Bipartisan Consensus (?) Gone Wrong on Trade
This week, there’s been a sudden flurry of questioning the economic value of free trade — on many fronts. Hillary Clinton came out against the Korea-U.S. Free Trade Agreement. Senators renewed their bipartisan effort to bludgeon China about the value of the Yuan — this time by calling China a “currency manipulator” to trigger sanctions rather than by proposing a tariff to directly “compensate” for the manipulation. And one of my colleagues on this blog, Matthew Rojansky, was shocked to discover that some people think that aiming for energy independence (that is, avoiding all trade in energy) is not a smart goal.
Dan Drezner has a useful (if a bit ascerbic) post countering these arguments, especially focusing on China. His main point is that the U.S. benefits from many imports, whether it’s efficiently produced goods or capital that keeps interest rates low (pointedly right now, capital that we borrow from China). The argument that trade benefits consumers and investors in the U.S. is well-known but needs reiterating from time to time.
Why? Because it’s also well-known that trade does not benefit everyone. In the U.S., trade hurts certain import-competing business, and it hurts labor (especially workers without particularly scarce, hard-to-obtain skills). Critics of free trade like Scott Paul at the Huffington Post focus on those who are hurt, arguing that presidential candidates (specifically Hillary Clinton, Barak Obama, and John Edwards but also, he hopes and expects, Republicans, for whom he might cite positions on the immigration reform bill) are “witnessing the toll those [free trade] agreements are taking on America, and they are courageous enough to say it’s time to change course.”
But the free trade agreements are not taking a toll on America. The U.S. is prospering. Maybe we’re due for a recession, or maybe not. The business cycle is real, and some economists worry about, say, the subprime mortgage mess and the housing bubble. But we’re not likely on the economic brink due to free trade or general economic openness. It’s just that some people are feeling the redistributive effects of trade: there are winners and losers, but the winners win more than the losers lose. It’s hard to find strong evidence against that general story.
What foreign economic policy needs is not a chorus of bipartisan complaints about openness or international unfairness. I’m doing a lot of work these days on energy security issues, and I’m struck by the consensus that the U.S. would be better off if we didn’t import oil. Rojansky, in his post, tells us that importing oil doesn’t create any value at all. But that’s nonsense: importing oil creates a lot of value. If we didn’t import oil, we would have to engage in less economic activity, because we would pay a higher price for whatever different form of energy we consumed. Output per value of inputs would drop — that is, real productivity would be lower. [Some people might think that's a good idea, for example for climate change reasons, but that's a different debate from the question of whether imports can "create value."]
The standard political economy line is that we should cushion the blow to “losers” from economic openness by taxing some of the “winners” profits and giving them to the losers. In theory, we can do that over the long term (not just as a temporary transition payment) and still reap the society-wide benefits of globalization. But it’s hard to do in practice, especially because the hope to receive “free money” from such redistribution changes people’s incentives to invest in productive activity (why work super hard for a chance at rewards — and higher taxes — when you can “work” somewhat less hard at trying to convince someone to give you a handout?). The good news is that most people actually prefer to “earn” their money — that we have social norms that prevent too much pure rent-seeking. Nevertheless, we have to be cautious about proposed redistribution, because we don’t want to weaken those norms.
Two leading economists (Kenenth Scheve and Matthew Slaughter) just published a big call in Foreign Affairs for such redistribution to “save globalization.” It’s worth reading and considering, although I worry about the incentive effects of their proposal. And remember, too, that the alternative is for political leadership. When it comes down to it, I doubt most Americans worry about “inequality” and hope that government will come to their rescue by flattening the income distribution. The story has always been that Americans value the opportunity to get rich and believe that they have a chance. What we need are policies and political speeches on globalization that emphasize its opportunities rather than policies that tend to diminish the pay-off to hard work and entrepreneurship.
I have two concerns with the current free trade concept and increased globalization, and both are from a national security viewpoint. First, we have the migration of American manufacturing to nations with cheaper – much cheaper – labor. Just cross the border into Mexico as an example of this. For a good 50 miles from each major border crossing, you’ll see rows of American factories. The reason is extremely cheap labor, often as little as $6.00 per day. My concern, though, is not the loss of manufacturing jobs in the US. Rather, it is the placement of manufacturing outside the US.
We have forgotten the lesson of World War II, perhaps because it has been 66 years since the entire nation had to be placed on a war footing. What we have forgotten is that we did not win that war by out-fighting the enemy. Rather, we won by out producing the enemy. Germany could not keep up with American industrial might, and that is what ultimately lead to our victory in Europe. Likewise, after the attacks at Pearl Harbor, Japan had about a six-month advantage, but American industry closed the gap and turned the tide in the Pacific. That is the advantage we have squandered by shipping our industry to third world countries. That industrial might belongs in the US because it is in our national security interests to keep it here.
The second issue is centered around technology. As a mainframe systems programmer, this particular issue is near and dear to my heart. What we are seeing is the out-sourcing (although we in the industry call it off-shoring) of technology jobs to India and China. Not only are our call centers going overseas, but also the development and support of major applications in some of the largest corporations in America. The reason is simple enough. An application programmer in India costs about 25% of what an American application programmer costs. Of course, I certainly would not want their standard of living, but that’s the topic of another post. In any case, just like the free trade logic, it is cheap labor that is driving the technology migration eastward.
This technology migration is perhaps the greatest security blunder we as a nation have ever made. American corporations today are completely dependent upon that technology. Cripple our data centers and you effectively cripple the corporations that depend on those data centers. In a very real sense, we are placing our entire economy into the hands of India and China since those countries are gaining total control over the data centers of our largest corporations.
Consider the political situation between India and Pakistan. It is no secret that Pakistan is a major training ground for anti-American terrorists. What we have done through off-shoring is given those terrorists easy access to American infrastructure without ever forcing them to leave the Indian sub-continent. They don’t need to strike New York to effect our economy, they only need to hit data centers in neighboring India. Off-shoring is a national security nightmare, yet we appear blind to the very real exposure we have created in the interests of pursuing cheap labor.
It is not a matter of supporting free trade. It is a matter of national security. It simply does not make sense to give third-world countries control over our life blood. We must regain control of our industry and our technology. We must eliminate the tremendous exposure we have created over the course of the last 15 years.
Comment on June 15, 2007 @ 5:34 pm