Lakes ship agent and they were hauling in a lot of rolled steel, a lot of it from Italy. It was good for the grain industry here because they loaded up on grain so they would not go back empty. I asked the agent why they bought this steel from overseas and he said that it was not something that was produced here.

So the question is do economists say that if protectionism and tariffs are bad, is there another way the steel industry could be saved or are they saying that it doesn't matter if we keep it?

Posted by: northernLights on November 24, 2003 06:44 PM

____

Masaccio says, "Straight utilitarian theory says that benefits to the rest of us justify the immiseration of some. The interests of the damaged can safely be ignored."

Actually, it says that if a net gain can be gotten out of an arrangement, then the winners can afford to compensate the losers.

It's the greedy that turn that into what you describe, namely piracy.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Sparks says, " I fail to see the benefit of pitting our workers against the third world masses."

Let's consider what comparative advantage would argue. Let's say that the cost of a widget is $100. Of that, $10 is labor. By exporting manufacturing, the manufacturer can reduce the price of labor to $5. We'll assume perfect competitition, so that he is forced to pass along all $5 of savings to the consumer. Now, the worker who made the widget is out $10, but saves $5 when he purchases it. AND, since his country specializes in advanced technology, his labor is freed up to write computer code or build nanotubes, perhaps at a wage of $7. He is therefore up $2 from his original position.

