Globalist and free traders often assume as set of facts exists and then proselytize those assumed facts to first world economies that unfettered trade in goods and services and free movement of capital, technology and ideas are givens in the world’s globalized economy. The failure to assume these facts they warn, will lead to less production, less prosperity, and overall socioeconomic decline. It is here in part II that an economic alterative is proven as plausible. In fact, we will see how first world economies are indeed exploring economic alternative to unfettered trade and economic outsourcing. This reversal will have profound implications for the global economy.
It was in part I (here) that I expounded on and criticized America’s existing suicidal free trade policies.
A summary of part I: American businesses outsource Americans jobs to save a few dollars on the cost of production over a period of time. They can send the parts to India, China, or any other country overseas and get labor rates that reflect the level of success in that country, which allows them to then save more money and put more in their pockets. Moreover, companies aren’t outsourcing to help the business. They’re doing it to increase their own profits and make more money for themselves.
Outsourcing is nothing new. It has been around for centuries, and has always allowed for businesses to save money while helping to create jobs. However, it was never intended to completely replace the jobs of people who were already getting things done, and has had a detrimental impact on the domestic, micro-level economy because of its use in this manner.
In a time when jobs are already scarce, the economy shaky, many companies will immediately find a way to run their business smarter, faster, or cheaper.
A similar Wall Street Journal report last April found that America’s largest multinational corporations outsourced more than 2.4 million jobs over the last decade, even as they cut their overall workforces by 2.9 million.
The top reason for companies to outsource was to “reduce operating costs” (46 percent of respondents). Only 12 percent of respondents said their reason for outsourcing was “access to world class capabilities.” This means companies are outsourcing to save themselves money, not make better products.
In Search of a (New) New Trade Theory
Almost all new groundbreaking products and designs were initially made in America. Because the size of the American market it was worth producers to find ways to lower costs and produce more of the product. We once had a monopoly on everything from cars, steel, and computers, to now high-tech design software and products (with commercial and military application) As a result, America has been the most self-sufficient republic in history.
So why has the US been sheading jobs, closing factories and putting to pasture entire industries? (As it stands now, American car manufactures are fighting for their lives). The answer is ideology and free traders decided to “fix” what wasn’t broken.
Over time it was decided by the gurus of trade that it would be beneficial to outsource production to other countries and import the products once made here, back to the US. This doesn't mean that the US lost its ability to produce the product; rather it was stripped of its ability to do so.
The reasoning behind this was that in the meantime, US producers would find newer products to introduce into the American market. Those who lost their jobs from outsourcing could simply pick up and become a cog in the production of newer products.
Then after they have successfully done this, the rug would be jerked out from under the poor peasants again…then the product life cycle is repeated. Of course this is not what at all happened. Entire communities were decimated. Old steel towns and mining communities are faded memories; nothing now but Norman Rockwell paintings. The people? American employment has suffered a net loss since the 1970s.
Instead we have received “diminishing returns.” That’s economic-speak for someone got screwed. The outsourcing did not produce a net gain for the American worker. It has lowered real rage rates, and mass illegal immigration and other kinds, has accelerated income inequality. Most American jobs now go to immigrants.
Specifically mentioned is the phenomenon of outsourcing tech-savvy jobs that were once secure in America. The ease of flow of information and communications along with a growing number of educated and technically skilled populations in countries like China and India, could pose a threat to high skilled workers.
That's right. Even the the top earners, the ground breakers are not safe from the "fix'n.
If the labor market expands in India and more American businesses seek out the abundance of labor at lower costs, the labor market in American contracts.
In other words, rapid advances in productivity of foreign labor due to better education lowers wages in the US, and raises sector unemployment. These factors are enough to outweigh the positive benefits of international trade for America.
Free traders and the globalist who finance them have never denied there will be losers and hardships. However, the gains made by free trade outweigh the losses. They’ll point to rising GDP as a result, yet never consider falling wages, a stubborn unemployment rate and growing welfare numbers.
