When you study economics 101 as a university freshman or, later, when you read about globalization and international trade after you have graduated and joined the work force, you constantly hear about the "gains of trade" -- the lower consumer prices and increased productivity that arise from specialization of production and trade between countries. What you never hear about is the possible existence of a downside and losses from trade.
Now, a new report on trade with China says that the adjustment costs like rising unemployment and the food stamps, declining tax receipts, reduced school budgets, and other expenses arising from trade with China wipe out up to two-thirds of the gains from trade and that doesn't include economic losses from people who lost their jobs. The full implication of the study is that, depending on circumstances, there may well often be no gains and perhaps even net losses from trade.
Done by MIT economist David Autor, U.C. San Diego economist Gordon Hanson, and David Dorn of Madrid's Center for Monetary and Financial Studies, the paper confirms earlier findings made by former Sloan Foundation President Ralph Gomory and former American Economic Association President William Baumol in a study of trade under conditions of imperfect competition and with less than full resource utilization.
Coming especially at a moment of economic crisis with high unemployment and declining median household income, these works hit directly at the main rationale for free trade. That has been the notion that free trade is always and everywhere a win-win proposition for the countries involved. Indeed, the argument has been that even if one trade partner is protectionist or mercantilist, the other is still better off sticking with free trade.
The conventional argument has always been based on restrictive assumptions including that all markets are perfectly competitive (no producer has market power), that there are no economies of scale and no cross border flows of investment or technology or people, that all resources (labor, equipment, land, etc.) are fully utilized, that there are no costs of adjustment in closing and opening factories or switching jobs and types of production, and that exchange rates are fixed. The conventional argument also does not say there will be no losers from trade. Rather it is careful to explain that some industries and workers might suffer temporary losses, but emphasizes that the gains of the winners will outweigh the losses of the losers and that the winners will therefore compensate those temporarily down on their luck.
Of course, a main difficulty over the years has been the fact that the winners have never compensated the losers adequately. But the new studies suggest that there may not be enough winners to do any compensating. The main problem is that the conventional assumptions obviously don't hold any longer if they ever did. Most markets are not perfectly competitive, investment does cross borders as does technology, economies of scale exist and are enormously important, and adjustment costs not only exist but can be very significant. Indeed, the new work indicates that the adjustment costs are huge.
In the past, the cost of worker adjustment has been estimated by adding up the number of workers who lost jobs due to imports, calculating how long they were out of work and the wage at which they returned to work, and multiplying all that times the days out of work. Then the resulting loss figure has been compared to the benefits to consumers purportedly arising from lower prices for a variety of goods and services. Since there are more consumers than affected workers, the result has always shown a balance of benefits under free trade.
But the new work goes much deeper into the cost side of things by looking at lost tax revenue, rising food stamp and other costs, and Gomory and Baumol also make the point that rising unemployment puts downward pressure on all wages that may more than offset the gains to consumers of lower import prices. In addition, there is the obvious fact that if huge benefits accrue to a small portion of a nation's population while the majority suffer losses, arithmetically the gains may offset the losses, but most people won't see or feel it that way.
A major point of the new work by the three economists is that China's advance into higher value added areas of production has been so fast that there has been no time for adequate adjustment on the part of U.S. and other countries' workers. Traditionally it has been presumed that poor countries like China would produce labor intensive products and trade them with countries like the United States for capital and knowledge intensive goods. But that kind of complementary, resource endowment based trade, is less and less what globalization is all about.
In his present job creation mode, maybe President Obama should think twice about calling for ratification of more free trade agreements and emphasize instead the importance of once again making America a producer country.
Robert Scheer: The Men We Trusted to Lead Us
1. The Internet and global information exchange will become too risky to sustain commerce. It will fal victim to hostile hackers... whether they are anarchists or nations fighting a cyberwar. When this happens, it will no longer be safe to transact business or anything else on the Internet.
2. Probably the more likely scenario. The global economy is dependent on the easy and cheap transportation of goods. This transporation will become ever more expensive and unreliable due to security and energy costs.
You could have ended your piece a bit more forcefully! Obama will do what the kleptocracy desires and tell us how it is good for us. Gomory and Baumol have long proven the fallacies in the corporatist trade policies and American people knew it instinctively long before that. But the truth makes little difference in a system owned by kleptocracy. They own the economic system, political system, information system, money issuance system,... Do you really think another academic paper will make any difference?