Comparative advantage does not suppose that anyone is pitted against anyone else. Rather, each nation does what it does best and everyone wins.

~~~~~~~~~~~~~~~~~

Julian Elson, the problem with your examples is that they involve incomes that are so high that adjustments seem like arbitrary fiddling. Imagine instead that the elimination of tariffs destroys industry T, reducing wages from $17,000/annum to $0, while simultaneously increasing wages in industry M from $1,000,000/annum to $1,200,000/annum. It is not realistically possible for workers in industry T to move into industry M, since industry M has high entry barriers, including social connections, college degrees, and so on.

Would there not be a reason to compensate the losers?

Posted by: Charles on November 24, 2003 07:27 PM

____

Sparks: what you say is undoubtedly true, that monopoly power can be used to set prices above the competitive equilibrium level, and profit from it without sharing any of those profits with workers (in fact, paying them less, since they are less in demand to create the lower quantity), hence making wages lower than marginal productivity. Still, what does it have to do with trade? Isn't the same thing true in a totally closed economy? I think there may be a case there if there were a very small country, in which labor isn't mobile, and one corporation (or very few), which couldn't exist without free trade and/or capital flows, is a monopsony buyer of some segment of the labor market... but could that REALLY happen?

As for an excess supply of unskilled labor depressing wages... well, I'd wager that the marginal productivity genuinely IS less with a lot of unskilled workers around. There are a few jobs for which they're vital, but how much added benefit is there to a movie theater in hiring extra ushers once you've got enough? That first janitor is really productive on the margin, but wouldn't you expect more of them to add continually less? This seems, to me, to be a problem of low productivity, not wages pushed to below-productivity levels.

Charles, you're right that I changed incomes, rather than (realistically) assuming that some people would just lose their jobs, period (though I don't know how you can claim that a change in income from $30,000 a year to $50,000 a year is "arbitrary fiddling"). However, on that point, I would say, "so what's so special about losing your job to trade, as opposed to losing it to a business cycle downturn, technological change, or just the perfidies of capitalism in general?"

I think a safety-net is a good idea generally, unemployment insurance, re-training, etc, included. If someone loses his/her job, then s/he should have access to options to help them along to self-sufficiency again.

However, I don't see the point in compensating the losers in international trade in particular. In the case that you gave, I would say that the people in the destroyed industry should have access to unemployment benefits and other things. In addition, at the level of inequality that you describe, employees of industry M would, through progressive taxation and programs such as the EITC, compensate employees of industry T, but that would be a matter of the income inequalities between the two payment levels, not because M won in international trade and T lost. In fact, even if M had lost in international trade, and T had won, say, bringing wages for T workers up to an oppulent $40,000, while bringing M workers down to an awful condition of making only $400,000 a year, I *still* would support transfers from M workers to T workers, rather than vice versa.

In short, what's so special about trade?

Posted by: Julian Elson on November 24, 2003 08:27 PM

____

I made some changes to reflect what's happening in the world:

Let's consider what comparative advantage would argue. Let's say that the cost of a (Nike) is $100. Of that, ($30) is labor. By exporting manufacturing, the manufacturer can reduce the price of labor to ($1). We'll assume (supply and demand for Nike's sets the price of the shoe so the retail price remains unchanged). Now, the worker who made the (Nike) is out ($30 and can't afford to buy Nike's anymore). AND, since (there is a mass of unskilled labor in our country the worker takes a new job at WalMart and makes $5. Now the company has increased profits by $29 and the worker has lost income of $25 so the free traders boast of a net gain to society of $4. They even show average disposable income going up by $2. They fail to realize that at the point an economic policy leaves masses of our countrymen in poverty that it has failed even if accompanied by GDP growth. Period. End of story.)

Posted by: Sparks on November 24, 2003 09:01 PM

____

Julian asks an interesting question, and I think the answer speaks to the fact that most of us assume, if only implicitly, that the natural (perhaps) ideal state of a national economy is autarkic. Trade is different, therefore, because it represents a conscious disruption of the natural state of affairs, and someone who's been hurt by that disruption therefore deserves to be compensated. Of course, if our economy were autarkic, lots of people would never have jobs that would have been created by trade, manufacturers would find it easier to charge oligopoly prices, and we would eventually all be driving Pintos. Everyone recognizes those benefits that trade brings, but trade still faces a high hurdle: not only must the benefits outweigh the costs, but some of the benefits must go to pay the costs of the displaced. (This, at least, is the argument for compensation.)

Now, there's a certain historical logic to this way of thinking, since most countries have gone from being more autarkic to more open. (Although, as Brad points out, a century ago many countries, including the US, were very open and then gradually became less so.) But from a theoretical point of view, treating the opposite position -- everyone trading with whomever they want, with no barriers in place -- as "natural" seems to make more intuitive sense. After all, it's the imposition of tariffs and quotas that is the true disruption, as the word imposition suggests. In that sense, the people who are keeping their jobs because of tariffs and quotas are inflicting costs on us. And the burden of proof should go the other way, as with any exercise of state power: opponents of free trade should demonstrate that the benefits of tariffs and quotas outweigh the costs.

This also gets to the incredibly simple question that for some reason I rarely see asked, perhaps because asking it is self-indictingly naive: Why should the government be allowed to tell me who I can do business with? If I want to trade with someone from China or Chad, in what sense is it appropriate, or even ethical, for the state to forbid me (as it does literally with quotas and effectively with high tariffs) to do that? More to the point, perhaps, should the U.S. government really be in the business of telling Vietnamese workers earning one dollar a day that they cannot sell the products they make to Americans? Using this logic, what's the limit on the government's authority over exchange? Could it forbid us from talking to foreigners, since we might be trading ideas (which could potentially be intellectual property)?

Posted by: James Surowiecki on November 24, 2003 09:20 PM

____

Surely if the workers who made the Nikes can't buy the Nikes anymore, the demand for Nikes -- and therefore the retail price, and therefore the profit -- will not remain unchanged. It will fall. More to the point, if the market is at all competitive, as costs drop so too will prices. If you assume that free trade will cause workers to lose jobs while consumers reap no benefits, well, it's not surprising that you're against free trade. But that's not the way the world works. Clothes, shoes, consumer electronics, cars, computers: they are all cheaper or barely more expensive than they were a decade ago, and in many cases significantly cheaper than they were just a few years ago. You can buy a DVD player now for $29. None of this would be possible without free trade.

Three other things are missing from your model. First, "Nike" is not a person (as you seem to imply when you write that average disposalble income per person will rise by $2). But its shareholders are. Assuming the profits are distributed to them, they'll have to spend those dollars on something. In purely mathematical terms, it seems like the former Nike workers could get jobs making stuff that the Nike shareholders would want to buy.

Second, the dollars that the new foreign Nike workers make have to come back to the U.S. somehow, either as spending or investment. Is there any reason to think that that investment won't be translated into gains for society as a whole?

Third, you seem to assume that the wages of the foreign workers won't rise over time, that they'll just keep working for $1 a day forever. But the evidence suggests just the opposite. Between 1963 and 2002, Korea's GDP per employed person sextupled, and in just the past twenty years it's almost tripled. Japan's quadrupled between 1960 and 1990. And these gains translated into dramatic improvements in worker pay. According to the U.S. Bureau of Labor Statistics, hourly direct compensation for a Korean worker in manufacturing was 72 times higher in 2002 than it was in 1975. (That's in Korean currency.) If you look at Taiwan, between 1975 and 2002 hourly pay for manufacturing workers increased 13,000%. Singapore: 6 times higher. Hong Kong: 12 times higher. Or how about Sri Lanka: 20 times higher. In all these countries, as investment and productivity rose, and trade increased, so too did worker pay, over time making them more competitive with American workers? No one goes to Korea anymore for cheap labor.

(All those numbers available here: ftp://ftp.bls.gov/pub/special.requests/ForeignLabor/supptab.txt.)

The point is there is no race to the bottom. If a country gets more productive, attracts more foreign investment, and its economy grows, its workers' wages rise. There may be exceptions, although I don't know of any, but it seems as a rule that in those countries that have enjoyed significant growth in national income as a result of exports, the export workers have seen their income rise significantly, too. (In most of the countries I mentioned above, in fact, the income of manufacturing workers rose much faster than national income.)And like most of us, they want to buy stuff with their money. Again, there's no reason we can't sell it to them.

Now, successful economic growth is not a gimme. It doesn't just happen just because a country decides to trade. But when developing countries grow fast, the vast majority of the people in those countries benefit. David Dollar of the World Bank has shown a strong correlation between economic growth and poverty reduction in the 1990s, and while plenty of people question Dollar's work on trade and globalization, I don't think any serious economist doubts that the poor reap benefits from fast growth. The immiseration thesis is bunk.

Posted by: James Surowiecki on November 24, 2003 10:24 PM

____

I did have a question about the supposed benefits of comparative advantage based trade for poor countries, and the claim of "free trade" advocates that trading with poor countries is the best thing we could do for them. Take the imaginary economy of rich country RC which produces tools and garments, with tools requiring 1 hour of labor per tool and garments 1/4 hour of labor per garment. Take the imaginary economy of poor country PC which also produces tools and garments, using 10 hours of labor to produce 1 tool and 1 hour of labor to produce 1 garment. Comparative advantage says that, if RC and PC trade with each other, with each specializing in the industry which has the highest relative rate of productivity, both countries will be better off, as an overall net surplus will result. So if PC specializes in garments and produces 20 garments in twenty hours and RC specializes in tools, producing 2 tools in 2 hours, PC can trade, say, 7 garments for 1 tool and both PC and RC will realize a net gain of 3 garments. But the overall surplus generated by the trade is the same, regardless if the going rate for a tool is 9 garments or 5 garments. And note also that the gain for PC, translated into tools as unit of value will be between .1 and .5 tools, which when divided by the tool-value of total output, 2 tools, is a gain in total GDP of between 5% abd 25%, whereas, for RC, the gain in tool-values is between .25 tools and 1.25 tools, or a GDP gain of between 12.5% and 62.5%. So the potential gain for RC is greater both in relative and absolute terms for RC than for PC. But though the potential gain for RC is greater, so is the ability of RC, because of its much greater rate of productivity/standard of living, to withhold itself from a trading relation with PC. So given the nature of market forces and the difference in negotiating power in determining mutually satisfactory terms of trade, would not the outcome of a trading relationship between RC and PC tend more toward the 9 garment to 1 tool rather than the 5 garment to 1 tool ratio of exchange?

