Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

This is The Problem With Free Trade

Economics / Global Economy Feb 25, 2016 - 12:23 PM GMT

By: Rodney_Johnson

Economics If you join a poker game and can’t identify the “mark,” then chances are, you’re it! The “mark” is the person at the game who is less experienced, or perhaps is given to reckless betting. By including this player in the game, everyone else has an opportunity to walk away a winner.

But don’t lose sight of the bigger picture. Not everyone is a winner, and typically someone ends up the big loser!

The same principle works when countries get together for free or open trade. Everyone talks about how great it will be, how much their economies will grow, about efficiencies and new opportunities. But they almost never talk about the people who will lose.


Believe me, there are always losers.

Adam Smith’s famous book The Wealth of Nations laid out the case for free trade. If one nation is really good at making shoes, and another is really good at making cloth, then when they exchange goods the shoemakers can focus on what they do well and so can the weavers.

In this exchange, the cobbler nation shouldn’t make cloth and the weaving nation shouldn’t make shoes. By specializing on what they do best, each nation can better hone its skills while enjoying a bigger market for its product as well as have access to better goods from abroad. Everyone wins, right?

Wrong. Everyone benefits, but some still lose.

Specialization is at the heart of free trade. Companies that are really good at something should do more of that, using their abilities and resources to be as productive as possible. If they don’t have to work on a bunch of other things at which they lack expertise, then companies can boost their efficiency.

At the same time, consumers in each country benefit from greater selection and, presumably, lower prices. Ideally specialization allows companies and countries to lower costs of production, thereby offering clients better goods and better deals.

So countries win, companies win, and consumers win. But then there is the pesky case of displaced workers.

The weavers in the country of cobblers are now out of a job, as are the cobblers in the country of weavers. In Adam Smith’s version of the story, this is no problem. Obviously the newly-unemployed workers will be quickly hired by companies in their home country that suddenly have an abundance of orders to fill from overseas.

Maybe that was true in Adam Smith’s day.

It’s possible that in the late 1700s, before the industrial revolution created the lands of plenty, such specialization by country created tremendous new selling opportunities for both countries so worker displacement wasn’t a problem. But in the 21st century, we’re not so lucky.

From 1990 to 2013, China’s share of exported manufactured goods on the planet grew from 2.3% to 18.8%. In some areas of American life, Chinese market penetration neared 100%. And if it wasn’t just the Chinese, it was a combination of foreign manufacturers.

Chances are, the computer screen you’re looking at right now was made in Taiwan or South Korea. Even the ones that say “Made in U.S.A.” typically have parts made overseas and just undergo final “assembly” here.

There’s no doubt that by opening their doors to labor and becoming the low-cost workforce on the planet the Chinese government dramatically improved the lives of its citizens.

Since 1990, the average real income in China rose from 4% of its American counterpart to 25% today. As we paid them to make disposable consumer goods, we gained access to cheap stuff, which improved our overall standard of living.

But it came at the expense of jobs. Because of the size of the Chinese labor force and its ability to take over entire industries, giant swaths of manufacturing employment in the U.S. were obliterated. According to a study by Dorn, Autor, and Hanson, 44% of the manufacturing decline in the U.S. between 1990 and 2007 can be attributed to the rise of China. A $1,000 rise in Chinese exports in an affected industry drove down per-worker wages by $500, and government subsidies (retraining, etc.) only replaced $58.

The logic of free trade works, as long as you kept your job, and aren’t competing with a bunch of people laid off because of free trade. For them, the process of getting rehired by domestic companies that picked up a lot of work because of the deal is taking just a bit longer than expected.

The problem is that industries tend to be concentrated geographically. An entire town might work for one company in one industry. So when that industry is undercut by new imports, the effects are broad and deep in those areas, leaving little employment opportunity for the newly displaced. Rebuilding those areas can take years, if it ever happens.

Moving to a different part of the country is a solution, but anyone with a working spouse and kids knows that such a transition is exceptionally difficult.

Contrary to earlier theories that assumed workers could find new jobs quickly, now it looks like it can take over a decade. The authors estimate that we currently employ 2.4 million fewer people because of Chinese competition.

This doesn’t mean that we should not have free trade, or that we shouldn’t have specialization of labor. These arrangements allow for amazing leaps in technology and standards of living.

But we should keep in mind that just because a TV costs less doesn’t mean everyone wins. Before you can buy a cheap TV, you need to have income. That’s tough without a job.

Rodney
Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Copyright © 2016 Rodney Johnson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Rodney Johnson Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in