American people will have to realize that the elites whom they enable to rule over them don't care about Americans. Why not consider yanking away our consent to the rule by these criminals? We can start by refusing to elect any of their preselected and pre-vetted candidates! Start voting for people about whom the media tells you they have no chance of winning. Refuse to vote for their candidates, you know, the people like Obama or whoever is selected the GOP candidate. This doesn't even require for us to change our political affinities. Righties can vote for Ron Paul whom kelptocracy clearly fears and the Lefties can choose someone like Kucinich or Sanders. Let's see what happens. ;-)
We need a government solution on this one. We need to stop signing free trade agreements with protective economies. We need a value-added tax. We need to turn most of these idiot tax credits we've got out there right now for businesses into credits for actual manufacturers. You may have noticed these multinationals have been throwing intellectual capital and expertise into China by the bucketload once they moved plants over as a condition for operating in that country, and in the long run if we follow this course, there will not be 'big American companies'. We're ahead right now because of our higher productivity, because of our intelligence, because of our better practices, because of our better innovation, because of our real intellectual property (Not any of the crap the MPAA/RIAA go on about).
And we're throwing this advantage away in 'free trade'.
What were the predictions dismissed as "nonsense" and "fear mongering" back then?
* Loss of manufacturing as production was shifted to cheap labor outside the US - Mexico, China, Taiwan
* Loss of entry/clerical level jobs due to outsourcing - customer & billing service calls are routed to India, Singapore, South America
* Small US companies going out of business (more job loss) because they wouldn't be able to compete with cheap labor manufacturing.
* Disruption of outsourced supply necessary of final US based production - Japan's disaster is a good recent example.
An over-abundance of governmental regulations don't help either -
http://www.therightscoop.com/huckabee-peter-schiff-on-why-he-was-fined-for-hiring-too-many-people/
I own some rental units. Twenty years ago most of my tenants had long term and steady clothing manufacturing jobs which came with low but decent wages and health care benefits. Fifteen years ago, these plants had moved offshore and my tenants were working in nursing homes, WalMart and convenience stores at greatly reduced wages and few if any benefits.
Today most of my units are vacant, more than a few have been seriously vandalized, and it is almost impossible to find a tenant with a steady job. Needless to say, I am selling out for what I can get.
Do I blame the government's trade policies for this situation. Oh, yes I do.
Tyranny or no tyranny, 1/10 if 1% cannot rule without 99.9% going along with the program. It is time to stop that. We need to learn how to say NO!
The gains have not been shared across society.
They have gone to a selected few.
I think it's because we were put to sleep by the cheap 'credit' (that's really expensive 'debt') for the cheap goods made by oppressed workers and destroyed environments.
Wakey uppy time. Time for a new paradigm ... The Great Renewal. These are some jobs we can create worldwide that can heal our planet, be created in every country and become a powerful tool for a whole new way of Living.
Build millions of miles of bike and horse paths
Replant diversified forests, grasslands and hedgerows
Tear down derelict buildings and parking lots and plant urban farms
Retrofit all buildings
Build light rail and high speed, trollies
Clean up every creek, stream, river, lake, beach
Put solar hot water and micro wind on all buildings
Develop clean energy
Put water catchment on all buildings
Modernize water, sewage systems
Put all power lines under ground
Join us and post positive things that are happening. We can have the change we believe in. http://www.facebook.com/TheGreatRenewal
Probably when adam smith wrote the wealth of nations transportation technology was such that it would work. There were whole segments of industry that simply functionally couldn't be exported abroad.
This will require many changes and it will be impossible to find any sort of compromise that pleases nearly everyone. Some powerful interests will be enraged and may have to change their business models; those who seek to protect workers, consumers and environment from everything including our own stupidity will also be enraged. I say good riddance to both these groups and will be very pleased if they are enraged as they share rather equally and highly in the blame for our present situation!
Oh...and leave the economists and their overly simplistic macro-economic theories in the classrooms where they belong.
Amazingly, astoundingly TRUE.
Although, I believe, you have understated the urgency and importance.