Free trade and the global movement of goods and services have been under political attack from the left for quite a while. Now these ‘socialists’ have been joined by America-Firsters and other ‘My Country, Everyone Else Be Damned’ groups on the Right.
These people, who agree on little else, sing from the same hymn book on free trade and the song they sing most often is the one about the flight of manufacturing jobs from Frank in Toledo to Pedro in Mexico City or Pho Bang in Vietnam. This refrain, conjuring up as it does an image of a simple two-way transmission belt, as if Frank’s job was packaged up and mailed directly to Pedro or Pho by nefarious, cost-cutting corporations is a cartoonish depiction of macro-economic reality.
It's Robots, Not Foreigners
Corporations do cut costs, always have, always will in competitive environments – that is how they stay around to provide the jobs they do provide. And yes, the United States and other post-industrial countries have lost and continue to lose manufacturing jobs – 5.5 million of them went in the U.S. between 2000 and 2017. The problem for the free trade blamers is that 87% of these jobs were lost to automation, not third-world replacement workers. Build a tariff wall as high as an elephant’s eye, these jobs aren’t coming back. In fact, since interfering with globalized supply chain management makes the cost of doing business higher, it actually increases a company’s incentive to automate because people are more expensive over the long run than machines.
Criss Crossing the Globe
Integrated supply-chain management is one of the most potent efficiency drivers in the modern world and plays a massive role in reducing the costs of everything we buy. ISCM is the thing that turned Walmart from a country store in Bentonville, Arkansas into a global behemoth and Amazon into its next-gen equivalent.
Manufacturing a product in the year 2017 is not in the vast majority of cases, remotely a linear or a local process – it looks more like the diagram below than any simple series of two-way transmissions.
It’s not just computers. Boeing makes its American planes with parts sourced in 150 countries and it better do so if it wants to compete with AirBus. Look around your house, you will see a myriad of products with a small label stating “made from American and foreign parts.” This global manufacturing integration is a web so complex that supply-chain-management is one of the fast-growing and most lucrative specialties around. Tariffs can damage the efficiency of global ISCM significantly, although the likelihood of untangling it is virtually nil.
Walk a Million Miles in My Shoes
For those who find this all rather abstract, let’s play with one small example. Chris up in Canada is very fond of an American shoe brand called Johnson and Murphy. They have been making great shoes since 1850 (Lincoln wore some.) J&M has a solid retail presence in many stores and some of their own branded specialty outlets. They are selling internationally in 91 countries and increasingly online.
Of course American-made doesn’t mean what it used to mean. One can be sure that the shoe laces, the insoles and god-knows what else are sourced in the third-world. It is indeed likely that J&M outsources everything but the brand-name. So, the current U.S. administration decides to slap a 20% tariff on Asian-sourced imports. Of course the countries affected are not going to just sit there passively. So, they slap a 20% countervailing tariff on U.S. exports. Now, J & M’s ISC has been negatively impacted to the tune of approximately 40% increasing their overall costs of production by say 10%. These costs are of course passed on to the consumer. Chris up in the Great White North does not want to pay an extra 10% for his beloved shoes and buys fewer pairs hurting the company’s bottom line. It strives to counterbalance this by cutting costs. Does it try to turn the clock back to 1899 when U.S. workers made the entire shoe using lots of hand-labour? It emphatically does not, it puts even more robots in place, and may even reduce its retail employee numbers (people are costly) and migrate more of its business to the web. Meanwhile, the share price of J &M’s parent company has lost some value making everyone who holds it in their retirement vehicles, 401Ks, and mutual funds incrementally poorer on an investment return basis. Now, multiply this little scenario by the tens of millions.
Let's (Not) Be Frank
So what has protectionist public policy achieved? It has made everything from high-tech knee joint replacements to flat-screen TVs more expensive. Frank in Toledo is poorer because even at Walmart he and his wife are paying more, Pedro and Pho Bang are poorer and don’t quite make it to the level of disposable income that allows them to buy discretionary items made or partially made in America further reducing the U.S’s GDP. Most relevant to the debate, the work will not come back to Toledo.
I feel bad for Frank, if he is 52, poorly educated and emotionally rooted in a declining community, his prospects are glum. But the answer is not to make everyone else poorer, including governments whose tax revenues stagnate because their economic growth is hobbled by declining exports. Declining tax revenue means less money to help Frank transition if he can. More importantly, I am really rooting for Pedro and Pho Bang. Since 1950 Gross World Product (or Global Combined GDP), the value of goods and services produced world-wide has gone from $4.1 trillion to almost $80 trillion (over $100 trillion on a purchasing parity basis according to the CIA’s World Factbook). A billion people have been pulled out of poverty and the perpetual stagnation of rural subsistence farming and towards or into the middle class. The key factors in this — liberal trade policy since the end of the Second World War, technical innovation and exponential improvements in information management.
This Has All Happened Before
The most recent American experiment with broad-scale protectionism occurred during the 1920s. The Smoot-Hawley tariffs crippled trade between Europe and the one major economy that was still prosperous, making it far more difficult for countries such as Germany to recover from the devastations of the First World War. And we all know who came along in the thirties to sing his racial siren song to an agonized German middle-class battered by hyper- inflation and massive unemployment while the U.S. slid into depression anyway.
Since the actual negative consequences of protectionist policies are widely accepted in economic theory, it is necessary for its supporters to play word games; so we now have “fair trade; not free trade.” This is disingenuous verbal subterfuge. The fairest trade is the freest trade under a system of rules that are as impervious to manipulation by governments for political purposes as is possible, and with a dispute resolution mechanism that builds in flexible adjustments through negotiation. All governmental actors will try to manipulate trade agreements and they do this often for political reasons that have perverse economic consequences. It is not to the advantage of most of the citizens of the EU or Japan or Canada that they all pay more for vegetables, rice and dairy products than they should because of the political potency of farm lobbies.
And It Will Happen Again
There are no perfectly fair trade deals and reviewing them every few years is a perfectly reasonable exercise. The important thing is not to lose hold, in a blizzard of partisan rhetoric and political dysfunction, of the fact that in economics there is such a thing as a win-win proposition. In an age of reduced tolerance, where scape-goatism and the assumption that the normal jockeying for competitive advantage that goes on all the time is somehow a manifestation of hostile intent – of enemies at the gates – the win-win insight is in danger of being submerged with disastrous consequences.
The hotel magnate who now occupies the White House knows damn well where all the sheets on the beds in his hotel rooms come from – and it begins with Bang and ends with desh. I think he also knows exactly how important for the profitability of his business and the dividends of his shareholders it is that no powerful government in a large economy mess with the globally integrated supply chain. He should also know, if he stops to think about it, that any effort to make America a world power in sheet manufacture is doomed to fail – and this is a good thing. When economic actors work within the Law of Comparative Advantage – when we produce the things we are good at producing and trade for the rest – we all get richer. Mr. Trump may not know much about Mr. Smoot and Mr. Hawley; but he should think carefully before he attaches his legacy to their failed policies.
– Updated May 2020 –
It’s interesting when you look at manufacturing jobs in Canada and the United States you will see that they went down sharply over time about the same time as China was admitted to the WTO. However, that tells an easily misleading story. When you look at industrial output, it has continued to go up (with the exception of recessions). As you suggest, also going up and at an accelerating rate is the use of automation. For example, the number of industrial robots has tripled since 2008 and that’s not like from one to three, but one- to three-million.