Posted by: john c. halasz on November 25, 2003 01:56 AM

____

I have alays wondered why these problems of free trade and subsidies, cannot be ameliorated by implementing them over a period of years, say 10, to give time for adjustments to be made.

Posted by: big al on November 25, 2003 04:00 AM

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Masaccio,

My first point certainly cannot be taken to grow out of an assumption, unspoken or otherwise, that efficiency is paramount. Rather, I noted that a hypothetical assertion that losers can be compensated is not of much value if compensation is, in fact, rarely made in anything like full measure. The second point does not take that assumption for granted, either, rather calls into question a scheme (free trade) which appeals to efficiency, but which involves remediation (compensation to losers) which very likely undermines efficiency. So while I’m perfectly happy to read your views about scientific materialism, I’m not sure my stuff is the right jumping-off point.

Posted by: K Harris on November 25, 2003 04:33 AM

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A large part of the problems are due to an inability of the prevailing GOP ideology to address the current problems of our economy. Ford management today joined with its union and spoke in favor of a National Health Insurance coverage. Mr. Ford complained that his competitors made autos in countries where the government paid the health care costs. Ford said it was difficult to compete when American Auto industry is saddled with additional costs.

As for the steel industry, the mini-mills are efficient and can compete with anyone. The dinosaurs are not and are in need of further restructuring. Propping them with steel tariffs is expensive and delays the inevitable. The dinosaurs face huge retiree medical costs from past labor negotiations. What US steel needs is help with medical costs. Their overseas competitors do not have those costs. They are paid by their governments. The old outdated ideology that worker benefits must be left to private corporations puts our companies at a competitive disadvantage.

The GOP leadership does not recognize the health care problem. A larger government role is anathema to their ideology. As a result, our industry is at a competitive disadvantage and we get saddled with expensive Rube Goldberg solutions to our health care problems. When administrative costs are over 25% of the health care dollar, isn't it time to rethink?

Health care is an infrastructure cost. The US has THE MOST EXPENSIVE health care system in the world, but not necessarily the best and certainly not one that excels if metrics such as infant mortality are applied.

The GOP ideology opposes taxes and redistribution. This has had a great effect of underfunding the infrastructure of the US. Roads, high-speed rail, communications, renewable energy are all underfunded. Funding these areas instead of giving tax cuts to wealthy campaign contributors would do far more to stimulate the economy and create jobs. There is no reason why the US cannot be a leader in producing clean energy devices. We don't have the political will to fund it. This administration is taking a step backward by proposing massive subsidies to the fossil fuel dinosaurs. Their ideology prevents them from creating government programs to move the US in those directions.

The GOP made fun of Al Gore's goal of replacing the internal combustion engine. Well, the ICE is over 100 years old and at the limits of efficiency. Even the auto industry recognizes this and actively is researching replacements. This administration directs its largess at its cronies. They are too blind to opportunities that are the future. Given the history of business failures of Mr. Bush, it should have been obvious that he was not intellectually fit and lacking the necessary entrepreneurial vision this country needs.

Posted by: bakho on November 25, 2003 06:23 AM

____

Jeff is right that the dominate factor in weak labor markets in recent years have been the weak
domestic economy and that job loses to trade are secondary. With productivity stronger than growth the result is weak employment. that is part of the problem with the consensus forecast in that it includes both good employment gains and strong productivity--an unlikely development.

The ones arguring that trade , comparative advantage, should only be between rich countries
does completely ignore the east asian example
where they have used trade -- and moving up the chain from simple manuf to more advance products -- to achieve one of the greatest advances in standards of living ever.

I still believe many of the critisms of trade are really misdirected. The core problem is the trade deficit and that is a function of the savings-investment gap that in turn is largely a function of low savings and the federal deficit.
I was taught the econ justification for large income inequality was that it increased savings
-- moreover the rational part of the Bush Admin uses that argument to justify their tax policy.
But the US has just gone throught a massive increase in income inequality and it did not
lead to an increase in savings.

Posted by: SPENCER on November 25, 2003 06:42 AM

____

The key to understanding any major policy debate is to assume that all the major factions have no idea what they're talking about, and set out to disprove all major assumptions. Once you've done that, you may understand the issue. Trade is no exception.

In particular the most common style of "anti-globalization" position against free trade is actually rather silly. Certainly trade causes disruptions in employment which the US "screw the poor and unemployed" system does not cope with all that well. But the usual position involves two huge honking false assumptions.

The first is that "free" is some new thing which is to blame for the woes of the 90s and 00s. Trade has been getting freer and freer since Bretton Woods half a century ago. Most tariffs were eliminated long ago, and what have been eliminated recently or are now slated for elimination are a fairly minor set of them. Free trade agreements don't explain the growth in the competitiveness of third world labor after the 70s. Nobody completely understands it, but technology appears to have played a major role in making it feasible for so many first world companies to expand operations overseas, as did the success of many third-world countries in east asia in developing into advanced (but still cost-competitive) economies. Free trade negotiations today are mostly about trying to "improve" trade laws in regard to particular industries in an environment where most industries already experience basically free trade. I put "improve" in quotes because it involves stuff like drug company IP laws, whose expansion actually has nothing to do with free trade in the economic sense.

The second is that free trade is the major cause of job dislocation. This is not the case. The major cause of long term job dislocation (as opposed to short term losses due to recession etc.) is technological change. The effects of free trade in an economy such as the US are minor compared to technoligical change (though they may seem larger in a third world country where freer trade is used to enable the country to undergo a tremendous technological transformation such as the ones in east asia). I've often seen anti-globalization types protesting that free trade causes good jobs to be replaced by Walmart and McDonalds McJobs. This is ridiculous. Walmart and McDonalds spread low-wage unskilled jobs across the US for purely domestic reasons - they both found that they can compete successfully in the domestic service industry by slashing wages, via technological (technical and organizational) innovations. Industries providing domestic "McJobs", such as my two examples, generally aren't in a position where their overall industry can grow due to trade. I've never seen any plausible argument that the fast food indsustry, for example, gets a larger market in the US whenever some other US industry loses jobs to foreign competition.

Posted by: Ian Montgomerie on November 25, 2003 09:29 AM

____

I think that people often forget that wages are determined by the supply and demand of labor/human capital at a NATIONAL level, not an industry level. Over the long run (say, a couple of years) why wouldn't labor demand and therefore wages increase with productivity?

Furthermore, why do people think that trade between next-door neighbors is good, but somehow it destroys jobs or reduces income when you draw an imaginarly line between the houses? If we were to follow the anti-globalizers' logic, we'd shut ourselves in all day and not leave the house. Come to think of it, that pretty accurately describes some of my roommates back in college.

Transition costs and compensating losers are interesting issues--there's a cost for, say, a serf in southern Mexico to move to the city. But a good solution doesn't involve keeping the third world as a poverty theme-park for the rich so they can visit and feel morally superior.

Posted by: Chris on November 25, 2003 11:07 AM

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Thanks to John Halasz -

http://www.nathannewman.org/log/archives/001345.shtml#001345

Jobs- and Union-Busting for Africa
The African Growth and Opportunity Act (AGOA) was officially designed to help Africans by providing more jobs by removing US tariffs.

But the result has been a theft of jobs from one poor country to another-- with the predictable result of desperately low pay and union-busting as a threat by the employer.

Many of the jobs have jumped from poor Asian countries to poor African countries-- in this story's example, from Sri Lanka to Uganda. And the new employers are violating labor rights heavily, paying as little as $40 a month and suppressing any dissent:


In an embarrassment to the president, who visited Washington earlier this month to urge American officials to extend AGOA benefits, hundreds of Uganda's AGOA workers recently walked off their jobs, accusing their supervisors of exploiting them. The AGOA girls wanted to form a union, a kind of protection that is weak in Uganda and throughout Africa.

The boss at Tri-Star, Veluppillai Kananathan, a Sri Lankan businessman, promptly fired nearly 300 workers whom he considered trouble makers.

The women marched to Parliament, camped on the lawn for nearly a week and won the sympathy of some top government officials. "The AGOA girls have a legitimate case," Dr. David Ogaram, the labor commissioner, said.

But Mr. Kananathan has connections at the top. He rebuffed attempts by officials to inspect the factory and ignored an order from the High Court to reinstate the workers.

When AGOA was passed, many politicians and leaders criticized the law for lacking any commitment to raising labor standards in Africa....

Posted by: anne on November 25, 2003 11:08 AM

____

Thanks to John Halasz - There is another side to my optimism on trade.

Posted by: anne on November 25, 2003 11:10 AM

____

Julian Elson says, "...I would say, "so what's so special about losing your job to trade, as opposed to losing it to a business cycle downturn, technological change, or just the perfidies of capitalism in general?" I think a safety-net is a good idea generally, unemployment insurance, re-training, etc, included. If someone loses his/her job, then s/he should have access to options to help them along to self-sufficiency again."

There's no disagreement, then. I agree that nothing is special about trade. What's missing is the funding of unemployment insurance to help people through re-training. For someone who studied 4, 6, or 8 years in engineering, software or other high technology, it would need to be a fairly well-developed system. At the blue collar level, for people employed in a one-industry town, relocation might be necessary.

The problem is that the winners (managers, for example) have so far been unwilling to compensate the losers (textile workers, for example). In fact, the winners have used their winnings to but a government that is in the process of wrecking the tattered safety net that exists, with Medicare about to be overcommitted and underfunded.

