Hoary old mercantilist arguments aside, trade with China does create jobs
January 30, 2005
New York - When another piece of research on the deleterious effects of trade with China landed in my inbox two weeks ago, my first reaction was: no interest. I'm tired of China scapegoating.
But something about the summary intrigued me. The gist of a new working paper by Robert Scott, a senior international economist at the Economic Policy Institute in Washington, was that trade with China "caused the displacement of production that supported 1.5 million US jobs" between 1989 and 2003.
Was that supposed to be a little or a lot? I did the maths: 1.5 million divided by 14 (years) divided by 12 (months in a year) equals 8 928.57 jobs a month.
It sounded like a rounding error in an economy with a workforce of 132 million. The labour department considers a seasonally adjusted monthly increase of 108 300 jobs or less statistically insignificant - no different from zero job creation. Last year about of 4.3 million people were hired and 4.1 million fired each month.
Still, I assumed Scott's research dissecting the effect of trade flows on employment was a serious effort. I didn't have to wade very far into the paper to run into that old mercantilist thinking that trade kills jobs.
"Increases in exports support domestic employment, while increases in imports displace domestic production that could have supported more jobs in any given sector," Scott says.
That reflects ideas that dominated western European economic thought and policies in the 16th, 17th and 18th centuries. Trade was a zero-sum game: the importer's loss was the exporter's gain.
Then along came Adam Smith to upend mercantilist doctrine with the publication of An Inquiry into the Nature and Causes of the Wealth of Nations in 1776.
Smith demonstrated that trade, freely initiated, benefits both parties to the transaction. He showed how competition would encourage economic development and reduce poverty. He argued that specialisation of labour would create greater efficiency.
Even after centuries in which the benefits of trade raised living standards of rich and poor nations alike, mercantilist sentiment refused to die. It lies in wait for a time when circumstances heighten the public's susceptibility.
The Great Depression, for example, saw a rise in protectionist sentiment and legislation, which only served to deepen and lengthen the economic malaise.
The idea that imports reduce employment finds new advocates in each generation, especially among pro-labour groups. "The employment impact of a change in trade is determined by its effect on the trade balance, the difference between exports and imports at the detailed sectoral level," Scott writes.
No one will deny the pain of US apparel workers displaced when the company shifts production to China.
The job thief can be home grown as well: productivity has a way of making jobs expendable, while intense domestic competition contributes to job destruction.
To argue that every import displaces a job fails to go beyond the first-round effects. To the extent that outsourcing to low-cost producers increases efficiency and saves money, companies can invest more here in higher-skilled jobs, earn higher profits, and pay higher wages.
Cold as it may sound, society benefits from free trade even as individuals are harmed.
Greg Mankiw, the chairman of President George Bush's Council of Economic Advisers, was pilloried last February for saying that outsourcing, "just a new way of doing international trade", was probably a plus for the economy "in the long run".
His comment, "when a good is produced more cheaply abroad, it makes more sense to import it than make it domestically", was such a statement of the obvious it illustrates how easily free trade principles can be sacrificed to politics.
Discussions about outsourcing tend to focus only on what goods and jobs leave the US. Yet for every call centre outsourced to India, the demand for US hi-tech goods and services increases.
"The US is far and away the world's top destination of outsourcing of information technology, financial, communications and other business services," said
Dan Griswold, the director of the Centre for Trade Study at Washington's libertarian Cato Institute.
In 2002, US companies exported $14.8 billion (R88 billion) worth of computer, data processing and other technology services, according to Griswold. That compares with $3.9 billion of imports in those services.
I called Scott last week since it's my practice to talk to the author of any research I'm critiquing. "He's on vacation in Mexico," I was told. Doing his share for Mexico's economy and maybe killing a job or two in the process. - Bloomberg
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