Shaking Up Trade Theory

[GrGr]

Business Week

Ever since Americans began fretting about globalization nearly three decades ago, economists have patiently explained why, on balance, it's a boon to the U.S. Yes, some Americans lose their jobs, either to imports or because factories move to cheap-labor countries such as China or India. But the bulk of this work is labor-intensive and lower skilled and can be done more efficiently by countries that have an abundance of less-educated workers. In return, those countries buy more of our higher-value goods made by skilled workers -- for which the U.S. has a comparative advantage. The lost jobs and lower wages in the U.S., economists say, are more than offset when countries specialize like this, leading to more robust exports and lower prices on imported goods.

Now this long-held consensus is beginning to crack. True, China is emerging as a global powerhouse, realigning many economic relationships. But in the long run a more disruptive trend may be the fast-rising tide of white-collar jobs shifting to cheap-labor countries. The fact that programming, engineering, and other high-skilled jobs are jumping to places such as China and India seems to conflict head-on with the 200-year-old doctrine of comparative advantage. With these countries now graduating more college students than the U.S. every year, economists are increasingly uncertain about just where the U.S. has an advantage anymore -- or whether the standard framework for understanding globalization still applies in the face of so-called white-collar offshoring. "Now we've got trade patterns that challenge the common view of trade theory, which might not be so true anymore," says Gary C. Hufbauer, a senior fellow at the Institute for International Economics (IIE), a Washington (D.C.) think tank. A leading advocate of free-trade pacts, he still thinks white-collar job shifts are good for the U.S.

...

"A Right to Be Scared"
How large might the white-collar offshoring trend become? The more jobs that go, the greater the impact on U.S. wages. Consultant Forrester Research Inc. (FORR ) in Cambridge, Mass., was among the first to spot the white-collar job shifts and has done the most detailed projections so far. It sees the pace of U.S. job flows abroad averaging 300,000 a year through 2015. This is probably conservative since Forrester has also found that the number of U.S. companies among the 1,000 largest that engage in some level of white-collar offshoring will rise sharply -- from 37% today to 54% by 2008. Already, some 14 million white-collar jobs involve work that can be shipped electronically and thus in theory could be moved offshore, according to a study by economists Ashok D. Bardhan and Cynthia A. Kroll at the University of California at Berkeley's Haas School of Business.

The hit to wages could be powerful if that happens. Forrester analyst John C. McCarthy identified 242 service jobs as likely to be affected among the 500-plus major occupations tracked by the Bureau of Labor Statistics (BLS). He ranked each by the share of jobs employers are likely to shift abroad by 2015. His conclusion: The cumulative job outflow will total 3.4 million over that period. That comes to 6% of the 57 million people who work in these 242 occupations today.

If that's in the ballpark, U.S. white-collar wages would get whacked, says Harvard University labor economist Lawrence F. Katz. Every 1% drop in employment due to imports or factories gone abroad shaves 0.5% off pay for remaining workers, he found in a study with Harvard colleagues Richard B. Freeman and George J. Borjas. So if job losses rise to 6% of the white-collar total, these workers' pay could be depressed by 2% to 3% through 2015, figures Katz. While a few percentage points over a decade or so may not sound dire, it's roughly as much as blue-collar workers lost to globalization in recent decades. "White-collar workers have a right to be scared," says Katz.

Another way economists gauge the potential wage impact is to look at examples of how people fare when they lose a job and extrapolate for those who might get displaced by offshoring. Turns out that just 30% of laid-off workers earn the same or more after three years, according to a study of 22 years of BLS data by economics professor Lori G. Kletzer of the University of California at Santa Cruz. Only 68% even hold a job at that point, while the rest are unemployed, retired, or perhaps at home with children. On average, those reemployed earn 10% less than before, Kletzer found. "Clearly, offshoring will be bad for U.S. wages, given what the job displacement numbers tell us," says Princeton University economics professor Henry S. Farber, who has written extensively about displaced workers.

But even if the incomes of more U.S. workers fall, won't the rest of American consumers benefit from the lower-priced goods and services globalization brings? Not necessarily, some economists now believe. Most studies of trade's impact on pay, including Katz's, assume that factory-job losses simply shift the demand for labor from one kind of worker to another higher up the value chain. So higher-educated workers gained much of what the less-schooled lost.