~~~~~~~~~~~~~~~~

Sparks, I presented the theory of comparative advantage and explained how it predicts that buying power can go up even if wages go down. I have also posted to the effect that since none of the theoretical assumptions on which comparative advantage is based are met in the real world, there's no reason to believe that the theory will either.

The real world is, in my opinion, somewhere in between the absolute benefit that theory predicts and the absolute nightmare that free trade opponents paint. Free trade, as it is practiced, does increase consumer buying power overall, though not for those who lose their jobs; it could easily turn out to be a net wash (or worse) if externalities are included. It does raise cash incomes, though not necessarily *real* living standards, for foreigners who take the jobs.

It's only in the longer view that free trade can benefit foreign nations. They learn how to manufacture as the West forgets. The US trade balance (or, more descriptively, the current account balance) has been negative for a couple of decades. The system is on a crash course, at which point those who have been on the receiving end of free trade will be in the catbird seat. Then we shall see how many American free traders like living on $2.50 a day, assuming they can get it.

~~~~~~~~~~~~~~~~~~~~

Spencer says, "The ones arguring that trade , comparative advantage, should only be between rich countries does completely ignore the east asian example
where they have used trade -- and moving up the chain from simple manuf to more advance products -- to achieve one of the greatest advances in standards of living ever. "

Spencer, there are several factors in East Asia that need recognition. First, a portion of the growth is due to US military dollars flowing into Japan and Korea. The Japanese have a mot that after WW II, Europe got the Marshall Plan while Japan got the Korean War. Second, Asia has been protectionist and did engage in dumping until recent liberalization. Third, it's easy to grow rapidly from a low base. As one sees in Japan now, growth from a high base is far more difficult.

The Asian story is the best case that can be made for trade, and even that one has some large loopholes.

Spencer also says, "I still believe many of the critisms of trade are really misdirected. The core problem is the trade deficit and that is a function of the savings-investment gap that in turn is largely a function of low savings and the federal deficit."

And I see the low savings as a function of wages that have been stagnant (as family wages) or declining (as individual wages) for 25 years. The deficit, of course, is a political matter, but even the ascendance of the corporatists (mainly Republicans) is also a function of the decline in the middle class rather than a rise in popularity for Republican ideas.

Why has the power of the middle class declined? Because free trade has reduced wage bargaining power. Is that a good or a bad thing? Well, a little of both, econonomically-speaking. But the loss of middle class power has been a political disaster.

Posted by: Charles on November 25, 2003 12:11 PM

____

Ian Montgomerie claims that, "The major cause of long term job dislocation (as opposed to short term losses due to recession etc.) is technological change."

That's highly arguable. The software industry has been hit by a massive expansion of the H1-B visa as well as outsourcing to India and elsewhere. The primary motivation for the H1-B wave was to depress wages in the US. From the standpoint of US citizens, job loss is all due to foreign competition. The people who have been driven from the industry are highly retrainable, so technological change cannot be said to be the driving force.

Yes, technology has automated many jobs out of existence. But that change has been relatively slow. When Dell decides that it's moving thousands of call center jobs to India (a decision it recentlt reversed), that happens quickly.

Chris says, "Over the long run (say, a couple of years) why wouldn't labor demand and therefore wages increase with productivity?"

This is a double bankshot, Chris. Productivity reduces the demand for labor. If productivity lowers prices, as it did in the software industry, it increases demand for product. But in the retail banking industry, for example, higher productivity has eliminated thousands of jobs for tellers.

Chris adds, "Furthermore, why do people think that trade between next-door neighbors is good, but somehow it destroys jobs or reduces income when you draw an imaginarly line between the houses?"

That's a good point, and here's the counterpoint: In the US, the minimum wage is the same all over. One foot into Mexico, and it's a small fraction of the US value. Environmental standards are the same, and so on. Trade is only fair when the rules under which goods and services are produced are the same.

Posted by: Charles on November 25, 2003 12:16 PM

____

James,
If you haven't abandoned this thread, Mexico is a counter example, I believe - I know at the time of the NAFTA debate, studies showed that Mexican workers' productivity, especially in the auto industry, had risen substantially, while wages remained stagnant. I believe the Carnegie Endowment report, cited by anne in her post upthread of 11/24 1:30 pm, may have more up to date info on Mexican productivity vs. wages.
And I do wonder why you cite the examples of Japan and Korea as cases wherein wages rose with productivity - isn't it fairly indisputable that the Asian tigers departed considerably from the free trade model, employing protectionist walls to build up home industries?

Posted by: Brendan Lynch on November 25, 2003 01:28 PM

____

Anne:

Such optimism is a bit to mystical for my taste.

Posted by: john c. halasz on November 25, 2003 01:45 PM

____

Ian Montgomerie,

"In particular the most common style of "anti-globalization" position against free trade is actually rather silly."

i wish you would address my very real concerns (see comment above) with so-called "free trade" instead of creating a strawman to knock down.

also, no one i know calls their view "anti-globalization"... the most common term i've heard is "global justice".

p.s. i was one of the folks getting pepper sprayed in miami last week... what do i need to do to get my concerns taken seriously?

Posted by: selise on November 25, 2003 02:01 PM

____

Charles says, in response to my contention that technological change rather than trade is the dominant cause of long term job dislocation (by which I mean, the shift of jobs within a region from one industry to another):

"That's highly arguable. The software industry has been hit by a massive expansion of the H1-B visa as well as outsourcing to India and elsewhere. The primary motivation for the H1-B wave was to depress wages in the US. From the standpoint of US citizens, job loss is all due to foreign competition. The people who have been driven from the industry are highly retrainable, so technological change cannot be said to be the driving force."

This is completely wrong in so many ways.

First it is completely wrong simply as a characterization of what is going on in the software industry. The software industry has massively shed jobs because the revenues of the industry have undergone a huge decrease. With a massive decrease in the amount of work to be done, companies have unsurprisingly laid off workers en masse. H1Bs have absolutely nothing to do with this - they became very popular during the _boom_ and its labor shortage, but during the bust less workers are coming in on visas. Outsourcing also played absolutely no role in causing this. It is a symptom of the general decline - companies in dire business straits are sometimes using outsourcing as one way to survive, knowing that their call centers/IT/etc will suffer but that in the bust economic climate, keeping expenses down is more important than quality. Blaming the tech bust on anything to do with immigration or trade betrays a complete ignorance of its basic nature.

Second, even if the tech bust had somehow been caused by trade, it wouldn't be an example of long term job dislocation. This is a temporary recession in a trend of growth for the tech industry and tech jobs. Essentially the overall trend is an increasing demand for tech jobs, which pushes the domestic wages of tech workers up high enough that some of the demand will be satisfied by overseas labor. It is not at all an example of a US industry experiencing net job loss due to trade.

