Going Global on Independence Day

As we celebrate the 226th anniversary of the symbolic founding of our nation, waving our flags and talking about how great America is, I want to buck the tradition of national introspection and instead look outward, examining free trade: the philosophy, and its impact on workers.

For generations now we have been inundated with the perceived virtues of free trade, the most basic being a vast national net gain in wealth. And when put to that litmus test, free trade has delivered. But cast aside the vague and overarching numbers, and a different story begins to take shape.

While there is generally no better weapon that numbers when in an argument (and the numbers for American workers are sickening: in 2004 there were 68,000 jobs being outsourced per month, which is undoubtedly much higher now; and ardent free trade advocate Alan Blinder estimates 30 to 40 million jobs will be in danger of being outsourced in the next two decades), I want to delve into economic philosophy of it all, and why it's failing us.

Paul Craig Roberts penned one of the best rebukes of the long-held free trade gospel, pertaining to the mobility of capital:

Economists mistake the free movement of factors of production for free trade. Raised on the theory of comparative advantage, economists know that free trade is mutually beneficial. They dismiss without thought any concerns that seem to call free trade into question. The case for free trade has been unassailable for so long that economists have overlooked that today's circumstances do not comply with the assumptions of the theory.

The gains from trade flow from each country focusing on what it can do best and trading for other goods. The idea that there are comparative advantages in production is based on countries having different endowments of immobile factors of production. When the theory was developed, agricultural output was an important component of Gross Domestic Product, and a country's advantages resided in its climate and geography.

Unlike the prevailing "wisdom" that has kept free trade the prevailing economic policy, current global conditions support what Roberts is explaining:

Climate and geography cannot migrate, but capital and technology can. Today, absolute advantage resides in an abundant supply of cheap and willing labor. Now that Asia is safe for capitalism, capital and technology flow to countries where labor costs are lowest.

The global mobility of factors of production is a new development. Until recent years, it was not safe for capital and technology to migrate outside North America, Western Europe and Japan. No first-world country had an absolute advantage in labor cost.

The collapse of world socialism changed circumstances overnight. U.S. labor now faces direct competition in global labor markets. The excess supply of labor in these markets will drive down wages, salaries and employment in the United States. As the dollar is likely to lose value under pressure from our growing trade deficit, the decline in wages will not be compensated by a decline in prices, and U.S. living standards will fall.

It is irresponsible for economists to dismiss these concerns by citing empirical evidence from historical correlations. New developments are not reflected in historical data.

And it's not just manufacturing jobs that are being sent out of the country. Estimates have 3.3 million white collar jobs being outsourced by 2015, and the most common example, call-center customer service jobs that have been sent to India, are just the tip of the iceberg. Rapidly advancing education systems in much poorer countries mean that software engineers, medical analysts and every other high education job under the sun can be outsourced to a country where labor is just so much cheaper. Roberts and Senator Schumer wrote a piece in the NY Times about just this very aspect:

Two recent examples illustrate this concern. Over the next three years, a major New York securities firm plans to replace its team of 800 American software engineers, who each earns about $150,000 per year, with an equally competent team in India earning an average of only $20,000. Second, within five years the number of radiologists in this country is expected to decline significantly because M.R.I. data can be sent over the Internet to Asian radiologists capable of diagnosing the problem at a small fraction of the cost.

These anecdotes suggest a seismic shift in the world economy brought on by three major developments. First, new political stability is allowing capital and technology to flow far more freely around the world. Second, strong educational systems are producing tens of millions of intelligent, motivated workers in the developing world, particularly in India and China, who are as capable as the most highly educated workers in the developed world but available to work at a tiny fraction of the cost. Last, inexpensive, high-bandwidth communications make it feasible for large work forces to be located and effectively managed anywhere.

So this is where the neo-liberal insistence on better education and retraining falls short; people with years of education are in danger of seeing their jobs go overseas to cheaper foreign workers, as well.

But still we hear things like "globalization is inevitable" and the future is in free trade. Well, of course we'll hear that, because there ARE some people who benefit from free trade, and they make up a majority of political fundraisers and media ownership. Despite that, the harms our corporate written free trade laws have caused American workers have been made clear to the American people, if only because so many people are feeling them. Now the goal has to be challenging the prevailing wisdom and philosophy that make these deals seem inevitable and part and parcel to the future of business. It's time to make FAIR trade the buzzword.