But if white-collar offshoring swells enough, the resulting job losses could undercut a large swath of U.S. consumers. In part, this is a question of scale. There's little doubt that globalization is likely to continue to cut into the country's 14.5 million factory hands. Add in 57 million white-collar workers suddenly facing global competition, too, and more than half the U.S. workforce of 130 million could feel the impact. Then, economists conclude, the benefits of globalization would flow mostly to companies and shareholders who profit from the cheaper labor, with little pass-through to workers and consumers. "If a majority of Americans have lower wages from outsourcing, then capital would be the prime beneficiary, even if U.S. GDP goes up," says Harvard's Freeman.

...

Indeed, it's possible that the U.S. already has suffered immiseration. Mann's study found that the offshore exodus of U.S. chip factories accounted for 10% to 30% of the decline in the prices of personal computers and memory chips in the early 1990s. These savings boosted U.S. multinationals' net exports of these products, and by 2000 the companies saw a $10 billion trade surplus in them.

But did the U.S. as a whole come out ahead? Mann's study also shows that the country's overall trade deficit in these products plunged into negative territory in 1992 and has remained there ever since. So while large U.S. companies gained from moving chip factories abroad, the overall U.S. economy may have lost. "This looks like immiseration to me," says Leamer.

Globalization, say most trade economists, ultimately should benefit the U.S. more than it hurts. But they can't yet show that to be true. Until someone comes up with a convincing explanation for what happens when the highest-skilled jobs move offshore, battles over globalization are likely to rage even hotter.

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[self-immiseration = making oneself poorer]

 

[ntdz]

You can only benefit from globalization. There might be downsides like less goods produced here, but it frees us up to produce goods we specialize in and produce BETTER than other countries. We let China make all their little garbage goods so we don't have to and can make better ones instead. It's Econ 101, trade only helps both countries involved, ALWAYS.

 

[myusername]

Originally posted by: ntdz
it frees us up to produce goods we specialize in and produce BETTER than other countries.

Assuming globalization, what will we possibly produce "better" than any other country 20 years from now?

We let China make all their little garbage goods so we don't have to and can make better ones instead.

You mean like Japan and Taiwan used to?

It's Econ 101...

Perhaps if you had taken classes beyond 101...

...trade only helps both countries involved, ALWAYS.

Ah, yes, the hallmark inability to see anything beyond black/white.

 

[ntdz]

Originally posted by: myusername

Originally posted by: ntdz
it frees us up to produce goods we specialize in and produce BETTER than other countries.

Assuming globalization, what will we possibly produce "better" than any other country 20 years from now?

We let China make all their little garbage goods so we don't have to and can make better ones instead.

You mean like Japan and Taiwan used to?

It's Econ 101...

Perhaps if you had taken classes beyond 101...

...trade only helps both countries involved, ALWAYS.

Ah, yes, the hallmark inability to see anything beyond black/white.

Point 1: The same goods we are better at now. Every country has their own niche that they specialize in, and we have ours too. By letting other countries produce the stuff we are less efficient at, we can produce more of the goods we are better at producing, increasing productivity, etc...

Point 2: Japan and Taiwan are both way more advanced that China. Go look at GDP/capita and see who's higher.

Point 3: Perhaps if you knew what the hell you're talking about, you don't know what I have taken and what I haven't, so don't assume things about people.

Point 4: It is a fact that trade helps all countries. It is indisputable, and you won't find one reputable economist say that trade is not beneficial to all countries.

 

[GrGr]

Originally posted by: ntdz
You can only benefit from globalization. There might be downsides like less goods produced here, but it frees us up to produce goods we specialize in and produce BETTER than other countries. We let China make all their little garbage goods so we don't have to and can make better ones instead. It's Econ 101, trade only helps both countries involved, ALWAYS.

That is the theory of comparative advantage. However economists are discovering that the basis for that model has changed. The theory states that for there to be mutual advantage both parties must retain it's strengths. But if one nation's strengths are transferred to the other nation (because of cheaper production costs) the nation with the cheaper productions costs gains more and the higher cost nation loses out. The advent of modern communications that allows people, skills and capital global movement overnight has tipped the balance in favor of the nations capable of cheap production.