They presume the jobs lost for the low skilled workers are inefficient for producers in the first place. Therefore, the low skilled will have to discover a new trade. Smith, Ricardo, and Heckscher-Ohlin would argue the low skilled would move to another sector in the new economy. They must assume the invisible hand will help get them there.
Toward Splendid Self Sustainment
Autarky is not a realistic option. Should America, however, hypothetically speaking, exist under autarky, she would do just fine. Already with this point we are at disagreement with the existing dogma on free trade.
Starting in 2008, the growth in cross border capital flows has fallen substantially compared to the 20 previous years. As a result, free movement of capital, at least compared to the era before 2008, has tightened if not become restricted. For a better explanation, consider globally what happened to Cyprus when explicit capital controls were implemented to prevent capital flight. These pressures on capital movement are a significant departure from recent historical policy. In fact, even the IMF has accepted controls to limit volatile cross-border capital flows.
Despite the negatives from the preceding section, America still produces nearly 20 percent of the world's output with roughly 5 percent of the world’s total population. Considering that China is mostly a poverty-ridden, backward country with over a billion mouths to feed, America is in far better shape than its chief competitor.
For the reasons opposite of China, America’s economy has access to a large domestic market. Because of widespread affluence, and a large (if not shrinking middle class) she is less exposed (read less dependent on other markets) to trade (around 15% of GDP) than other large economies. Even after the financial crisis, American households still hold a substantial net worth in excess of US$70 trillion.
Her fertile plains feeds a land of over 300 million people; and yet, its surplus crops is enough to remain the world’s leading food producer. In grain alone, she exports half of the world’s supply.
She rich is minerals, natural gas and even oil. Considering her technology and industrial know-how, it is an embarrassment of riches. Consider that America is shackled with draconian regulations against mining, drilling, and exploration and yet she still is a world’s leader in energy in spite of her government.
The dollar, though weakening greatly, is still the world’s reserve currency. Some 60 percent of global-wide investments are held by the dollar.
America’s antagonists may threaten to bail on this system, even kill the dollar in the process. All the US has to do is threaten to let it die and the nonsense talk ends abruptly. That is because there is no other reserve currency, and no other market or economy big enough to replace the dollar. Who will guarantee to those countries that hold US debt, securities, etc? Most of the world’s global trade is denominated in US dollars. Not even China, all of Asia, even with the help of Russia, can change that anytime soon.
She knows this, too. In fact, Nixon’s floating currency idea was premised on this outcome. She can retreat from cluttered or chaotic global issues at anytime she desires. Afterward, she can still maintain low interest rates to reduce the cost of servicing debt. This allows for higher levels of borrowing, meaning it creates wealth and churns out multipliers from thin air.
If the dollar devalues (by devaluing I only mean internationally or in foreign holdings. Because of America’s large domestic market and near guarantee of foreign or foreign backing, a devaluing of the dollar would have little impact on the American citizen) that fact also reduces the level of government debt, by decreasing its value in foreign currency terms. A weaker US dollar boosts exports and potentially erase or ease trade imbalances.
A weaker dollar can also boost domestic production while encouraging a shift of production bringing manufacturing and assembly work back into the US. The effect would be job growth, more revenue for the government to pay down the large US budget deficit. A healthy shift to a more closed/or self sufficient economy is historically and politically consistent with America’s natural inclination toward isolationism. However American isolationism has always had another side to the coin. She has, at least since 1898, simultaneously focused on protecting the nation’s economic self-interest and expanding and defending US power and influence. The tightrope act has looked schizophrenic at times, however that is a different subject.
Might we be seeing growing evidence and reason end this blind obsession to globalization? Greater integration is as dangerous is it is beneficial. Perhaps that is why we are seeing growth in trade and cross-border investment being reversed.
Along with the economic benefits of global free trade, it is just as acceptable to consider the cost and simply asks: Is it worth it?