Foreign Trade

My Thoughts On: July 12th, 2007

Today there's a lot of talk about trade policies, the balance of trade, the threat of outsourcing and job loss, as well as the environmental impact of big business leaving our borders. Sweat shops and other such horrid atrocities by these "un-American" businessmen prevail the general public's view of those who leave to do business elsewhere, or employ internationally what could be employed at home. There are many myths regarding this view, and a more important role the free market has in foreign policy that is entirely overlooked. Come inside as the staff of debunks the myths behind Foreign Trade.

It's true that the American economy has taken a recent downturn into a recession. There has been some overall job loss in the early 2000's. Manufacturing jobs are trivialized by China's manufacturing successes, while tech outsourcing is going to India, recouping the business of dot-com fallouts. Manufacturing jobs are declining in America, a loss people attribute to the multinational corporations giving other nations the jobs, due to the convenience of their cheap sweat shop labor. People on the border worry about immigration while businesses lobby for protection legislation that restricts the rate of imports to the rate of exports, to make the market more "fair".

The balance of trade is, in the eyes of economists, not tipped in our favor, as we import nearly twice as much as we export. To many this says we are selling America's prosperity on the open market, but to the staff of, we simply see these ideas as another part of the New American Myth - a series of common ideas that betray our ideals of liberty. We contend that the American economy is one of the healthiest, robust ones for reasons which have nothing to do with "balance of trade". Protectionist policies will ultimately hurt our aims at prosperity.

Debunking the Myth - Foreign Trade:

"We are losing jobs to China, our manufactures have steadily declined as we import more of theirs. Why should they benefit?"

Importing produce does not necessarily hurt our own manufactures - the cheaper goods acquired from afar can sometimes make it easy for other trades to produce at home. The loss of manufacturing jobs in the market today is not so much a result of trade with countries like China, but instead a predicted result of an economy that is simply able to produce more than it could before (meaning less needs to be manufactured). That is in every way a good thing for America, since it creates tons of other types of jobs (services).

A general misunderstanding, however, is that as things become more efficient and jobs are no longer needed to continue high production, that the jobs disappear and are sucked into a void of unemployment. This isn't true at all, since more jobs are usually created than jobs that are lost. During the 1990's the overall number of jobs were on the rise and despite many jobs being lost, still more were created. It wasn't until the tech fallout of the early 2000's when a recession hit that we ever hit a point of actually losing jobs. Even in that situation, the rate of job loss quickly balanced back up to gaining jobs as the market recovered.

Our job turnover is high, making many think that since there are lots of people in transition all the time, that job longevity and job security is being attacked. However, this is simply a perception driven from the quicker changeover of old jobs to new, more efficient jobs.

"Why should we let profiteering businessmen move their businesses, putting many out of work, while lacing their pockets with the savings of cheap labor? Shouldn't there be a law to prevent them from doing that?"

There are many myths about business-owners who employ some or all of their stock abroad. Such movements can be beneficial in many ways, and when they aren't the effects are typically misunderstood, so here are some points to consider:

1. Business owners who move may benefit home producers by offering them deals on the land and resources they can't move. This may mean entire factories and stretches of land being turned into more productive uses. A business will rarely move if it's doing well - so chances are if it is moving, the land and resources it occupies will be put to better use by those who buy them (otherwise those others would wind up finding similar incentive to move, making the purchase of the new commodities wasteful).

2. Businesses that move to produce better elsewhere will typically reciprocate several advantage to the home market:

A. By offering the home market deals on it's produce through exports back home (as such businesses typically do), it makes the home market more efficient since those other businesses can acquire the same produce for cheaper.

B. Holders of capital that can't move with the company will benefit by having new investment opportunities in different trades.

C. The people who do become unemployed due to the movement will saturate the labor market, driving down wages temporarily, while also driving down prices to the consumer. People in general will benefit from the competitiveness of labor, and the lower wages become, the more other businesses from afar have incentive to move in (for the same reasons the business that left moved out - to gain from the demand for work). Eventually, this will benefit society at large, while harming only the few who manage to not be employed during this shuffling of trades.

3. When a business moves and stops trading back home (simply leaves and doesn't look back), yes, there is an overall decrease of jobs due to the moving. But a lesson brought to us by Adam Smith says that in a lot of cases, entire sectors of trade are simply not needed at home. There's no stated advantage or difference between some manufactures being stationed here or abroad besides a difference of employing a few people to run it at home, and those few jobs (whether it be 10-20 jobs or 10,000-20,000 jobs) does not typically make the difference between domestic prosperity or failure.

4. Investors who make their choices solely on profit margins often wind up stuck with a variety of problems. Profit margins, as Adam Smith suggested, are not the defining measure of success in a business. Higher profits can sometimes indicate the existence of circumstances that ultimately lead to lessening wealth. This can doom these profiteers who think of moving to acquire monopolies and garner special interests abroad, and often are a sign of a chief misunderstanding they have - a misunderstanding often shared by the people at home - about what creates real wealth. This negative occurrence is rare, but often caused by interventionist policies, not prevented by them.

