Free Trade? America Benefits, but Doesn't Seem to Realize It

Roundup: Media's Take

Jagdish Bhagwati, writing for the Guardian (London) (March 8, 2004)

A free trader's work is never done, especially in the United States. The historians of free trade in Great Britain since the repeal of the corn laws in mid-19th century have argued that politicians in strong economies embrace free trade because they expect their countries to win in the Darwinian struggle in the marketplace. But the US, despite having emerged at the end of the second world war as the top dog on the block, has repeatedly descended into paranoia on trade.

The recent furore over outsourcing fits into a pattern of fear of trade with the developing countries that goes back to the fierce fights against Nafta with Mexico, and the furore over the imports of labour-intensive goods from the Far East and then China (the"yellow peril"). Now we have the outcry over the imports of (mostly) labour-intensive services online - what economists sometimes call"long distance" services where the provider and the user do not have to get together physically - from India (the"brown peril"). As always, the fear is baseless and based on bad economics.

The earlier fear was that manufacturing jobs for the working class would disappear with imports; vice-president Fritz Mondale conjured up a nation of"hamburger flippers". Now the fear is that the new imports will take good jobs from the middle class, and the modern-day doomsayers imagine a nation of"grocery baggers" at the supermarkets as discharged computer programmers et al struggle for survival at low wages in lower occupations. The fear is not just exaggerated, it is also false; though, as the Russian proverb goes, it has big eyes, and a recent poll suggests that more than a third of the American labour force is in a state of anxiety over jobs.

The difficult job situation in skilled information technology-related occupations has been heavily overlaid by the dotcom bust and by the overvaluation of the dollar, both pheonomena which are being reversed. In fact, according to the bureau of labour statistics, jobs in the very recent years for IT-related occupations have risen, admittedly slowly, but they have not fallen.

Moreover IT, like so much other technology but even more so, displaces unskilled workers and hence low-paying jobs; but it creates demands to maintain and support the technology, which implies new, higher-paying jobs. Vast numbers of jobs to support and service hardware (say, PCs), to maintain the software and to manage the ever-growing new variants and applications, have emerged and will grow rapidly through the next 10 years, as the BLS projections also underline quantitatively.

Furthermore, many services cannot simply be provided on the wire. In particular, as the US population ages and the IT revolution gathers speed and enters senior citizens' lives, many will need not a voice from Bangalore telling them in incomprehensible technical language what to do but a technician who will come and do it for them.

These optimistic assessments are clouded in the public domain by a delusion fostered by mindless commentary in the media. That is illustrated by the astonishing Lou Dobbs show on CNN which daily lists the firms that have outsourced jobs. Mr Dobbs forgets that he should also list the jobs that come in, not just those that go out.

The clinching argument against interfering with outsourcing through protectionism or its variants such as tax deterrents or opprobrium is provided by the fact that the US is closely integrated in the world economy.

In a world that is characterised by intense competition today, small cost disadvantages can spell the demise of a firm: hence all the clamour about"unfair trade" by your rivals on the flimsiest grounds.

If US firms lose out to UK firms because the British government is not joining the protectionist chorus, then they could fold, making the job loss, and hence the worker adjustment required, manifoldly greater. An analogy, not recommended for use by politicians, is that of triage: a lifeboat with a hundred people on board will sink and drown the hundred; but if 10 are thrown overboard 90 will survive.

So the fears over the job adjustment required thanks to online imports of services are unwarranted. And if they are succumbed to they will themselves create serious adjustment problems in their wake.

Will the US ever learn?

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