The major trends in jobs that have occurred and are occurring in the US are the shifts away from manufacturing and agriculture, toward service, and within service toward research and information technology and so on, and in the less-skilled aspects such as restaurants and retail stores, toward the mega-chains and away from smaller operators. All of these were fundamentally driven by technology and every single one of them would have happened if the US was the only country on Earth. All that trade has done is accelerate the rate of some of these changes, in particular allowing the US to experience a more rapid and complete shift away from mass manufacturing and toward high-tech than it already has. Other changes have actually been decelerated - the US is a net agricultural exporter, for example, so without trade there would be less demand for US farm products and the shift away from farming would actually have gone further. And some major things as I said have basically nothing to do with trade - the megachains such as Walmarts and McDonalds taking over the low-end service industry are a domestic phenomenon, the US developed "McJobs" first and exported those techniques to the rest of the world.

Posted by: Ian Montgomerie on November 25, 2003 02:06 PM

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Selise says:

"i wish you would address my very real concerns (see comment above) with so-called "free trade" instead of creating a strawman to knock down."

I didn't respond to you specifically and I certainly didn't respond to a strawman. It is an often-repeated argument - raised multiple times in this very thread no less - that free trade in the post-NAFTA, post-WTO era is specially responsible for a dramatic shift in jobs where jobs are lost in some industries in return for jobs in other industries. Generally it is also argued that "good jobs" are being lost in the developed world and replaced with "bad jobs" due to trade, and held explicitly or implicitly that in the absence of free trade agreements of the last decade or two, such shifts would not have happened.

This is about as close to conventional wisdom among people arguing against modern free trade agreements as anything gets. I agree that there are nasty aspects to modern trade agreements, such as undermining the ability of nations to protect their own environments by calling such legislation restraint on trade, but the argument that "NAFTA etc. is bad because it exports good jobs overseas" is incredibly common and as I have shown, largely baseless.

Posted by: Ian Montgomerie on November 25, 2003 02:19 PM

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The East Asian countries are examples of success with protectionism. I don't think any serious economist would argue against that. Also, it is a shame to try to bring DVD price declines into an argument about the benefits of free trade unless you are ready to quantify how much of the price decline comes from 1)manufacture overseas 2)economies of scale 3)improvements in manufacture technology.

It is true that my Nike model was simplistic and does not account for price declines. Prices will decline due to cheaper labor in commoditized goods and much less so in differentiated products, where the price is much more dependent on the success of the advertising campaign. The overall point of the Nike model still stands.

The best comment on this thread belongs to Charles: "The real world is, in my opinion, somewhere in between the absolute benefit that theory predicts and the absolute nightmare that free trade opponents paint" I believe modest wage, environmental, and human standards is the best way to reach this middle ground. After all, the most glaring example of price decreases from free trade is the price of human labor.

Posted by: Sparks on November 25, 2003 02:20 PM

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Brendan --

There are actually two distinct questions when it comes to developing countries and trade. The first is: Can export-led growth boost GDP and living standards? The second is: Do you need to open your borders to foreign imports and direct investment?

The answer to the first question is, I think, obvious at this point. There is no example of a developing country in the 20th century enjoying fast, sustainable growth without competing on the world market. And, as I said, in all the East Asian countries, the benefits of that growth have been shared by manufacturing workers. The point I was responding to was Charles' point that GDP growth does not necessarily translate into growth in workers' income. I think the evidence shows unquestionably that historically, at least, it does and has. So if, in fact, jobs are being sent overseas, we can at least say that workers in other countries are reaping real benefits.

The "nurture home industries" question is a complex one. Japan is the extreme example of a country that did that, Korea less so, and less so after the 1980s, Singapore not at all, Hong Kong not at all, Taiwan somewhere in the middle. India did it, with disastrous results, as did many Latin American countries. The one thing that seems indisputable is that a country's businesses have to compete on the world market if the country is to grow: the competitive pressure is essential to pushing countries up the technology and productivity ladder.

Mexico is an interesting case. If you look at that table I linked to, you'll see that Mexican manufacturing workers' compensation in pesos has roughly tripled since NAFTA was passed, while in dollar terms it's just about the same. But even in dollars compensation is up 80% since 1995, after the currency crisis. And I'm also not sure what the Mexican productivity numbers are. Certainly GDP did not grow very fast in the 1990s. So I don't think it's really a counter-example, which is to say there's no evidence that most of the gains from trade are being captured by a small number of people.

The one thing that's obvious when you look at all this data is how devastating currency crises are. If developing countries could avoid those, they'd have a huge headstart.

Posted by: James Surowiecki on November 25, 2003 02:24 PM

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Sparks says:

"Also, it is a shame to try to bring DVD price declines into an argument about the benefits of free trade unless you are ready to quantify how much of the price decline comes from 1)manufacture overseas 2)economies of scale 3)improvements in manufacture technology."

Oh, one can go further than "price declines". DVD itself is fundamentally a creation of Japanese consumer electronics manufacturers, who became highly specialized in and successful at serving a worldwide market. DVD today is an extremely international technology - driven by Japanese standards, the US movie industry, Chinese manufacturing, and the combination of US, Japanese, and Taiwanese software and silicon designs (plus consumer demand around the entire world). Nothing close to this level of success would exist if each of the major world markets was served only by companies within that market. Without easy international trade, there is no question that the US might have DVD technology but in a rather more expensive form, Japan ditto, but there would be many competing technologies and fractured markets and most countries would have little access. Indeed, player costs today would be at least double what they currently are without a few specific developing-world companies such as Apex in China and MediaTek in Taiwan. Consumers have benefitted _tremendously_ from DVD prices decreased by the possibility of competition from many companies in countries around the world. The industry has tended toward oligopoly, and major price cuts were accomplished by new companies from new countries entering the market.

Posted by: Ian Montgomerie on November 25, 2003 02:35 PM

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Sparks --

Don't the numbers on wage increases in the East Asian countries above demonstrate that trade dramatically increased the price of human labor in all of those countries? And again, it's obviously real income, not nominal income, that matters, so insofar as trade holds down or reduces prices for consumers, all workers benefit.

One question about the wage, environmental and human standards: You want the U.S. to insist that Third World countries adopt them or else we will not trade with them? What is your explanation for why these countries haven't already adopted these standards themselves, if they're so beneficial? Isn't it a nation's prerogative to decide for itself what the proper trade-offs between employment, GDP growth, environmental standards, and working conditons are? No one impoed external standards on the U.S. or Japan or Korea or Taiwan or Singapore as they were industrializing and entering the world market.

And I'll ask the question again: Why should the state be able to tell me whom I can and can't buy my sneakers from?

Posted by: James Surowiecki on November 25, 2003 02:43 PM

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Ian Montgomerie,

thank you very much for your thoughtful response...

all i can contribute is to say is that after spending most of last week in miami talking with unionists, environmentalists, human rights workers, pro-democracy advocates (anarchists),... and so forth... the argument that "NAFTA etc. is bad because it exports good jobs overseas" was rarely, if ever heard. what i did hear alot of was that FTAA etc. is bad because (among other things) is bad for workers rights everywhere ... in one meeting i attended representatives from mexico, guatamala, ecuador and usa trade unionists all echoed this idea.

