Does global free trade destroy jobs?

Free trade destroys jobs, especially good, high-paying jobs

Lawrence Summers, former World Bank chief economist, US secretary of the treasury, and president of Harvard University, has summarized the case against free trade as follows:

“Abe Lincoln captured the basic intuition of almost anyone . . . when he said that . . . if he bought a coat from an American, he had a coat and an American had a dollar, and that . . . it seemed to him better to do it . . . [that] way.”

Lawrence Summers¹⁸⁹

Summers went on to say that he disagrees with Lincoln’s point of view, as indeed a majority of economists do. But Jerry Flint, a Forbes automobile-industry columnist, has his own response to that:

“You can’t help noticing that the folks supporting free trade never have their jobs threatened: editorial writers, economists, professors. . . . Imagine colleges replacing those two-classes-a-week professors with brainiacs from India at $50 a class.”

Jerry Flint¹⁹⁰

SteelworkerJob can be done elsewhere, and increasingly is.

MachinistThe same.

Call centre workerThe same, over a telephone line.

Economics professorCould be, in principle. Has not been.

This is an argument about the arguers rather than the argument, which is a weak move in logic and a strong one in practice. It does not show free trade is harmful. It asks why the people most confident about the adjustment costs are never the ones who pay them.

Peter Lynch, a legendary American investment fund manager, has also been skeptical about finding jobs in a free-trading global marketplace: “We keep showing more workers, but they’re all making [low wages]. . . . It seems to me that if you give a dollar more to the consumer and he buys a Japanese-produced Toyota with it, you don’t help the US economy much. . . . [Other nations are] doing [to the US] what [John D.] Rockefeller [Sr.] did. . . . They dump a product, they drive everybody out. . . . It’s totally unfair trade.”¹⁹¹

Left to itself, unrestrained free world trade produces a “race to the bottom” for labor and environmental standards

The central flaw of a free market, whether domestic or global, is its underlying ideology of greed. Profit becomes the be-all and end-all of existence; human decency be damned. The result is not just cutthroat competition and rampant product “dumping,” but labor, social, and environmental “dumping” as well. In effect, to attract global capital, governments everywhere dismantle safeguards against child labor, unbearable working conditions, inhumane wages, and pollution.

1Capital can go anywhere it likes

2One country relaxes a standard to attract it

3The others must match it or lose the investment

4The floor drops, and no single country can raise it alone

The force of this claim is that it does not require anybody to be wicked. Each government is doing the sensible thing for its own people, and the result is worse for everybody’s people. Whether it actually happens is what the other door disputes.

As William Greider has written, finance capital “is . . . the Robespierre . . . of this [global capitalist] revolution, . . . collectively act[ing] . . . like a Committee of Public Safety presiding over the Terror.”¹⁹² Al Sharpton, preacher and 2004 candidate for the Democratic nomination for US president, added that “We cannot [allow a] trade policy that overlooks labor, overlooks workers’ rights, overlooks environmental concerns. . . . African-Americans are here [in the US because of] . . . bad trade policy.”¹⁹³

Some critics of global capitalism hope to tame it, to negotiate global regulations ensuring decent working and environmental standards. But these hopes are naive at best. Historian Arthur Schlesinger, Jr. understood what is really happening, and how helpless nation states are to rein in world markets:

“The computer turns the untrammeled market into a global juggernaut crashing across frontiers, enfeebling national powers of taxation and regulation, undercutting national management of interest rates and exchange rates, widening disparities of wealth both within and between nations, dragging down labor standards, degrading the environment.”

Arthur Schlesinger, Jr.¹⁹⁴

Free trade is ultimately about exploitation

No one should be under any illusion that the billions of dollars of investment poured into the developing world are intended as a charitable act. The money is intended to create an abject dependency, and rarely fails to achieve this end. Richard Gephardt, candidate for the Democratic nomination for US president in 2004, courageously noted the “raw human exploitation for the profit of a few corporations”¹⁹⁵ in global trade.

Nearly 1 Billion Starve while Markets Boom Making Profit the World’s Highest Law A New Imperialism Global Village or Global Pillage? Who Pays the Price for Trade

From the National Catholic Reporter and Commonweal. Worth noticing who is speaking: this claim is not confined to the left, and the oldest institution in the West has been making a version of it for a very long time.

Activists around the world are committed to fighting the inhuman values of global capitalism and regularly turn out to protest at meetings of the World Bank, the International Monetary Fund, or the World Trade Organization, institutions supposed to facilitate world trade. One such activist, Jaggi Singh, explained that his actions were “about changing the world, creating structures, frameworks, institutions, communities, neighborhoods that are based on our values, which are values of social justice, mutual aid, solidarity, and direct democracy.”¹⁹⁶

Free trade produces more and better jobs

The preservation or protection of jobs is a dead-end policy. We have only escaped from life in the Stone Age by learning to innovate, to specialize, and, in global trade, to pursue our comparative advantage.