Here is another argument:

Clarifications on the Case for Free Trade
by Paul Craig Roberts
mises.org

[Posted January 10, 2004]

Free trade has necessary conditions. Today these conditions are not met. This point has escaped Joe Salerno and George Reisman (both writing on Mises.org), as it has a vast number of other people.

The case for free trade is based on David Ricardo?s principle of comparative advantage. Ricardo addressed the question how trade could take place between country A and country B (England and Portugal in his example) if country B was more efficient in the production of tradable goods (cloth and wine in his example) than A.

In other words, if Portugal could produce both cloth and wine at lower cost than England, how could trade between the countries benefit each?

Ricardo found the answer in relative or comparative advantage. He said that if Portugal specialized in wine, where its absolute advantage was greatest, and England specialized in cloth, where its disadvantage was least, total output would be higher than if both countries achieved self-sufficiency by producing both products. The higher productivity from specialization would result in mutual gains from trade.

For comparative advantage to reign, two conditions are necessary:

One is that capital and labor must be mobile within each country so that the capital and labor employed in England in the production of wine can flow into the production of cloth, where England?s trade advantage lies. In Portugal capital and labor must be able to flow from cloth to wine where Portugal?s advantage is greatest.

The other necessary condition is that capital and labor (factors of production) cannot be internationally mobile. If the factors of production are internationally mobile, capital and labor would move from England to Portugal, where both commodities can be produced the cheapest. Both wine and cloth would be produced in Portugal. Portugal would gain and England would lose.

Ricardo makes it clear that for trade to make both countries better off, trade must be based on comparative advantage. Ricardo gives reasons why, in his time, factors of production are internationally immobile.

Since the time of Ricardo, the key assumption of trade theory remains, in the recent words of trade theorist Roy J. Ruffin, "the inability of factors to move from a country where productivity is low to another where productivity is higher." In a recent article in History of Political Economy (34:4, 2002, pp. 727-748), Ruffin shows that Ricardo?s claim over Robert Torrens as the discoverer of the principle of comparative advantage lies in Ricardo?s realization that comparative advantage, the basis of the case for free trade, lies in "factor immobility between countries." Ruffin notes that "of the 973 words Ricardo devoted to explaining the law of comparative advantage, 485 emphasized the importance of factor immobility."

If factors of production are as mobile as traded goods, the case for free trade--that it benefits all countries--collapses. There is no known case for free trade if factors of production are as mobile as traded goods.

For some time I have been pointing out that the collapse of world socialism and the advent of the Internet have made factors of production as mobile as traded goods. Indeed, factors of production are more mobile. Capital, technology, and ideas can move today with the speed of light, whereas goods have to be shipped.

The collapse of world socialism has made Asian countries, such as China and India, receptive to foreign capital, and it has made first world capital willing to migrate beyond first world countries. The Internet makes it possible for a country to hire knowledge workers anywhere on the globe.

The Internet and the international mobility of capital and technology have, in effect, made labor internationally mobile, especially labor that is paid less than the value of its marginal product or its contribution to output. The huge excess supplies of labor in countries such as China and India ensure that it will be many years before labor in those countries, both skilled and unskilled, will be paid the value of its marginal product.

The international mobility of factors of production is a new phenomenon. It permits first world businesses, seeking lower costs, greater profits, and a stronger competitive position, to substitute cheap foreign labor for the entire range of domestic labor involved in the creation of tradable goods and services. Only labor involved in non-traded goods and services is safe from foreign substitution. It is not yet possible to package hair cuts, surgical operations, dentistry or home repairs as internationally tradable services.

Many people confuse the workings of capitalism that lead to lower costs and greater profits with free trade. They overlook the necessary conditions for free trade to be mutually beneficial. The same people tend to confuse the free flow of factors of production with free trade. I have been amazed at the number of fierce adherents of free trade, even among economists, who have no idea of the necessary conditions on which the case for free trade rests.

Senator Schumer and I do not attack the doctrine of free trade. We accept it. We simply point out that the known necessary conditions for free trade to be mutually beneficial do not hold in today?s environment where factors of production are as mobile, if not more so, than traded goods. What we are witnessing, we think, is not trade based on comparative advantage but the flow of first world factors of production to cheap Asian labor where the productivity of capital and technology is highest.

