January 08, 2004

New World

It is trendy these days, particularly in the USA, to argue whether China or India will be the ones that usurp America's place in the world. Economically, if not politically. It is usually looked at in a win-lose way; America's losing jobs because of hordes of cheap Chinese/Indian workers. In a way they are right. India and China probably are taking jobs away from America. That's a good thing. Let me explain why.

Imagine you had a job in a one person company that had two parts to it. One part was highly profitable, let's say making sales calls. You make $100 a day doing this. But the other part, let's say making coffee, is obviously boring and not-profitable at all. It takes up 1 hour of your 10 hour day. So in effect it's costing you $10 a day making coffee. Nevertheless that's your job. Then someone comes along and says to you they will make your coffee daily at a cheap rate, say $3 a day. Not only do you save the time, you can actually then become more productive and make $110 now instead. So in fact you are now net making $107 (=$100+$10 from the extra hour work - $3 from the coffee cost) and are $7 better off. Not to mention you no longer have to worry about buying the coffee, milk, sugar, cups, getting the right formula, keeping up with things etc.

This is what is meant by the term comparative advantage in economics. It means that everybody wins, because the guy doing the coffee making is doing it at a price they can make money and you are better off by $7 too. It raises general welfare and is why I'm a firm believer in free trade.

The analogy points to the problem too. Instead of a single person, imagine it was departments in a company. The coffee department get told they're being replaced by a group from Asia that can do the job cheaper. That means the coffee department is out of work. Eventually they will find other jobs, either by lowering their prices in the same job or by better education and training for a new (and better paid) job. Low cost labour replacing more expensive labour. It frees these people (resources in economic terms, but that's so impersonal) to make more money by taking better jobs. But the squeaky wheel gets the grease; those jobs that are threatened in this replacement process make a lot of noise, whereas society as a whole only experiences a moderate increase in welfare. The noisy minority drown out the benefits to the vast majority. This is a common problem.

Lest you think all this arguing about this process is new, think again. To use but the most recent example, most Western economies in the last twenty years have seen a massive shift from primary (rural/mining) and secondary (manufacturing) industries into tertiary (services) industries. The pattern over the last 300 years has been simple: from farms to factories, and now from factories to offices. There are still Western farmers (albeit many of them heavily subsided), and there are still plenty of Western factories. Westerners have never been as prosperous while all this has taken place. The job of growing the world's food has slowly but surely shifted to cheaper places, as is manufacturing (e.g. Chinese TVs). It is now starting to happen in services (e.g. Indian computer programmers).

The end result: it is good for us. It is good for China/India. People working in these industries in those countries earn higher than average wages; they are raising the welfare of their economy too. They are bringing expertise and knowledge to develop their own economies. Everyone wins. The adjustment process can be difficult and this is where Governments can add some value, by helping those in affected industries with training programs and the like.

But free trade works, damn it. Next time you see an anti-globalisation speaker, check out their Reeboks, their Levis, their Ray-Bans, their appearance on BBC. They are hypocrites who enjoy the benefits of trade without appreciating them. If they don't like free trade, go to North Korea.

Stories of India and China mean we're all going to be better off. Enjoy it.

Posted by Simon at January 8, 2004 04:26 PM | TrackBack
Comments

Excellent analysis, Simon. It's wearying trying to convince anti-free-trade types that economic development simply need not be a zero-sum game, the premise so many argue incessantly from.

And speaking of multiplying the joy, many congrats on your ubul-riffic news!

Mr Tall

Posted by: mr tall at January 9, 2004 09:54 AM

Whoa nelly ! I think your drawing a mightly wide line on this one. As a theory fine. But in real life your marginalising alot of people.

Firstly, don't confuse anti free trade protestors with people fighting for their jobs. They might have similar arguments but they aren't the same. These are people fighting for a crust. Is it so easy for middle aged or older people to reskill or find new work at similar pay scales ? Would you geel so confortable if you fell off the thin edge ?

Second your commodifying jobs. Not all work can be done this way. There are alot of swings and roundabouts, especially for skills based work. You also reduce the outsourcer to a project manager with no real skills. Bad move in my book, you just gave away the keys to the kingdom (or at least the blueprints).

Third I totally agree with you on the anti free trade protestors who show up at WTO meetings to cause havok. Yet seem to forget that their whole lives are benefited by free trade.

Sorry if my bleeding heart offends.

Posted by: Andrew at January 9, 2004 07:49 PM

as they say, it is the congress and the media that drives policies in the US, so Japan bashing has recently been replaced by China bashing...well, the amnericans got to remember what happened to jobs in the Lancashire region of england when they themselves expanded...i am sure they didn't mind it then, so please let the invisible hand do its job and ride the economic improvements to everybody

Posted by: Brian Liu at January 9, 2004 07:51 PM

Thanks Mr Tall.

Andrew - I agree it is not fun to be on the wrong end of the adjustment process i.e. getting fired. Especially if you are towards the end of your working life. That's why I said that Governments have a role in the process, easing the transition by helping such people. But nevertheless society as a whole is better off through free trade, and changes in economic structure (ie jobs shifting from one sector to another) is part of the deal. You've got to take a more macro view of the benefits and again that's the problem, because job losses mean a vocal and harshly affected minority, but mean broad but small benefits for the large majority. But the overall result is a gain for society.

As to commodifying jobs, you are right. Some jobs can't be outsourced. That's because the costs of outsourcing them outweigh the benefits. Costs are not just wages, it includes potential loss of intellectual capital and many others. Skills based work which is higher value added is likely to remain in home countries because China and India offer cheap labour, not skilled labour (although this is changing too, particularly in India's case). More often than not, people go to jobs rather than the other way around.

Your bleeding heart does not offend at all - it is vital to remember that economics is not just about numbers, it's about people with families and jobs.

But anti-free trade protesters are just idiots. All they are doing is keeping poor countries poor; poorer countries benefit disproportionately from free trade because they rise from a lower base. America's incremental improvement from free trade is tiny compared to it's economy; for an African nation it would be a significant jump in GDP.

Posted by: Simon at January 9, 2004 08:59 PM

I would like to believe that free trade makes the world a better place. If we are losing factories and skilled office positions, doesn't that make our country poorer because were less productive and less skilled? If gdp is based on production and skill, I think we will be hurt by this trend. 3Q gdp only looked good because of government messing with the numbers.

Posted by: Jan at January 13, 2004 08:16 AM

This isn't entirely on-topic, but I'd like to point out that many globalization protestors aren't against free trade, they're against the West's version of "free trade", whereby poor countries have to put up with the West's (mainly the US's) heavily subsidized industries, currency manipulation, feudal copyright laws, and dumping tactics. How can African cotton growers, for example, endure "free trade" when US cotton is cheapened to absurdity by enormous subsidies and the Federal Reserve's unlimited ability to print money?

Paul

Posted by: Paul D at January 13, 2004 10:34 AM
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