Monday, October 4, 2010

WSJ: Americans Souring on Free Trade as Losing Their Jobs Overpowers Lower Prices

A very interesting cover story in the Wall Street Journal today on attitudes towards "free trade".   First,let's be truthful here - there is very little free trade in reality - certainly not an even playing field.  Go try to buy a U.S. car in Japan and report back on the enormous tariffs you have to pay for the honor of buying 'foreign' in that country.  Or try to compete with labor markets where safety is an afterthought, and there is no need to pay benefits.  Even the U.S. - which is quite open for product dumping into the country - has some protectionist arms up, especially in foodstuffs.  So it is a misnomer to call it free trade but we get the larger picture here.

The theory if you are not familiar is the whole world gets richer if you let every country specialize in what they do best and at lowest prices.  (In the U.S. that means home flipping, and financial innovation I guess)  Over the course of time as everyone gets richer, and middle classes are formed overseas in developing countries everyone demands more service and every person is lifted in the big hands of 'free trade' to a wonderful life.  And maybe that *will be* true over the long term (i.e. 3-4 generations)  But even if true it does not address the wrenching dislocations happening in the middle class of some developed countries - especially the most open, like the U.S. where multinational labor force migration has been huge.  And if it is not true - well then you just have Ross Perot's famous 'giant sucking sound'.

What this story points out is how the angst of Ross Perot being correct is moving up the food chain... at the earliest stages we were told just "low skill" grunt work would go overseas.  Then of course low skill service work.  But a funny thing happened - suddenly a mass of Research & Development jobs (in the U.S. very high paying 'science' 'engineering' type of work) has moved... because it only makes sense to put your R&D next to your manufacturing.

(Nov 2009)

  • Applied Materials is the biggest maker of equipment to make solar panels. Last month, it opened the world's largest solar research facility – in China.
  • "If the manufacturers are in China, that's where we need to go," Pinto says

And after a generation, higher level service jobs (as long as it does not require human to human contact) has begun to leave as well.  [Aug 15, 2008: NYT - Cost Cutting in New York City, but a Boom in India]  And this (in my opinion) is why those who brushed away any concerns about this trend in the higher income brackets are now turning tail.  It is easy to say 'globalization is great' when it is not your job or your peer's jobs going overseas.  But when it becomes a mechanical engineer, rather than a call center operator, Americans up the income strata now are questioning what the end game here is.

Whatever the eventual outcome, we are in the middle of a multi decade social experiment and at this point in the daisy chain a lot of Americans have lost their jobs, while multinationals have lowered their cost of labor dramatically, while opening up new sources of revenue.  So it is definitely good for businesses that export outside the country.  And as you know - what is good for the multinationals is good for America ;) after all S&P 500 profits is how you judge the well being of a country.  Of course many of these same companies that are benefiting from new lines of sales overseas, are not translating them to new jobs here ... which is the paradox.  Of course the factor oft cited on why Americans should be happy with the arrangement is lower prices at Walmart for the sacrifice of their jobs.  And somehow a service economy where we barter services (haircut for accounting) is fine as the bedrock of a country.  (Manufacturing down to 13% of GDP and 9% of employment).

From my own views, I will say what free trade is doing is creating a more level existence for human kind - a lot more people are going to a global mean.  As a human race that is a net positive.  That means positive things for those who were below the mean, but (at least to some degree, even if you disagree with this belief) has meant negative things for many above the mean - especially in this country where retraining, social safety nets, and the like are below that of other countries experiencing similar issues.

Now for those who live in ivory tower textbooks who worship at the alter of "free trade is only good" (especially in a world we all know not to be a true even playing field) I will ask these questions as I always do when we bring up the topic of global labor (wage) arbitrage   [Sep 14, 2009: Global Wage Arbitrade at the Micro Level: Marvell Technology] [Nov 5, 2009: Blue Coat Systems - More Global Wage Arbitrage

  1. How many years will take place between the displacement of workers "today" in America and the "middle class demanding things in China" from America? 
  2. What do we do with those workers in the meantime aside from plugging them into government work or pseudo government (health care)? 
  3. What will happen to the income of said "displacements" as they move out of jobs from a very good high tech company to... (crickets chirping)? 
  4. What exactly are Americans making today (in the country) that the Chinese want and need to import excluding large scale industrial weapons / defense? 
  5. What exactly will Americans be making in "some day in the future" (10? 15 years?) when the Chinese middle class get to a level of wealth and can buy things from us... ?  
  6. Whatever those products are you named in question 5, why can't the Chinese make them internally in 5, 10, 15 years?  Why will they need us to make them?

Of course none of this takes into account politics, and after a few decades of generally supporting the concept - it appears the tide has turned sharply.  And to that we go to the Wall Street Journal:

  • The American public, already skeptical of free trade, is becoming increasingly hostile to it. In the latest Wall Street Journal/NBC News poll, more than half of those surveyed, 53%, said free-trade agreements have hurt the U.S. That is up from 46% three years ago and 32% in 1999.
  • Across the country, politicians are responding accordingly, and that is clouding prospects for congressional approval of pending free-trade pacts with South Korea and Colombia. It is also prompting concern among U.S. businesses reliant on the rest of the world for growth.
  • Even Americans most likely to be winners from trade—upper-income, well-educated professionals, whose jobs are less likely to go overseas and whose industries are often buoyed by demand from international markets—are increasingly skeptical.
  • "The important change is that very well-educated and upper-income people compared to five to 10 years ago have shifted their opinion and are now expressing significant concern about the notion trade," said Bill McInturff, a Republican pollster who helps conduct the Journal survey. Among those earning $75,000 or more, 50% now say free-trade pacts have hurt the U.S., up from 24% who said the same in 1999.
  • Worries about side effects of trade and outsourcing seem one of the few issues on which Americans of different classes, occupations and political persuasions agree.   Opposition to trade is fueled by reports that many U.S. multinational companies, sitting on huge stockpiles of cash, are reluctant to invest in the U.S. and are looking overseas, and by the fact that China has pulled out of the global slump much faster than the U.S.
  • John Wallis, 50 years old, blames imports for the 2001 death of his 12-employee business that made small electronic prototypes for the telecommunications industry and the subsequent loss of his Chicago-area home. "Trade is fine and dandy in a scenario where everybody wins," Mr. Wallis said. But the U.S. isn't winning, he said. Mr. Wallis now works in programming and design for an international manufacturer in Rhode Island, but doubts he'll ever be able to repay debts from his old business. "Financially we've never recovered," he said.

Pretty amazing statistic, professionals/managers even more so than blue collar (typically thought to take the brunt of outsourcing) blame outsourcing for the economic struggles.  One would expect the opposite - but both figures are sky high:

  • In the recent Journal poll, 83% of blue-collar workers agreed that outsourcing of manufacturing to foreign countries with lower wages was a reason the U.S. economy was struggling and more people weren't being hired; no other factor was so often cited for current economic ills. Among professionals and managers, the sentiment was even stronger: 95% of them blamed outsourcing.

[Aug 18, 2010: Foxconn to Hire Up to 400,000 in 2011; Increasing Employment by 50%]
[Nov 2, 2009: Lack of Green Energy Manufacturing Capability in US Means 84% of Stimulus Goes to Foreign Firms] 
[Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?]  

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