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The real problem with free trade

from Jayati Ghosh

Even if free trade is ultimately broadly beneficial, the fact remains that as trade has become freer, inequality has worsened. One major reason for this is that current global trade rules have enabled a few large firms to capture an ever-larger share of value-added, at a massive cost to economies, workers, and the environment.

For most critics of globalization, trade is the villain, responsible for deepening inequality and rising economic insecurity among workers. This is the logic driving support for US President Donald Trump’s escalating tariffs. Why, then, does the message resonate far beyond the United States, and even the advanced economies, to include workers in many of the developing countries that are typically portrayed as globalization’s main beneficiaries?

Free trade is hardly the only – or even primary – source of inequality and insecurity worldwide. Surprisingly, one enduring problem that provokes far less popular backlash is that finance continues to dominate the world economy, generating substantial instability and mounting risks like those that led to the 2008 global financial crisis.

Moreover, some countries continue to pursue fiscal austerity, instead of consolidating their budgets by, say, addressing large-scale tax avoidance and evasion by major companies and wealthy individuals. And labor-saving innovations continue to be developed and deployed, producing “technological unemployment” among some groups.

Some argue that free trade is being demonized simply because people do not understand what is in their own best interest. But that is both patronizing and simplistic. Even if free trade is ultimately broadly beneficial, the fact remains that as trade has become freer, inequality has worsened. 

One major reason for this is that current global rules have enabled a few large firms to capture an ever-larger share of the value-added from trade. Specifically, the proliferation of global value chains has enabled powerful multinational firms to control the design, production, and distribution of traded goods and services, even as various segments are outsourced to smaller firms far from final markets.

These firms often benefit from intellectual-property monopolies, reinforced by free-trade agreements designed to strengthen corporate power. These enable them to collect massive economic rents, especially at the pre-production (including design) and post-production (marketing and branding) stages, where the most value-added and profit is generated.

Meanwhile, increasingly intense competition in the production phase drives down prices, so that the actual producers, whether employers or workers, receive diminishing shares of the value pie. The upshot of this system is that many developing countries that should have benefited from the globalization of value chains have remained confined to low-productivity activities that yield only limited economic value and do not even foster wider technological upgrading.

The forthcoming Trade and Development Report 2018 by the United Nations Conference on Trade and Development (UNCTAD) captures how top firms have steadily increased their share of total exports, and now dominate global trade. Ironically, this trend has intensified since the 2008 global financial crisis, which cast a spotlight on the disproportionate market power of the few and the outsize gains going to the top 1% of the income distribution.

UNCTAD’s research also shows that, for both developed and developing countries, integration into global value chains correlates with declining shares of domestic value-added in exports. The share of actual production in domestic value-added has also declined, as has the share of the remaining value-added accrued by labor. One potential driver of the latter trend is that, by drastically enlarging the global labor supply, the economic integration of countries with large populations like China and India has increased the bargaining power of capital relative to labor.

The only significant exception to these trends is China, which has designed industrial policies specifically to increase the share of domestic value-added and to improve workers’ conditions. Ironically, it is these measures, which have helped offset some of the negative effects of free trade, that Trump has condemned in his pursuit of policies that will do little to protect workers.

But the implications of allowing a few global corporations to wield such vast market power extend further. For one thing, such concentrated economic power makes it more difficult for countries to industrialize, because local companies cannot expect to compete with established multinationals. For another, it prevents developing countries from reaping the full benefits of rising commodity prices, though they gain no protection from price downturns. The ability of large corporations to underprice natural resources also encourages excessive extraction, pollution, and environmental degradation – outcomes that they disingenuously present as the “price of development.”

Consumers also suffer. Yes, major multinationals can offer low prices. But their massive market power leaves consumers at their mercy in every sphere, from manufacturing to financial services to digital technologies.

The more power these companies have, the more they can accrue, as they use their influence to shape regulatory systems, economic policies, and even tax regimes. The result is a weakened state that serves the interests of the few, rather than protecting the many. Those who claim that redistribution can adequately address this problem must address the fact that the “losers” of free trade have so far received little, if any, compensation.

Globalization’s detractors are right that free trade has created serious imbalances. But a trade war completely misses the point. The problem is not that free trade has led to too much global competition, but rather that it has enabled a few companies to secure monopolies or near-monopolies. This has given rise to massive inequalities, blatant rent-seeking, and predatory behavior. Only by addressing these trends can the benefits of trade be increased and equitably shared.

