Thoughts on International Trade

There has been a great round robin discussion on international trade in the economic blogsphere over the last week or so. I believe it started with this article from William Polley and was followed up on by Mark Thoma and Kash over at Angry Bear. I wanted to throw my two cents into the discussion as it were, especially as it relates to manufacturing jobs and the overall benefits of international trade.

Let me first make what I believe are two very important points regarding this discussion.

There seems to be a desire to return to the "glory days" of US manufacturing in the 1950s and 1960s when a manufacturing job could provide a middle class wage etc.. There is one problem with this argument: there is no way that will happen again. The glory days of US manufacturing were great, but were also characterized by a massive lack of competition. After WWII Japan and Europe were literally in ruins; Russia and Eastern Europe were behind the Iron Curtain, China was under Mao and India was an economic basket case. In short, the US was the only game in town. Hence, our labor market benefited from being a monopoly. As we see various regions of the world come back on line we start to see the effects of the competition on the US labor market. I wouldn't call the situation a degradation or a collapse. Instead, I would argue we're now simply one of many choices for the location of a manufacturing facility. Hence, we have to compete along many different criteria, some of which where we are at an extreme disadvantage.

Second, as other countries came on line economically, the US was the largest world economy with a higher standard of living competing with lower cost alternatives. Given that situation, its far more likely poor countries will start to take away market share, thereby lowering the US' manufacturing base and negatively impacting our standard of living. Remember -- economics is the science of studying how we allocate scarce resources. If the US was eating the whole pie and now other people want a slice, we, by definition, get less. More practically, if a manufacturer was looking to start a new plant in the early 1990s and narrowed his choices down to China and the US, chances are China would win for one simple reason: their labor costs were far cheaper, even after counting in price factors such as transporting the product back to the US.

So, before moving forward, let's sum up the two points.

1.) The U.S.' previous position as the manufacturer of the world was caused by lack of competition.

2.) Because the US was at the top of the economic heap, it was far more likely we would be negatively impacted by international trade.

Now, let's move forward.

What started the discussion was this paragraph:

If we economists stubbornly insist on chanting 'free trade is good for you' to people who know that it is not, we will quickly become irrelevant to the public debate.

In other words, it's hard to tell someone who has lost their job to an overseas competitor that free trade is good for you. Fair enough; I won't try and make the argument.

However, I believe the excerpt misses the mark. I think the better way to phrase the issue is in a developing country, the benefits of free trade are exciting and vibrant, whereas here they are far less exciting. For example, living in China right now -- and over the last 10 years or so -- would be an exciting time. The middle class is growing; there are more and more jobs available; GDP is up, wages are slowly increasing -- you get the idea. Someone who looks around in China now and compares it to ten years ago sees the benefit of international trade and thinks "great."

However, the benefits in the US are far less visceral and far harder to sell. For example, in my opinion one of the biggest benefits of free trade is lower inflation -- as we import lower cost goods from overseas, we have less inflationary pressure. I think that's a great benefit. But, it's also really hard for non-econo-geeks to get truly excited by that benefit. And frankly, I can't see a PSA swinging public debate to our side. Then there is the issue of more, lower cost products to choose from. We also like that, but, again, it's hard to sell. And then there are the export markets we have for our products. But the problem here is, thanks to higher productivity over the last 20 years, US manufacturing needs less labor. Plus, once, the goods leave our shores, they're gone. In other words, the benefits for us are very hard to see.

All this leads to the primary point: free trade does provide numerous benefits. But the problems for us seem far more tangible and the benefits seem far less exciting than for the beneficiaries in the developing countries.

Now, let's turn to how to deal with the negative ramifications.

First, as I mentioned at the beginning of this, it's important to be realistic. We're not going to return to the age when any person has a job for life and is only employed by the same company. The general historical background that led to that scenario don't exist. Please stop arguing from the perspective that it can be duplicated.

Secondly, industries will disappear. I realize this is a rather unpleasant thought, but there are times when other countries will make better and cheaper products. This is especially true as products become commoditized. While we can erect trade barriers to shield industries (the textile industry comes to mind), all we're doing there is putting off the inevitable. We need to be realistic about industries that are currently marginal (again, textiles come to mind) and start to help the labor force make the transition.

Third, the US labor force needs to be highly educated. Lower cost -- and less intellectually intensive -- manufacturing booms in other countries, but not here. While US manufacturing is currently booming, it's important to remember that we handle far more advanced manufacturing and assembling that requires a smarter work force. To that end, we need to make life long learning the norm, and this learning must be inexpensive. The current method of funding education -- lower governmental inputs and higher individual debt levels -- is at best counter-productive and at worst leads to a life of near indentured servitude as recent graduates work to pay off debt for the first part of their professional lives, thereby preventing them from saving money etc... Instead, education needs to be cheaper and available to increase the skill set of our labor force.

Fourth, the US government needs to establish a list of potential industries that we can do here. I always recommend nano technology, stem cell research and alternate energy, but there are many others. The government should fund the pure research that forms the intellectual basis of these industries, probably through the college/university system but also through government programs and agencies. And yes -- this is governmental direction of the market -- but direction that will work. Why? Anyone remember all the benefits of the space program? From products like Velcro to aerospace applications, NASA spun off literally thousands of benefits. The internet was created by the military so the country could have a communication system in the event of a nuclear attack. And government funding of research for medical cures spills over lots of ways.

Anyway -- as I mentioned at the beginning -- that is my two cents.