We do not dispute that global gains might exceed first world losses. Nevertheless, the flow of factors of production to absolute advantage in place of comparative advantage vitiates the case for free trade--that it produces mutual gains to the countries involved. What we may be witnessing is global capitalism destroying national sovereignties, leading to a global government, much as Marx described capitalism?s role in the overthrow of feudalism and the rise of the nation-state.

...

Many people have noted that there is nothing new about the international mobility of capital. However, two crucial aspects of international capital mobility are new: (1) Until recently, capital mobility was limited to the first world, where labor cost differentials are not great. (2) Because labor costs do not greatly differ between first world economies, offshore production for home markets was not the reason for the capital flows. When Japanese and Germans invest in automobile plants in the US, it is to produce products for sale in US markets, not to displace car production in Japan and Germany by selling cars produced in the US in their home markets.

Another widely made error is to assume that US labor displaced by outsourcing, off shore production or the Internet moves into US export industries to meet increased demand for US goods from countries whose labor is made more productive by the inflow of US capital and technology. This model assumes that comparative advantage reigns. The model does not work if absolute advantage reigns.

The enormous and growing US trade deficit, reflecting our growing dependence on imported manufactured goods, the decline in US manufacturing, and the new, but rapid, loss of knowledge jobs, does not bear out the view that US labor displaced by factor mobility is re-employed in export industries. Certainly there is no empirical evidence for Salerno?s statement that US capital outflows are leading to "increased real demand for U.S. exports which raises prices and real wages in these industries." Isn?t Mr. Salerno aware that the dollar is declining in value and the prices of US exports are falling?

The theorizing offered by Mr. Reisman and Mr. Salerno is based on the assumption that comparative advantage reigns. If the necessary conditions for comparative advantage are not present, their theorizing does not hold.

Some try to avoid the issue of comparative advantage with an argument that we always benefit anytime we can acquire a good or service at a lower opportunity cost. This is true as partial equilibrium analysis. If 20,000 US workers involved in the production of brassieres lose their jobs to cheaper foreign producers, their loses will be outweighed by gains to 100 million American women. However, we cannot generalize this argument without the assumption of trade based on comparative advantage. If the full range of domestic labor involved in tradable goods and services can be replaced by cheaper foreign labor, the loss of incomes outweighs the lower prices. The lower prices themselves will be lost to currency devaluation.

...

It is trite to say that capital inflows and trade deficits are mirror images. The question is: which is driving the other? This can vary in time. I was able to refute the "twin deficits" theory advanced by Martin Feldstein and widely parroted by others during Reagan?s first term by showing that the US became a "net importer of capital" not because foreign capital had to rush in to finance "Reagan deficits," but because US capital outflows collapsed in response to the higher after-tax rate of return in the US due to the Reagan tax cuts. The capital stayed at home, and we financed our own deficit.

Today we are a net importer of capital because we are increasingly dependent on imported manufactured goods as a result of outsourcing and off shore production. Goods, and increasingly services, that US multinationals produce abroad for the US domestic market are driving up the trade deficit. Foreigners use the dollars we pay them to acquire ownership of our assets.

...

The proper way to answer the argument that Schumer and I have made is to make a case that free trade is mutually advantageous in the absence of comparative advantage. Alternatively, make a convincing case that comparative advantage does not require at least some factors of production to be immobile. Anyone who can devise a new theory that proves free trade to be mutually advantageous in circumstances where factors of production are as mobile, if not more mobile, than traded goods will win a Nobel Prize.

---------------------

 

[1EZduzit]

Originally posted by: ntdz
You can only benefit from globalization. There might be downsides like less goods produced here, but it frees us up to produce goods we specialize in and produce BETTER than other countries. We let China make all their little garbage goods so we don't have to and can make better ones instead. It's Econ 101, trade only helps both countries involved, ALWAYS.

Yeah....like we used to do with Japan. Just because somethiong is good for business doesn't mean it's good for the country.

 

[SuperTool]

Sounds like Cheap Labor Conservatives' wet dream.