i don't deny that some people are saying "NAFTA etc. is bad because it exports good jobs overseas", but i don't think they are at all representative of the global justice movement.

Posted by: selise on November 25, 2003 03:13 PM

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Surowiecki,

most country that have not standards at developed countries level are under pression from private actors to remain in this state. The fight against communism was always in fact the fight against such standards, because they stay in the way of benefits for inversors. Have you ever heard the expression "banana republic"? exercise your imagination.

DSW

Posted by: Antoni Jaume on November 25, 2003 03:24 PM

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For James I reiterate that East Asia was an example of successful protectionism with really no relation to free trade at all.

Also James, I choose not to engage in your libertarian screed. I am free to do so.

For Ian I reiterate that "modest" standards are what I propose - not his scenario: "Nothing close to this level of success would exist if each of the major world markets was served only by companies within that market".

Posted by: Sparks on November 25, 2003 03:49 PM

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I'm sorry? It's litertarian to suggest that there should be limits to how much the state can interfere with individuals' right to free exchange? I'm not a libertarian by any stretch of the imagination. I just don't understand what justifies the government telling an individual who he can do business or have a conversation with. Do you think the government should be able to tell you where you can travel to, as well? Don't engage my supposed screed. Just make an argument. Don't assume that it's so self-evident.

And you're completely missing the point of the discussion about East Asia. Your argument -- in the Nike model -- was that work gets shipped abroad, impoverishing American workers, and leaving workers abroad earning (in your model) $1 forever. My point was that this was not true: that the foreign workers' wages would rise, so that all the gains of trade would not, in fact, go to Nike. And as their wages rise, the gap between them and American workers narrows. Again, no one is going to Korea for cheap labor anymore.

Whether or not East Asia was protectionist -- which means that it limited imports, not exports -- has nothing to do with this argument, since what we're talking about is the impact on developing country wages of Nike-style manufacturing and exports. Unless you're arguing that somehow protectionism made exporting companies pay their workers more -- which doesn't really make sense -- then the point stands: The idea that trade is a race to the bottom is simply wrong.

This is important because it suggests that imposing external standards is either unnecessary or counterproductive. That's also why the examples from history are important. If you want us to dictate to other countries how they should behave, you need to explain why the path that the U.S., Japan, Korea, Taiwan, Singapore, etc. -- setting their own standards, and having them rise as the countries grew more prosperous -- is not appropriate for developing countries today. (Again, set aside the protectionist question. We're not debating whether developing countries should be open to imports. We're debating whether they need externally-imposed labor and environmental standards.)

The problem, I think, is that framing the question in terms of standards makes it sound as if you're interested in protecting Third World workers. But your Nike model, and your focus on trade as a matter of "pitting" workers against each other, suggest that what you really want to do is make it easier for American workers to compete with Third World labor. I think Third World workers can be forgiven for not appreciating that kind of benevolence.

Posted by: James Surowiecki on November 25, 2003 04:55 PM

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I'm sorry? It's litertarian to suggest that there should be limits to how much the state can interfere with individuals' right to free exchange? I'm not a libertarian by any stretch of the imagination. I just don't understand what justifies the government telling an individual who he can do business or have a conversation with. Do you think the government should be able to tell you where you can travel to, as well? Don't engage my supposed screed. Just make an argument. Don't assume that it's so self-evident.

And you're completely missing the point of the discussion about East Asia. Your argument -- in the Nike model -- was that work gets shipped abroad, impoverishing American workers, and leaving workers abroad earning (in your model) $1 forever. My point was that this was not true: that the foreign workers' wages would rise, so that all the gains of trade would not, in fact, go to Nike. And as their wages rise, the gap between them and American workers narrows. Again, no one is going to Korea for cheap labor anymore.

Whether or not East Asia was protectionist -- which means that it limited imports, not exports -- has nothing to do with this argument, since what we're talking about is the impact on developing country wages of Nike-style manufacturing and exports. Unless you're arguing that somehow protectionism made exporting companies pay their workers more -- which doesn't really make sense -- then the point stands: The idea that trade is a race to the bottom is simply wrong.

This is important because it suggests that imposing external standards is either unnecessary or counterproductive. That's also why the examples from history are important. If you want us to dictate to other countries how they should behave, you need to explain why the path that the U.S., Japan, Korea, Taiwan, Singapore, etc. -- setting their own standards, and having them rise as the countries grew more prosperous -- is not appropriate for developing countries today. (Again, set aside the protectionist question. We're not debating whether developing countries should be open to imports. We're debating whether they need externally-imposed labor and environmental standards.)

The problem, I think, is that framing the question in terms of standards makes it sound as if you're interested in protecting Third World workers. But your Nike model, and your focus on trade as a matter of "pitting" workers against each other, suggest that what you really want to do is make it easier for American workers to compete with Third World labor. I think Third World workers can be forgiven for not appreciating that kind of benevolence.

Posted by: James Surowiecki on November 25, 2003 05:00 PM

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Ian Montgomerie argues that, "First it is completely wrong simply as a characterization of what is going on in the software industry. The software industry has massively shed jobs because the revenues of the industry have undergone a huge decrease."

We'll agree on that there is cyclical job loss associated with the recession. We evidently will not agree that there is permanent job loss due to restructuring, especially the hiring of H1-B workers and foreigners. But I'll stick with my viewpoint, thank you very much.

He adds, "Second, even if the tech bust had somehow been caused by trade, it wouldn't be an example of long term job dislocation.This is a temporary recession in a trend of growth for the tech industry and tech jobs."

We'll find out about the long-term when it happens, won't we? When the long-term arrives, tell me I'm wrong, not before.

Ian Montgomerie also says that, "The major trends in jobs that have occurred and are occurring in the US are the shifts away from manufacturing and agriculture, toward service, and within service toward research and information technology and so on, and in the less-skilled aspects such as restaurants and retail stores, toward the mega-chains and away from smaller operators. All of these were fundamentally driven by technology...."

This is about half-right. Agricultural employment fell because of mechanization but, until recently, there was very little "outsourcing". The US was a net food importer. But in manufacturing, automation has generally played a far smaller role, and outsourcing a much larger role. As for services, that's such a mixed bag that one can hardly generalize. Barbers are not cutting hair faster than they have been in the last 30 years (or whenever electric shears became the norm). Personal maid/valet services have diminished with the advent of vacuum cleaners and dishwashers... and of course, outsourcing is impossible.

Your view, as stated, lacks the fine-grain of the real world. In the real world, some job destruction is caused by technology. Some (from the point of view of Americans) is caused by outsourcing abroad. In every sector, one can find examples where one predominates or where the other predominates. Blanket statements are not realistic.