The phrase “comparative advantage” is often misunderstood. It does not mean that a country should find something that it can produce more cheaply than other countries and specialize in that. If a country can produce something more cheaply than any other country, that is called an “absolute advantage,” not a comparative advantage.

Comparative advantage refers to what a country does best, without regard to whether there is an absolute advantage. The basic idea, sketched by Adam Smith in the eighteenth century and formulated more precisely a few decades later by David Ricardo, is that a country, like an individual, should concentrate on what it does best, and then trade with other countries to obtain what others do best. Even if, hypothetically, one country has an absolute advantage in everything and another country has an absolute advantage in nothing, the two countries will be well-advised to divide up the tasks and exchange their work.

Before they specialize

The US makes shirts

Twice as cheaply as Canada

The US makes shoes

25% more cheaply

So the US should

Make both, surely

After they specialize

Total shirts

Up about 20%

Total shoes

Up about 11%

What changed

Nothing but who did what

This is the counter-intuitive heart of the case. The United States is better at making both things and should still stop making one of them, because it is much more cost effective in shirts relatively speaking than it is in shoes.¹⁹⁷ No new factory, no new worker, no invention. Both countries end up with more.

Comparative advantage also tells us that when we buy a cheaper foreign import we may be helping to put a fellow countryman out of a job, but we are also helping another fellow countryman, probably more than one fellow countryman, to find a job.

Assume that we live in a completely closed economy without foreign trade. The ban lifts and many adjustments are necessary. If our domestic steel manufacturers are selling their product at higher than the world price, they will have to reduce prices and probably lay off workers. Many of our other companies, however, are steel users, not steel sellers. The math of comparative advantage suggests that they will gain more from the lower steel prices than the sellers will lose.

Cheap foreign steel arrives

The steelworkersLaid off, all at once, in one identifiable town, with a union and a name for what happened to them.

The car workersHired, a few at a time, across many firms, none of whom knows that cheaper steel is the reason they have a job.

There will be a tendency for the public to see only the unemployed steel workers. Voters may then listen to steel industry blandishments that tariffs are needed to save steel jobs without realizing that the net effect would be to reduce, not increase, overall employment. The bottom line is that people cannot be in two places at once.

These principles are well established for the import or export of goods. It is not as widely recognized that they are just as relevant for the outsourcing of service jobs over the internet or telephone lines. The savings achieved by importing electronic services has enabled many companies to prosper, where they otherwise might have stagnated or failed, and thus to hire more employees rather than fewer.¹⁹⁸

As a general rule, if we are going to specialize, and then exchange the fruit of our specialized labor, it helps to broaden the circle of shared labor, not restrict it. The United States is a good example. It represents the largest free-trade zone in the world, and the volume of trade inside the US may be as large as the total volume of global trade among countries. Within the US, it is common for many jobs to disappear each year.¹⁹⁹ This in turn makes it possible for the economy to keep changing and growing. Indeed, the most economically thriving US regions tend to have the greatest job loss, but also the greatest job creation. Job turnover can be hard on employees, especially older ones, but it is essential for job growth.

Sharing the work of the world has the potential to make everyone richer, even the already rich nations. It is true that, on a purely relative basis, the developing nations should make bigger strides. All nations should benefit, but the gap between rich and poor should close, because the poor should grow faster. The already rich may then feel poorer, because the income gap has shrunk and there is more competition for the most prized consumer goods. But, subjective feelings aside, there is no reason why the already rich should lose wealth.

The protection of existing jobs through trade barriers is a formula for impoverishment under any circumstances. As Llewellyn Rockwell, chairman of the Ludwig von Mises Institute, has noted, the tragedy of protectionism “is that it tends to creep up when it can do the most damage, that is, during economic downturns.”²⁰⁰ The one thousand economists who argued against the Smoot-Hawley Tariff Act, which imposed stiff new taxes on goods coming into the United States just as the country was falling into the Great Depression, would presumably agree.

Global markets are not trashing labor and environmental standards

Economist Jagdish Bhagwati replied to this charge on three fronts.

• They repelLower labor and environmental standards may repel, instead of attract, direct fixed investment from abroad.²⁰¹
• The wage premiumSeveral empirical studies find that multinationals pay what economists now call a wage premium. Affiliates of US multinationals sometimes pay a premium that ranges from 40 to 100 percent.²⁰²
• Who is askingDemands for enforcement of more uniform global standards often reflect a desire to raise the costs of production of rivals abroad.²⁰³ Antidumping processes have become the favoured tool of protectionists today, and extending them to eco-dumping and social-dumping will lead to more of the same.²⁰⁴

The third answer is the sharpest and the least comfortable. It does not say that people demanding better conditions abroad are insincere. It says the demand is useful to somebody else, and that the somebody else is usually the industry that would lose the contract.

