The New Protectionism?

With all the focus on off-shoring, out-sourcing, and now this article in the Washington Post by Senators Byron Dorgan and Sherrod Brown I can’t help but think we might be looking at a new era in which the idea of free trade takes a big hit.

The thing is that free trade doesn’t hurt, it helps. Sure free trade makes jobs in formerly protected industries more vulnerable, but that doesn’t mean that the people working in those industries become permanently un-employed. We’ve heard this kind of rhetoric before. Ross Perot claimed that NAFTA would result in a giant sucking sound as jobs fled south to Mexico. In reality, the reverse is the current problem: illegal immigration. More and more Mexicans and other latinos are coming into the U.S. looking for work. And oddly enough, the economic arguments against illegal immigration are themselves very similar to protectionist arguments. Then there is the idea of the “race to the bottom” in terms of wages and labor as put forward by Lou Dobbs (by the way, check out the link to see what an amazing hypocrite Dobbs really is),

“The fact is that we are seeing hundreds of jobs being outsourced on the basis purely of a corporation’s interest in achieving the lowest possible price for labor. Does that make sense to you?”

However, this is highly misleading. It isn’t solely the price of labor that firms look at. There is also the workforces skill set as productivity. Wages in developing countries are low in large part because productivity is so low.

But the thing is that we can’t prosper and protect jobs from competition overseas. It is like trying to prosper by moving to an isolated location and producing everything you need. While you might be able to do it, you lose out on specialization that comes with market economies. In international trade the idea of specialization is called comparative advantage and is the driving idea behind why free trade is a good idea. Think of it this way. If protectionism is a good thing for a country why isn’t a good thing inside that country? Why not give a specific firm in a given industry protected status in that it does not face tariffs that all of its competitors face? Why not create a single firm in each industry that way it can hire people and pay them lots of money in terms of wages which in turn will stimulate demand and thus bring about economic nirvana. If you’ve found the flaw in this domestic economic policy, you’ve also found the flaw for international economic policy.

FILED UNDER: Economics and Business, US Politics, , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. legion says:

    Sure free trade makes jobs in formerly protected industries more vulnerable, but that doesn’t mean that the people working in those industries become permanently un-employed.

    On paper, that’s true. But in application, it’s damned difficult for, say, a union welder making $70k to turn around next week and get a new job, that may or may not have anything to do with welding, and still pull in $70k. Any hit to that $70k is a direct impact on his (and his family’s) quality of life – he may be able to put some expenses on hold or on credit for a few months of ‘economic readjustment’, but a) that’s a stop-gap measure – if he’s stuck at a permanently lower wage, his entire life will change, and b) nobody can afford to do that very often – maybe only once or twice in their working life – without permanent repurcussions to the entire family unit.

    Part of the problem is labor itself (whether unionized or not, tho unions are an easy taget for this complaint). But inflexibility and unrealistic salary expectations are also accusations that can be made on the corporate/executive side. Accelerating salaries for ‘hands-off’ workers, especially when not connected to company performance, damage not only the company’s bottom line, but everyone’s (from the workers to the consumers) confidence in that company. If the CEO’s salary goes up into the 8 or 9 figures even as the company’s profits & products tank, I’m not going to expect very much out of them. Nor am I likely to invest in them. But rather than actually changing their systems, companies get into a death-spiral of believing that the only way to turn themselves around is to hire some big names, at even higher salaries, to run things.

  2. Tano says:

    Steve,

    I sense that one of the reasons that this type of argument is so long-lasting and ever-recurring is because few people seem interested in actually working their way through the issues to find some rational solution – preferring instead to rehash the theoretical arguments for free trade, or for the other side.

    That is what I sense you are doing here. No one doubts that international trade is important. Very few, if any, doubt that making that trade as free as possible brings many advantages. There is no need to rehash those arguments.

    The issue is that free trade also brings problems. The day that people stop focusing on the top-level dichotomy and simply accept that free trade is a mixed bag, will be the day that we can start finding solutions that win for us as many of the advantages of free trade as possible, while minimizing the problems.