 

[ReiAyanami]

the trade theory does not fully account for inflation caused by increased consumption in the beneficiarcy country (the one where many citizens are emerging into a sort of middle class out of poverty). for relatively small countries such as RoC and Japan (125 million) the impact is minimal. but when you throw literally almost half the worlds population (2.3 billion) china's 1.3 billion plus india's 1 billion, that puts a huge strain on finite resources (as earth does not have infinite resources)

best example would be oil which soared 80% in a year as china alone takes half of every new barrel of oil discovered

developed countries which depend on cheap commodities are thereby hurt the most and must face a decline in standard of living. even though commodities such as oil and precious metals have risen sharply, we have not seen much effect yet. but when it approachs 50% of that 2.3 billion block of people emerging into a middle class then commodity demand will be so huge its enough to start... a World War

 

[Deleted member 4644]

Global trends in consumption, trade, etc etc worry me more than anything else on this planet. Simply put, I think the world will be hard pressed to maintain consumption levels while also making sure developing countries develop and first world countries remain first world....

 

[CubicZirconia]

Originally posted by: LordSegan
Global trends in consumption, trade, etc etc worry me more than anything else on this planet. Simply put, I think the world will be hard pressed to maintain consumption levels while also making sure developing countries develop and first world countries remain first world....

Does anyone really care about developing countries? I'm going to have to go with no. As long as the first world can continue to exploit the third world nothing is going to change.

 

[3chordcharlie]

Actually, comparitive advantage doesn't mean you produce the things you are best at, it means each labour force chooses production of goods so that the entire (global) economy produces at a maximum. Even if you're better at producing every good; you don't do it.

The thing about econ 101 is there were never more than 2 countries, never more than 2 goods, and no one faced any consequences due to unemployment. Trade is good, but broad-strokes statements like 'trade always makes everyone better off' need to be cut in favour of analyzing a lot of situations to see if they actually produce a net benefit.

 

[Kibbo]

And even if they provide a net benefit to the country's economy as a whole, the wealth and income distribution effects should be evaluated as well.

 

[zephyrprime]

Originally posted by: 3chordcharlie
The thing about econ 101 is there were never more than 2 countries, never more than 2 goods, and no one faced any consequences due to unemployment.

This is exactly the point that so many would be economists fail to realize. In Ricardo's theory of comparitive advantage, there isn't even such a thing as unemployment or exchange rates let alone foreign capital investment.

 

[Kibbo]

Originally posted by: zephyrprime

Originally posted by: 3chordcharlie
The thing about econ 101 is there were never more than 2 countries, never more than 2 goods, and no one faced any consequences due to unemployment.

This is exactly the point that so many would be economists fail to realize. In Ricardo's theory of comparitive advantage, there isn't even such a thing as unemployment or exchange rates let alone foreign capital investment.

No, but there are models of comparative advantage that do allow for those complications. Of course, some of them suggest that absolutely free markets do not always lead to the best outcomes. But the dominant consensus believes that to be true, especially in the Anglo-American schools of thought.

 

[IronMentality]

I read that article as I subscribe to BusinessWeek... In that same edition they talked about the 'China Price' and how the U.S. in the mid 1990s produced and consumed 90% of it's own goods, and that at its present day it has fallen to 75%. That number is expected to fall again. While globalization is the primary cause for what the World Bank called the most prosperous year in world history in economic growth and wealth distribution -- I personally believe the United States has shipped off most of it's technological advantage and manufacturing base and that it will hurt us in the long run.

I would prefer it greatly if all of the companies that started the latest surge in productivity growth (e.g. Intel, Microsoft, AMD, NVidia, Cisco, etc) were manufacturing strictly in the U.S. -- but I can only dream. I am a Moderate Republican, and I sure wish we could go back to the days when we exported more then we ever did (under Reagan).

I can only fortell in the future unless you have one hell of a education, jobs are going to be tough. We all better hope and pray in the U.S. if we expect to continue the current way we are living that the Biotech industry comes along and gives a bailout.

 

[3chordcharlie]

Originally posted by: Kibbo

Originally posted by: zephyrprime

Originally posted by: 3chordcharlie
The thing about econ 101 is there were never more than 2 countries, never more than 2 goods, and no one faced any consequences due to unemployment.