~~~~~~~~~~~~~~~~~~~

Mr. Surowiecki, I had hoped we had agreed not to continue our discussion.

Posted by: Charles on November 25, 2003 05:34 PM

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James, I mean no benevolence to third world workers as my interest is not to benefit them. My interest is the benefit of Americans. Wage standards are for Americans, environmental standards are for all of us, humanitarian standards are for our day of reckoning.

"no one is going to Korea for cheap labor anymore."
Nobody ever went to Korea for cheap labor. Only Korean companies could hire Korean workers. Similar barriers exist to this day. Certainly it has always been difficult to penetrate their markets with imports.

"Unless you're arguing that somehow protectionism made exporting companies pay their workers more "
Precisely, because Korea was supplying its own nation and America. The lack of imports created high demand for Korean labor and all Korean companies were forced to pay more. Supply & demand is a powerful thing.
Consider Mexico, which truly did embrace free trade. No wage increases for them with factories moving to China.

Posted by: Sparks on November 25, 2003 06:46 PM

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Sparks --

You're simply wrong about the facts here. Nike started production of its shoes in South Korea and in Taiwan in 1972, and until the late 1980s those two countries accounted for 90% of the company's production. Adidas and Reebok also made their shoes there. Then, because South Korean and Taiwanese wages had risen, it moved on to Indonesia, Thailand, and China, and eventually to Vietnam. Companies once went to Korea for cheap labor and now do so no longer.

In any case, if you believe your own argument, why do you want to bother with wage standards, etc., which are a circuitous and difficult-to-implement route to your goal. Why not just advocate higher tariffs on imported goods? That takes away the cost advantage of foreign workers, raises tax revenue for the government, is easy to implement, and, at least according to your argument, would seem to ensure that American workers get paid more.

Charles, I have to say, that's a very strange sentence. The whole point of being here is discussion.

Posted by: James Surowiecki on November 25, 2003 07:48 PM

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Charles says:

"Your view, as stated, lacks the fine-grain of the real world. In the real world, some job destruction is caused by technology. Some (from the point of view of Americans) is caused by outsourcing abroad."

In the real world, technology's impact on the employment mix of industries vastly predominates over "outsourcing". Vastly. Outsourcing is not even within an order of magnitude of being competitive, in the real world.

Your views aren't even based on the right basic facts. For example you say that:

"Agricultural employment fell because of mechanization but, until recently, there was very little "outsourcing". The US was a net food importer."

This is totally wrong. The US has been a net food exporter throughout much of its history, and it has specifically been a net food importer from 1959 until now. The trend these days is in fact toward a decreasing agricultural trade surplus, as wealthy US consumers get an increasing taste for relatively expensive overseas foods. US agricultural exports are currently about 55 billion dollars per year, compared to about 45 billion in imports. The decreasing agricultural surplus, as I said, comes as a result of consumer demand - Americans' demand for overseas imports, especially expensive stuff like fruits, is increasing faster than US agricultural production.

For example see the following article which I found with a quick google:

http://www.iht.com/articles/111301.html

And you claim _my_ views lack "the fine-grain of the real world"?

Posted by: Ian Montgomerie on November 25, 2003 08:00 PM

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Charles --

One note on your response to Ian:

You argue that there is "permanent job loss" due to outsourcing and H-1B hires. Ian says it's a temporary blip in the midst of a long-term upward trend, implying that you're wrong. You say essentially, well, we'll see about the long-term when it happens, so don't tell me I'm wrong until then.