5. Legislation aimed at preventing businesses from moving only ensure that certain trades are allowed an unequal share in the profits of business (the share that the competition of moving businesses would have prevented). This allows for the growth of monopolies over time, which produce all sorts of problems.

"Things would be fairer if we made it so foreign goods had equal prices to domestic goods."

If foreign goods were on par with domestic goods, simply put, they would typically not be sold. Eliminating the advantage of them being cheaper is not "fair" to anyone - the only way to level out the prices is to put taxes on the population at large or by issuing excises on the producers - ultimately discouraging the benefits of extra productivity that foreign trade can often bring.

"Job loss never benefits us."

Typically, at least in the American economy, when jobs are lost on account of increased foreign trading or moving businesses, new jobs are immediately created in new sectors and evolving trades to replace them. This does benefit us, as it (as a trend) creates more productive new employments and overall saves general societies from the disadvantages of lost trade. If 327.7 million jobs were created when 309.9 million jobs were lost (1993-2002), then for every job that was lost, 1.05 new jobs were created. As you can imagine, this is a better situation to be in than a static system, and this kind of turnover could not happen without some kind of job loss in some sectors.

Job loss is harmful if it's the prevailing trend. As population grows, jobs naturally increase, just as when more workers become available too, jobs increase. These natural counterbalances to job loss prevent gross job loss from happening in a healthy economy. Thus the negative effects of the jobs that are lost are offset by the greater positive effects of natural job creation.

"If we keep foreign trade policies open, all we're going to hear is the sound of foreigners sucking away all our jobs."

Often the loss of jobs in one field has nothing to do with foreign trade. Years of NAFTA and WTO participation have not been accompanied by real job loss. Increased foreign trade is typically not met with increased unemployment, although one would imagine would be if such mantras were to hold true. The misunderstanding here is not in the fact that labor is purchased elsewhere to provide the same products, but in the fact that this movement of labor is often beneficial to real home job growth by freeing up labor and moving it to more productive ends. Old unproductive jobs go to places that need them while new, innovative positions open up at home. Without this migration, labor at home simply would not be available for these new ends. One may even argue the point that open foreign trade policies (the dreaded "Globalization") is a necessary tool of home innovations and industry diversification.

"Domestic traders need us to back them, so we should always buy products 'Made in America'."

The idea of buying domestic is simply unfounded. Buying domestic doesn't help consumers - it helps producers. Profiteering private interests are the first to promote such movements, and it's the domestic employer who benefits, only passing it to domestic workers by still employing them where he may otherwise not be able to. The ends of productive efforts is not to benefit producers, but to benefit consumers. So the best way American citizens can help themselves is to not buy products based on where they are made, but to buy products based on their prices. The American economy is too robust to simply be effected in any major way by such changes (as it was said before, many of these trades are turning over their jobs to different ends simply because of increased domestic productivity, meaning as time goes by, less and less importance is on manufactures of conventional produce). Buying cheap ultimately helps the economy more than buying at home. Due to the natural benefit of domestic business, it is at no threat of become extinct. It's only during the recent recession of the tech trades that we have even seen job loss overall, suggesting perhaps there is no dillemna of domestic business to speak of.

The biggest disadvantage to domestic trade that foreign trade brings is the threat of competition. Competition forces businesses to offer lower prices and often reduces their rates of wages and profits, making workers and employers seem like they are worse off. However, real accumulation of wealth is on the rise because of competition and can only really become impeded by monopoly powers - making the entire trade worse off. Why would we give domestic traders monopolies to benefit them, when it's very obvious the monopoly status hurts their trade as a whole, thus only really benefitting a very small section of their workers who can acquire the sharpest rates benefits in their wages/profits?

This practice certainly cannot create more jobs for Americans by granting domestic monopolies. If anything by making the profit rates of manufactures greater, it hurts consumers through higher prices and even other trades (like agriculture) by syphoning funds away from those trades into the monopolized industry. The negative effects of monopolies are well documented, and are not any different based on the motive of forging the monopoly to "protect" domestic trade.

"Offshoring jobs to countries with lower standards for worker's rights is contrary to the proliferation of human rights."

One of the initial complaints of offshoring jobs (paying for manufactures and services provided by foreign businesses) is that centering labor in these often undeveloped countries exploits labor laws and creates unreasonable working conditions. "Sweat shops", for instance, are said to be damaging to a national society and the integrity of workers everywhere. There are some reasons why price for labor in these nations is low, and more importantly, reasons behind how it is beneficial to move business to these nations (despite speculations about uncouth intentions behind doing so).

1. Jobs are important in many of these nations due to rampant unemployment. The businesses often could not move without cheaper labor, otherwise they would financially crumble. Bolstering their trades with government subsidies to keep wages high too has a host of problems, and is no better a solution. The low labor wages means lower prices, and while much of this trade is exported, the produce that does remain domestic makes domestic life for these people easier.