This is exactly the point that so many would be economists fail to realize. In Ricardo's theory of comparitive advantage, there isn't even such a thing as unemployment or exchange rates let alone foreign capital investment.

No, but there are models of comparative advantage that do allow for those complications. Of course, some of them suggest that absolutely free markets do not always lead to the best outcomes. But the dominant consensus believes that to be true, especially in the Anglo-American schools of thought.

You're right - there are much more comprehensive models. I was really only pointing out that drawing your conclusions about the world based on econ 101 is pretty simplistic, and not likely to take you far.

 

[dmcowen674]

Originally posted by: GrGr
Topic Title: Shaking Up Trade Theory
Topic Summary: For decades economists have insisted that the U.S. wins from globalization. Now they're not so sure

Awwww come on GrGr, the RRR FLL's say it's a great thing that the U.S. has no Mnyfacturing capability of it's own. You heard them, all those petty jobs are beneath them.

 

[IronMentality]

It's dangerous for us to lack military manufacturing, as we no rely on foreign countries to supply us with bullets and other military equipment...

 

[ntdz]

Originally posted by: dmcowen674

Originally posted by: GrGr
Topic Title: Shaking Up Trade Theory
Topic Summary: For decades economists have insisted that the U.S. wins from globalization. Now they're not so sure

Awwww come on GrGr, the RRR FLL's say it's a great thing that the U.S. has no Mnyfacturing capability of it's own. You heard them, all those petty jobs are beneath them.

yeah, we have no manufactoring capability, thats why our economy is nearly triple the size of the next biggest country, and we export the most goods of any country (including china).

 

[Engineer]

Originally posted by: ntdz

Originally posted by: dmcowen674

Originally posted by: GrGr
Topic Title: Shaking Up Trade Theory
Topic Summary: For decades economists have insisted that the U.S. wins from globalization. Now they're not so sure

Awwww come on GrGr, the RRR FLL's say it's a great thing that the U.S. has no Mnyfacturing capability of it's own. You heard them, all those petty jobs are beneath them.

yeah, we have no manufactoring capability, thats why our economy is nearly triple the size of the next biggest country, and we export the most goods of any country (including china).

We still import 50% more than we export.

Also, nearly 1/3 of our GDP is built upon those cheap imports.

 

[LordMagnusKain]

Originally posted by: ntdz
You can only benefit from globalization. There might be downsides like less goods produced here, but it frees us up to produce goods we specialize in and produce BETTER than other countries. We let China make all their little garbage goods so we don't have to and can make better ones instead. It's Econ 101, trade only helps both countries involved, ALWAYS.

unless in your outsourcing you also outsource the basic capital you are presuming will be re invested in better specialization.

 

[robertk2012]

Do me one favor please. I have not read the replies and I do not need to. Globalization is not the problem. Just as homelessness, lack of health care, unaffordable housing ect. are not. These are all symptoms of a greater problem which the only solution is improved education. It is the only way to stay ahead and should be the biggest concern. So please do not whine about offshoring instead complain about education. It is something that everyone should be able to agree on.

 

[LordMagnusKain]

These are all symptoms of a greater problem which the only solution is improved education.

are you nuts? this is like saying that all of our problems are because we don't have enough land, or because we don't have enough people.

the fact is that a well trained work force will add to the productivity of society, but it won't solve all our social ills, nothing will, we?re human and life isn?t utopian

 

[IHateMyJob2004]

In short:

The US Dollar and Chinas currency track each other.

The effect. China's goods have become 30% cheeper with the fall of hte dollar. The effect: We still rel\y on China and other countries are becoming even more dependant on China and shutting down manufacturing jobs.

 

[imported_Condor]

Originally posted by: ntdz
You can only benefit from globalization. There might be downsides like less goods produced here, but it frees us up to produce goods we specialize in and produce BETTER than other countries. We let China make all their little garbage goods so we don't have to and can make better ones instead. It's Econ 101, trade only helps both countries involved, ALWAYS.

Since everything that I buy these days except a house and others items that can't be shipped cheaply, please remind me of just what we do produce these days. It looks like not much. Be sure to mention technology transfer as well.