What is the difference between your assertion that the job losses are permanent and Ian's assertion that the job losses are temporary? Why is it that Ian has to wait until the long-term to make assertions about the long-term, when you made an assertion about the long-term two grafs before you cautioned him? And if there is no point to making statements about the future until the future arrives, then what's the point of having these conversations, many of which are attempts to think about what current conditions mean for the future?

Posted by: James Surowiecki on November 25, 2003 08:22 PM

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Ian Montgomerie says, "In the real world, technology's impact on the employment mix of industries vastly predominates over "outsourcing". Vastly."

Well, it's very nice of you to say so, but I don't see any facts being laid on the table. Here's an example of the effects of immigration that I recounted in another thread: At the time of the Tienanmen massacre, the elder president Bush granted a waiver to Chinese in this country. I heard a senior level executive say, "We will hire Chinese. We will be able to pay them less and we will have them by the balls."

That is a fact. I don't know whether you regard grasping people by the testicles to be a high-tech means of improving productivity, but I don't.

Mr. Montgomerie says, "Your views aren't even based on the right basic facts. For example you say that: 'Agricultural employment fell because of mechanization but, until recently, there was very little "outsourcing". The US was a net food importer. 'This is totally wrong.

Yes, Mr. Montgomerie, you've discovered a dreadful, fatal flaw in my reasoning: a typo. A rather obvious one, I would have to say.

Now that you've been informed that it's a typo, please go back and re-read what I said with the understanding that it should have read, as was abundantly clear from context, "The US was a net food exporter."


Posted by: Charles on November 25, 2003 09:21 PM

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Reposted from the Walmart thread:
http://www.j-bradford-delong.net/movable_type/2003_archives/002718.html

"James Surowieki says, "I don't think my position on Wal-Mart is infallible. I may be wrong. "

Such an attitude does not exactly jump out at the reader when one uses phrases such as "simply bizarre" and "fantasy" to describe the opposition position in debate. Accusing *me* of ad hominem is truly rich.

The [Surowiecki] Moneybox column is only relevant for one line: an unequivocal declaration that AOL stock was not overvalued in January, 2000.

The absolute certainty that other voices must be wrong runs through (your side of) our debate. Where I see a patch of common ground, you insist that there is none. Such certainty about the sources of Wal-Mart's success is just as well-founded as that of your call on AOL. In fact, I think you argued that one better than you have argued your case here.

I understand your opinion that social solidarity and declining wages have no role in purchase decisions. I've presented my reasons to believe that they are. I've presented a quote from Business Week indicating that low wages are a significant factor in Wal-Mart's success (this you discarded because there were no detailed figures given.)

If you had given me any substantive reason to change my opinion, I would have. I see no substance in your defense of your position. What facts could change my mind? Try presenting some and let's see. So far, I find few if any facts in your posts.

What I find is opinion, unsubstantiated so far with even a link-- and yes, I have read the B-school papers about how brilliant Wal-Mart's business model is. So was Enron's in September, 2001. But where's that link regarding 1970s era laws on price cutting, for example?

Yes, the evidence of corporate criminality is fragmentary and anecdotal. This is usually the case when crimes are committed. One does not know the depth of the criminality until there is a thorough investigation. Forty citations by the notoriously ineffectual NLRB is, however, extraordinary and suggests a pattern and practice of contempt for the law. Unfortunately, opinion either pro or con will remain opinion until there are serious protections of the right to organize and other basic human rights. That's not likely to happen in this new Gilded Age.

Regarding "excess profits," I do happen to understand basic economic theory. I also know that economic theory doesn't precisely correspond to the real world. The "excess profits" that a unionized worker "wrings" out of his employer are the money that sends his daughter to medical school. If he were unable to do that, only the owners of property would be able to enjoy such things.

In the laissez faire extremism that is the vogue nowadays, human considerations like that one are wrung out of the debate. What is left is a world headed toward serfdom, led down this path by economic ideologues who don't even really understand the theory.

Ironically, the best theorists, the ones who understand the approximations and assumptions that are made in constructing a theory are often sensitive to the issues of externalities, market imperfections and so on. Those who are rigidly doctrinaire are often, in my opinion, those who don't know how the sausage is sliced in making economic theory.

Unless my comments about what I regard as a regrettable style of debating on your part have any resonance, let's leave it there. Time will show who is right.

Posted by: Charles on November 17, 2003 01:30 PM

~~~~~~~~~~~~~~
Debate is not simply posting words on an electronic bulletin board. It is acknowleding the merits of the positions of others, and of being sincerely willing to change one's mind.

Take a hint, Mr. Surowiecki.

Posted by: Charles on November 25, 2003 09:26 PM

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Charles, for me the problem is that your definition of valid evidence seems to depend on whether you agree with it or not. For instance, in the Wal-Mart thread I quoted from a paper by Brad and two other economists, who presumably had spent a good deal of time researching what they were writing about, saying that the main source of Wal-Mart's competitive advantage was its use of technology, not lower wages. This, to your mind, did not count as evidence about Wal-Mart. In this thread, you argued that one problem with "free trade" is that greater GDP thanks to exports does not necessarily mean that workers in export industries reap the benefits. I put up numbers showing that, historically, it has meant exactly this, suggesting that this "problem" isn't a problem at all. Those didn't count as evidence, either, apparently. But one quote from an executive looking to sound like a hardass about his employees -- with no supporting evidence about how many Chinese workers companies hired after Tienanmen, or whether this executive actually did hire Chinese workers and fire American workers -- does count as evidence about the impact of immigration on American wages. Pardon me for wondering if this makes sense.

And as far as the impact of free trade on American workers and the U.S. economy goes, try this by an economist who does understand the theory: http://www.j-bradford-delong.net/movable_type/2003_archives/002014.html.

And by the way, an "ad hominem" attack is one that attacks the person making the argument rather than the argument itself. Calling an incorrect statement about history "bizarre" is not an ad hominem argument. Bringing up a person's bad prediction about a subject that has nothing to do with the question at hand is.

Posted by: James Surowiecki on November 25, 2003 11:14 PM

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Tariffs set by individual countries lead to spiralling out of control trade wars. The end result of each country making its own tariffs is worse than free trade.

The standards must be internationally set by the developed world based on some commonly agreed principles.

Posted by: Sparks on November 26, 2003 05:31 AM

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No, Mr. Surowiecki, my problem with your style of debate has to do with your use abusive language and subsequent dodges of claiming that it's technically not ad hominem and that it's really the other fellow being uncivil.

Enough. Life is too short to waste on... uh... answering arguments filled with hypocrisy and conceit.

Posted by: Charles on November 26, 2003 10:47 PM

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