2. Business concentrating in these undeveloped nations assists them in producing more - and, recalling basic principles about free market economics, increased gross national produce is the real source of growing wealth, not fixed dollar amounts. This means that while their wage is comparitively low to U.S. standards, workers will be able to command more with their money as time passes, increasing their national prosperity.

It's not until the poorest adults can get by on their wage that child labor will come to an end, and that cannot happen without improvements in real national wealth that come from new business being drawn in. So, in a way, cheap labor being isolated is the primary cause of it being ended. These developing nations, over time, will continue to draw business in, strengthening their citizen's financial standings, which always has been shown to assist - not prevent - the profileration of human rights. Sweat shops disappeared in all such nations when their national wealth industrialized, like the United States did in the 20th century. Letting capital accumulate in these nations is the quickest way to ensure the impoverished masses can realize enough real national wealth to move above the same threshold we already have, to allow the demand for better working conditions be satisfied.

3. The cheapest kind of compassion is the kind that says to boycott foreign goods produced by those who need the income to survive more than anyone else. Does buying from a "sweat shop", even those that employ children, encourage the business to exploit their labor? Or does it give families more money so fewer children have to work to survive? Understanding their predicament would be to accept the latter, and buying the cheaper foreign-produced goods is the only way companies would ever be able to meet the ever-growing demands for higher wages internationally. Boycotting all foreign goods made in such nations only retards the progress they require to gain enough money to escape their poverty entrapments.

"WTO? No!"

Open trade is important to the gain of real national wealth, the kind that allows everyone to prosper. Free trade organizations like NAFTA and the WTO have very limited approaches to endorsing it, and while having some open trade policies is a positive thing, narrowing them down to specific standards and limitations is not. Libertarians support open trade policies, however, they feel organizations like WTO and NAFTA get in the way of what would ultimately be a better policy - 100% open trade and uniformly low tariffs.

How do they get in the way? Well, by making exclusive deals between nations to trade openly, they often can narrow the effect of free trade, encouraging the same monopolistic intentions that domestic protectionism can cause. Sure they benefit, but perhaps ultimately there is a negative side effect to overal productivity that is hard to measure, but still very real. Overall, these organizations invite trade that is beneficial beyond these potentially negative side effects, caused by committe negotiations and lengthy regulations. This allows these organizations to become political tools, which is an ultimate abuse of their otherwise good purpose of making trade more free.

So... "WTO?" Well, no, but let me ask a better question... "Government? No!"

"Offshoring our IT jobs to places like India only puts more highly skilled Americans out of work."

With manufacturing jobs on the decline, fears are centering on the loss of services like IT work overseas to nations like India. It's hard to say it'd be a justified complaint if true, but that's not an issue because it simply is not true. Yes, offshoring IT work does occur. However, America is not less competitive because of it. Some of the biggest sectors projected for growth are in computer and high tech IT fields. Job growth in these sectors is recovering quickly from the tech fallout that caused this most recent recession. Companies are still strong in IT services. Financing and consulting firms are also in good shape, in light of offshoring of those services as well. Their profits have fallen due to increased competition, but that does not overall negatively affect the industry or even the businesses themselves in any negative way. We export more of these services all the time, so the recent importing has not any projected concerns for us at all. Unless the people doing the projections are private interests or anti-trade committees.

"Blue-collar jobs were lost by free trade, but thankfully replaced by more highly trained positions. Now even those positions are being outsourced overseas. America can't keep producing these white-collar jobs forever."

Right now most of the sectors that outsourcing offshores affects, regarding white-collar jobs, are mostly IT fields that are largely healthy. America has a lot of leverage to continue outsourcing because our market is healthy enough to use the demand that consumer savings and labor savings and use it to create newer, more productive services and manufactures. This is another sign of how the robustness of our economy benefits us in spite of the percieved negative effects job loss can present.

"With more revenue from domestic trade, we would increase how much we get from income taxes, which increases the amount of money government gets. This helps us by easing our tax burdens."

Ultimately society's ability to earn it's way is the limit on how much can be taxed without hurting a nation's own tax revenue. In a way, all taxes affect the revenue of society negatively, but some of the worst policies to increase social revenue (thus increasing tax revenue) are ones that create monopolies and channel capital to otherwise unproductive ends - policies like regulations on foreign trade. By allowing private individuals to manipulate the channels of trade to their advantage, even if they are at home, is negative to the rest of us and more importantly, the consumer who will in the end pay more for products and services because of such policies. Trade protectionism's aim is to assist domestic industry, but ultimately it's regulations stunt domestic industry growth, and hurt all trades in favor of the few by making sure that select people get higher profits for a percieved domestic "edge". This makes such approaches the wrong way to increase real national wealth, and they not only hurt the ability of a nation to garner tax revenue, but likewise they hurt the accumulation of wealth for all people.

Perhaps it's time to take a long hard look at where your jobs are really going, because foreign trade policies are just another part of the New American Myth we live in every day.