    I havent read the Dorgan/Brown piece yet, but I sense from hearing Dorgan speak on this issue in other contexts, that he does understand the advantages of free trade, is not a simplistic protectionist, and is interested in finding a real solution.

    Those who focus on “fair trade”, for instance, seem to have an underlying acceptance of the importance of expanded trade, and an understanding of the problems of protectionism.

    Trying to build into trade agreements certain provisions to raise the living standards of foreign workers and to force those countries to adhere to basic environmental standards is not the same thing as protectionism. It seems rather to be a very rational approach to insuring that the foreign country make progress toward building its own middle class (thus becoming a more stable and productive society in its own right), it prevents some of the gross defilements of the environment that occur now, and that will probably cost lots in the future to clean up, and it reduces the expense differential with our own labor force. It may also help to reduce the incentive to immigration.

    Finally I dont really see much sense in this comment of yours “Wages in developing countries are low in large part because productivity is so low.” as an argument against the claim that corporations move overseas simply to find the cheapest possible labor cost. When a US factory builds a new modern plant in Mexico, using fewer workers than in the US, and paying them a fraction of what they pay US workers, while then selling their product for a similar price as they did before, then how can you claim that those workers are less productive?

  3. YR says:

    Nirvana, nukes.

    Everyone thought it was Clinton looking the other way when India came out with the nukes, but it’s really the Fruit of the Loom guy making money. Check out his comprtoller and businesses in India. It looks alot like CIA, religious right and reublicans when it’s something that both Clinton and Bush looked the other way on.

    So, now they’re part of the nuclear club and outsourced all the call center credit and other records. The deal for India is too good. Look for North Korea and Iran and others to expect the same deal.

  4. RJN says:

    I just copied the following from the AP Dec. 18, 2006.

    “The current account deficit is expected to hit a new record for the full year, far surpassing last year’s record of $791.5 billion (€604.43 billion) although some analysts said they believed the third-quarter figure would represent the worst of the deficit numbers.

    “Lower oil prices, robust export growth and some cooling in import growth should bring the deficit down, beginning in the fourth quarter,” said Nigel Gault, an economist with Global Insight, a private forecasting firm.

    He predicted the deficit would average around $866 billion (€661.32 billion) this year but shrink moderately to $816 billion (€623.14 billion) next year.”

    Middle America is disappearing. We are being left with an expanded, and bloated, government a dumbed down, very expensive, and heavily politicized education system, and dwindling ways of paying for these burdens.

  5. Steve Verdon says:

    Trying to build into trade agreements certain provisions to raise the living standards of foreign workers and to force those countries to adhere to basic environmental standards is not the same thing as protectionism.

    Yes, it is. You are back-dooring the protectionism. In many countries the cheap labor is about all they got in terms of an advantage. Take that away with living standards regulations, environmental regulations, etc. you end up with no advantage and essentially the same thing as if you put tariffs in place. Seriously, you should read Paul Krugman’s article in slate on this issue. If I find it I’ll link to it.

  6. Steve Verdon says:

    Here is the article Tano. Here are some choice sections, but I recommend reading the whole thing. It really hits the nail on the head.

    The occasion was an op-ed piece I had written for the New York Times, in which I had pointed out that while wages and working conditions in the new export industries of the Third World are appalling, they are a big improvement over the “previous, less visible rural poverty.” I guess I should have expected that this comment would generate letters along the lines of, “Well, if you lose your comfortable position as an American professor you can always find another job–as long as you are 12 years old and willing to work for 40 cents an hour.”

    [snip]

    But matters are not that simple, and the moral lines are not that clear. In fact, let me make a counter-accusation: The lofty moral tone of the opponents of globalization is possible only because they have chosen not to think their position through. While fat-cat capitalists might benefit from globalization, the biggest beneficiaries are, yes, Third World workers.

    [snip]

    Workers in those shirt and sneaker factories are, inevitably, paid very little and expected to endure terrible working conditions. I say “inevitably” because their employers are not in business for their (or their workers’) health; they pay as little as possible, and that minimum is determined by the other opportunities available to workers. And these are still extremely poor countries, where living on a garbage heap is attractive compared with the alternatives.

