Protectionism is one issue that spans the ideological spectrum. One’s just as likely to come across calls for protectionist policies on the right as the left. Case in point as a conservative blogger using the name arclightzero writes on “The Reality of Economic Globalization.” According to the author, this is a reality where American jobs and the quality of goods are being sacrificed at the alter of globalization. “[M]anufacturing in America is dying,” he declares. But how accurate is this reality? A little research combined with some basic understanding of free market principles shows why this author has it all wrong.
I’ll start with his conclusion first. Is the American manufacturing sector dying? This seems like something that one should be able to prove or disprove empirically. So what do the facts say? Far from the image of a dying sector painted by the author, the facts show that American manufacturing is booming! The American manufacturing sector reached its all-time peak just last year, in 2006. Daniel Ikenson’s analysis for the Center for Trade Policy Studies at the Cato Institute titled, “Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade,” dispelled many of these myths. From the executive summary:
Since the depth of the manufacturing recession in 2002, the sector as a whole has experienced robust and sustained output, revenue, and profit growth. The year 2006 was a record year for output, revenues, profits, profit rates, and return on investment in the manufacturing sector. And despite all the stories about the erosion of U.S. manufacturing primacy, the United States remains the world?s most prolific manufacturer?producing two and a half times more output than those vaunted Chinese factories in 2006.
. . .In the first six months of the 110th Congress, more than a dozen antagonistic or protectionist trade-related bills have been introduced, which rely on the presumed precariousness of U.S. manufacturing as justification for the legislation. Justification for those bills is predicated on the belief that manufacturing is in decline and that the failure of U.S. trade policy to address unfair competition is to blame. But those premises are wrong. The totality of evidence points to a robust manufacturing sector that has thrived on account of greater international trade.
Arclightzero’s assertion that the manufacturing sector is dying is not all that is wrong with his article. There are several points of reasoning that I take issue with. Consider the following passage:
For every job that is shipped to India or China so that the company can make an extra couple of bucks, there is another American that won?t be able to buy that company?s product or service due to the loss of a job. It?s a very short-sighted way to run a business and an economy.
He errs here by viewing job loss as a static phenomenon, rather than as part of a larger process. Creative destruction is a necessary part of the capitalist system. Nor is what he describes unique to jobs lost to other countries. The same argument could be made within any economic subgroup experiencing dislocation, and it would also be equally myopic. Such constant efficiency maximization is what drives transformative and innovative growth. Without these processes we would be stuck with outmoded and immobile industries. Furthermore, our record low unemployment seems to indicate that jobs lost in this process are replaced by new job gains. In addition, the lower cost of goods provides a higher standard of living for all.
He also makes a case that these cheaper foreign goods are of a lower quality. That may or may not be true, but it’s entirely irrelevant. Consumers retain the same ultimate say in the matter regardless of who produces the goods. If the quality is not at a high enough level to satisfy consumers, the products will not be bought. The only way to circumvent this simple fact is by insisting that some other opinion, such as that of a government regulatory body, should matter more the opinion of the consumer. I don’t think it’s necessary to explain the folly of that position on this blog, nor do I believe the author would even take that position.
I find the biggest fault in the author’s reasoning to be that his analysis of the “human factor” completely disregards any negative feedback from the global economic system as a result of protectionist policies that would attempt to “[keep] work and production here at home.” When we enact policies to achieve that end, other nations respond in kind. In fact, he doesn’t acknowledge any connection at all between the strength of the American economy and the global economy, whether it be positive or negative.
The American economy has benefited greatly from the opening of trade and will see even more such gains in the future if we continue to open trade. Recent research compares the gains of free trade versus the type of lose the author is experiencing and finds that the net outcome is overwhelmingly positive for America.[1]
. . .We find that trade opening since World War II has added between $800 billion to $1.4 trillion to the US economy, or about $7,000 to $13,000 per household. More speculative estimates of the potential additional gains from removing the rest of US trade barriers range from $400 billion to $1.3 trillion, or about $4,000 to $12,000 per household. Since trade opening permanently raises national income, these gains are enjoyed annually. Trade opening inevitably entails adjustment costs. We estimate that the lifetime cost of all worker dislocations that have been triggered by expanded trade in the United States could be as high as $54 billion, although probably less. The permanent gains from past and potential liberalization easily swamp the modest sums necessary to alleviate the temporary pains of adjustment. In the future as in the past, free trade can significantly raise income ? and quality of life ? in America.
It’s easy for individuals to see only the localized dislocations and not the dispersed gains of globalization, as evidence by the fact that the author of this particular protectionist piece claims to be a “devout capitalist” who nevertheless says that “[a]nybody who thinks that sending work offshore doesn’t hurt the economy and capitalism need to have their heads examined.” The evidence begs to differ.
Further Reading: The Case for Free Trade by Milton and Rose D. Friedman
[1] See “The Payoff to America from Globalisation,” by Scott Bradford, Paul Grieco and Gary Hufbauer in The World Economy. Volume 29, Issue 7. July 2006.