Global free trade is not about exploitation

Global free markets are not a new form of imperialism launched to oppress and exploit the poor. These ideas, which originated with Marxist-Leninist Communism, should have perished with it.

It is perfectly true that global markets make the life of the rich more prosperous and comfortable. Lord Keynes described the pleasures of the first global economy, the one that was shattered by World War One. It enabled the inhabitant of London to:

“. . . order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world . . . and would consider himself greatly aggrieved and much surprised at the least interference.”

John Maynard Keynes²⁰⁵

In contrast to this, consider what it is to be poor. A poor person may have some assets, even if only a farm animal. But the farm animal cannot be sent halfway around the world to fetch the best price. It must be sold locally at whatever price and on whatever terms are available. If the poor wish to buy something that might make them more productive, they are similarly constrained. The object can only be bought locally, usually at a high price, and this applies to the American slum dweller as well as to the poor and isolated Asian farmer.

Clothes and shoes

Average tariff

10.5%

Bought mostly by

Poor and middle class people

Luxury goods

Average tariff

0.8%

Bought mostly by

The rich

From a study by the Progressive Policy Institute, and true in almost every country.²⁰⁶ Tariffs are not only a tax, albeit a hidden tax; they are a peculiarly regressive one. This is the most awkward fact on the page for the other door, because the barriers meant to protect ordinary workers fall hardest on ordinary shoppers.

Proponents of trade-as-exploitation tend to regard foreign aid and multilateral loans as a kind of reparations. But listen to Harvard historian Niall Ferguson: “The authors of . . . one recent study of 30 sub-Saharan African countries conclude . . . that . . . roughly 80 cents on every dollar borrowed by African countries flowed back [to the West] as capital flight in the same year. A similar story can be told for aid payments, a large proportion of which are simply stolen.”²⁰⁷

Global free markets are imperfect, because people are imperfect, but they offer the best hope for the poor. Even economist Paul Krugman, a vocal proponent of government control of the economy and critic of the profit system, thinks so: opponents of global trade, “whatever their intentions, are doing their best to make the poor even poorer.”²⁰⁸ To which columnist David Brooks adds: “Just once, I’d like to see [rock star] Bruce Springsteen stand up at a concert and speak the truth. . . . If you really want to reduce world poverty, you should be cheering on those . . . investors jetting around the world.”²⁰⁹

Massive and persistent US trade and current account deficits do not undermine arguments in favor of global free trade

A trade deficit occurs when a country buys more goods from abroad than it sells. A current account deficit occurs when more money flows out than flows in and reflects a wide variety of transactions including products, services, foreign investment income, and corporate profits earned abroad.

The US trade and current account deficits are in part financed by global seller financing. Assume that a non-US company sells some goods to the US. The American party pays in dollars, the non-US company takes the dollars to its central bank and is given local currency which has either been borrowed from domestic savers or newly created for this purpose. The non-US central bank may invest the dollars by buying US bonds, but is under no obligation to do so.

For many years, the principal seller and lender for the US was China, but eventually the two parties decoupled. While it lasted, did one party get the better of the other? Some American voices argued that the US was the winner. Economist Merton Miller: “We’ve actually been playing a cruel trick on countries exporting to us. We’ve persuaded them to send us expensive [goods]—and in exchange we give them pictures of George Washington. . . . They’re the losers at this game.”²¹⁰ Economist Paul McCulley agreed: “To those with Calvinistic tendencies, always looking for what can go wrong, . . . the notion of . . . [the United States financing its consumption by borrowing abroad] just doesn’t seem right. . . . But . . . [at least for the moment] it is good, very good.”²¹¹

Was it very good? This system was never sustainable. While it lasted, the US was building up a vast debt. Yes, the dollar is a reserve currency, which means it had the right to repay global debts in newly created dollars, a privilege that other countries do not have. But defaulting on its debt in this way would have very negative economic consequences. Meanwhile all the debt was choking economic growth, which made repayment in the usual way more difficult.

The bottom line here is that this “game” was not caused by free trade. It was a classic case of governments “managing” trade for their own purposes.

Nobody on the other door raised trade deficits

The objection answeredThat the US deficits prove free trade has gone wrong. It is a real and common argument, but it is not made in chapter twenty-one.

The answer givenThat the arrangement was not free trade at all, but governments managing trade for their own purposes. It concedes the system was never sustainable.

This is the only claim in the course with no opposite number, and it is left standing rather than dropped or matched with something invented. Read it knowing that, and notice how much of it is a criticism of governments rather than a defence of trade.