    And yet, wherever the new export industries have grown, there has been measurable improvement in the lives of ordinary people. Partly this is because a growing industry must offer a somewhat higher wage than workers could get elsewhere in order to get them to move. More importantly, however, the growth of manufacturing–and of the penumbra of other jobs that the new export sector creates–has a ripple effect throughout the economy. The pressure on the land becomes less intense, so rural wages rise; the pool of unemployed urban dwellers always anxious for work shrinks, so factories start to compete with each other for workers, and urban wages also begin to rise. Where the process has gone on long enough–say, in South Korea or Taiwan–average wages start to approach what an American teen-ager can earn at McDonald’s. And eventually people are no longer eager to live on garbage dumps. (Smokey Mountain persisted because the Philippines, until recently, did not share in the export-led growth of its neighbors. Jobs that pay better than scavenging are still few and far between.)

    [snip]

    The benefits of export-led economic growth to the mass of people in the newly industrializing economies are not a matter of conjecture. A country like Indonesia is still so poor that progress can be measured in terms of how much the average person gets to eat; since 1970, per capita intake has risen from less than 2,100 to more than 2,800 calories a day. A shocking one-third of young children are still malnourished–but in 1975, the fraction was more than half. Similar improvements can be seen throughout the Pacific Rim, and even in places like Bangladesh. These improvements have not taken place because well-meaning people in the West have done anything to help–foreign aid, never large, has lately shrunk to virtually nothing. Nor is it the result of the benign policies of national governments, which are as callous and corrupt as ever. It is the indirect and unintended result of the actions of soulless multinationals and rapacious local entrepreneurs, whose only concern was to take advantage of the profit opportunities offered by cheap labor. It is not an edifying spectacle; but no matter how base the motives of those involved, the result has been to move hundreds of millions of people from abject poverty to something still awful but nonetheless significantly better.

    [snip]

    The main answer, I think, is a sort of fastidiousness. Unlike the starving subsistence farmer, the women and children in the sneaker factory are working at slave wages for our benefit–and this makes us feel unclean. And so there are self-righteous demands for international labor standards: We should not, the opponents of globalization insist, be willing to buy those sneakers and shirts unless the people who make them receive decent wages and work under decent conditions.

    This sounds only fair–but is it? Let’s think through the consequences.

    [snip]

    The advantages of established First World industries are still formidable. The only reason developing countries have been able to compete with those industries is their ability to offer employers cheap labor. Deny them that ability, and you might well deny them the prospect of continuing industrial growth, even reverse the growth that has been achieved. And since export-oriented growth, for all its injustice, has been a huge boon for the workers in those nations, anything that curtails that growth is very much against their interests. A policy of good jobs in principle, but no jobs in practice, might assuage our consciences, but it is no favor to its alleged beneficiaries.

  7. RJN says:

    I think most of us have been through the thought processes that Paul Krugman goes through above. The big thing, now, is all of that stuff doesn’t matter.

    They are 2-3 billion; we are few and going broke. We can’t afford them and keep a living wage for our own industries. The people, in this country, who have incomes and pensions from the public sector – government and education – have expanded purchasing power with low cost imports. The rest are beginning to be hurt, and will continue to be hurt, if we don’t, at least, charge tariffs equivalent to, say, ten percent and allocate it all to social security

  8. Steve Verdon says:

    RJN,

    One thing everybody who goes through a rudimentary economics course learns is that economic transactions are, generally speaking, not zero sum. Hence your concern is completley unfounded.

  9. jpe says:

    Free trade brings many broadly distributed benefits with the trade-off (not zero sum, of course) that costs are closely concentrated in industries in which we don’t have comparative advantage.

    Any kind of sustainable free trade policy will have to grapple with these political effects (see legion’s first comment)

  10. Dave Schuler says:

    Your example is a little puzzling, Steve.

    A better one might be to consider job growth in the technology sector (specifically the IT component). There still aren’t as many people employed in the sector in the United States as there were Jan 1, 2001. However, U. S. companies have created technology jobs in India, China, and Taiwan. Five years is an eternity in technology terms—lots of people who were employed in the sector won’t be getting comparable jobs in the sector again. If they have the likelihood is that the jobs were in government or in healthcare (roughly 60% paid for by government).

    Is that your preferred outcome?

    Tariffs and quotas aren’t the only forms of protectionist policies. U. S. companies have pursued intellectual property law as a preferred method of protectionism. At this point it’s mostly protecting U. S. customers from inexpensive software.

  11. floyd says:

    Extreme “free trade” positions are every bit as dumb as isolationism, which hasn’t existed in the U.S. for generations. isolationism’s only echo is the hyperbole of the extreme “free traders”.

  12. RJN says:

    Steve: Yes, economic transactions are not, generally speaking, zero-sum. To prove it we can look to our continuing run of $800 billion annual trade deficits. That is not zero-sum. That is the poor house.

    The effect that Dave Schuler writes of above is also huge. Prof. Krugman’s prattle tells us nothing about our situation today. We are in a race to the earnings bottom for most of our citizens. Think crisis.

  13. Steve Verdon says:

    Tariffs and quotas aren’t the only forms of protectionist policies. U. S. companies have pursued intellectual property law as a preferred method of protectionism.

    Well, I’m not a big fan of how we handle intellectual property in this country, so I don’t see a major problem for me here.

    As for tech jobs, c’mon Dave your familiar enough with economics to know that when there are changes to the economy the adjustments take time, but the idea that we can freeze the economy in amber is just dumb. Most forms of protectionism are attempts to freeze the economy in amber to varying degrees. Frankly, I imagine that back during the industrial revolution similar arguments took place. Fortunately there was no central government to try and preserve that way of life.

    Steve: Yes, economic transactions are not, generally speaking, zero-sum. To prove it we can look to our continuing run of $800 billion annual trade deficits. That is not zero-sum. That is the poor house.

    Clearly you didn’t get my point. Part of the problem is that other countries are using protectionist policies to ensure that they have export driven economies. However, as you have pointed out that can’t go on forever. Either the party will end, badly, or some of the party-goers will realize they have to quit partying. The first will likely have a bad outcome, the other may not be so bad. Basically, other countries need to consume more, the U.S. needs to save more, and to do that it needs to get its fiscal house in order. Oddly enough with President Bush and politicians like him in office that isn’t going to happen. Frankly, from an economics perspective you should want Bill Clinton in office. Fiscally, he was a Hell of a lot more conservative than Bush.

    The effect that Dave Schuler writes of above is also huge. Prof. Krugman’s prattle tells us nothing about our situation today. We are in a race to the earnings bottom for most of our citizens. Think crisis.

    And there it is, the “race to the bottom” rhetoric I mentioned in my first post. Tell me RJN, why not pursue your notions of “protectionism” for domestic economic policy? Because it is idiotic. Same goes for international economic policy.

  14. RJN says:

    There are 2-3 billion eager workers overseas who will work for a few bucks a day, and there are corporations, not controlled by the Americans, busy finding ways to take the work from Americans and put it into those hands.

    There are politicians, in this country, who are supporting the migration of illegal aliens into the U.S. who are willing to work for much less than citizens.

    Our government continues to be willing to borrow as much as it takes to keep this process of bankruptcy going. Classic economics can’t react in time to save us; we can become so broke, so fast, that we (citizens) lose control of our country.

  15. RJN says:

    I found this at Viking Pundit.

    “The largest employer in the world announced on Dec. 15 that it lost about $450 billion in fiscal 2006. Its auditor found that its financial statements were unreliable and that its controls were inadequate for the 10th straight year. On top of that, the entity’s total liabilities and unfunded commitments rose to about $50 trillion, up from $20 trillion in just six years.”

    “That unfunded commitment number is made up almost entirely from promises made to Social Security and Medicare.”

    Maybe my 10 percent tariff idea is not so bad. Maybe it shoulkd be 15 percent.