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  1. Craig
    September 24, 2018 at 2:36 am

    Implementing the dual policies of the new paradigm of Direct and Reciprocal Monetary Gifting (a universal dividend and a high percentage discount/rebate at the point of retail sale) would enable national economies to rapidly re-industrialize in the most efficiently productive and ecologically sane fashion possible…because we would not have to worry about either inflation or unemployment. Of course there would actually be more employment and investment with these two policies than if they were not implemented because there would be so much more demand with them and so much less if they were not. It’s apparently too simple for the intellectual vanities of the erudite to countenance when they see how the two policies directly, reciprocally and seamlessly would be administered, complexity being all the rage. Didn’t we hear objections from the Church when Luther said mankind could have a direct and reciprocal relationship with God during the Reformation? Ah, the signatures of paradigm changes. Now that would be a very good study for modern economists and economic pundits to investigate.

    Of course there are many other beneficial and resolving effects from the new paradigm in virtually all of the normal activities and aspects of the economy…because that is what a paradigm does,…..but that could be next week’s assignment. Best to study and understand at least the signs of what everyone agrees we actually need first.

  2. Prof Dr James Beckman, Germany
    September 24, 2018 at 6:38 pm

    Globalization as a concept can be applied to an African village being linked to other villages for the first time by road & cell phones. The point to note it appears here is to watch who does very well & who does less good or even suffers. But that’s life, isn’t it, with the possibility that the tribe redistributes some of the “excess” winnings of the few. to those way down the economic line. In Medieval Europe most of the winnings remained at the top, except that it was obvious the Lord had good reason to keep most of his people healthy & happy. After all, they served him & defended his castle. Kind of like today, is it not?

  3. paul davidson
    September 24, 2018 at 10:18 pm

    the law of comparative advantage depends on the number of labor hours per unit of output in industries #1 and #2 in trading nations . As long as the technology in industry #1 in Nation A requires less labor time per unit of output than labor time required per unit of output in the same industry in Naton B, the Nation A has a comparative advantage and should employ its resources in producing from industry #! were it is most efficient in real terms. eyne noted his comparative efficient as importsnt in the production of ntural resources and climate affected industries (e.g.,agriculture)

    . Keynes expressly noted tht in the 1930s mass production manufacturing industries can transfer their technology across national boundaries– so there s no comparative adantage in these industries! In the global economy of the 21 century free trade in manufacturing merely implies that those natIons that permit sweatshop conditions in factories, low wages, etc will have a competitive advantage montrily but not real efficiency wise.

    The implicatioons of this critical point in Keynes analysis of free trade is developed in my book WHO’S AFRAID OF JOHN MAYNARD KEYNES?

    If a foreign nation used slave labor in its factories, would current advocates of free trade in the USA still insist in allowing the slave labor products to be imported under a free trade doctrine?

    • Prof Dr James Beckman, Germany
      September 25, 2018 at 7:35 am

      Hi, Paul, I teach in China. I assure you that most Chinese are glad to work longer hours & under less pleasant conditions than we, in order to enjoy their far better lives. Indeed, they probably work under conditions not unlike our grandparents. Certainly, however, Keynes is right about tech transfer. That’s why America stole from the UK at our beginning & the Europeans were always stealing from one another as the industrial revolution began in the 18th C. Most developing nations have long required joint ownership, which allows for the transfer of business practices as well as tech. China is the giant elephant in the human herd, so that we need its business as well as notice clearly the volume of knowledge transfer.
      Within ten years China’s economy will be far larger than ours, & soon thereafter as large as ours & the EU’s put together. Don’t touch on the idea of war, as it soon could go nuclear, which would be the end of us all. This is a very dangerous world, in which religious dogma joins with economic aspiration. Time, I think, to move very carefully.

    • September 25, 2018 at 9:25 am

      Hi Paul,

      Here is a very different take on comparative advantage: https://ssrn.com/abstract=3095473

      What Ricardo wrote is much simpler than the common interpretation and can be summed up in this quote from the Principles:
      “The motive which determines us to import a commodity, is the discovery of its relative cheapness abroad: it is the comparison of its price abroad with its price at home.”

  4. paul davidson
    September 24, 2018 at 10:58 pm

    By Paul Davidson
    One of the most widely believed policy conclusions of media economists is that free trade among nations is beneficial to all trading nations. It is claimed that free trade always provides more goods and services for residents in all of the free trade nations while fully employing all the workers of each trading nation. If this is true, then all import and export markets should be made permanently free of any government regulations and/or restrictions such as tariffs or quotas. The conclusion is that nations such as the United States will be better off if it would pursue free trade agreements with all other nations on the globe rather than employ Trump tariffs that encourage foreign nation to reciprocate and engage in a trade war.
    This desire for free trade is based on a 19th century economic analysis called the “law of comparative advantage”. It is claimed that this law is a universal applicable economic truth that assures free trade produces more goods and services globally with fully employed resources with every trading nation producing output from its industries that have the lowest comparative cost (supply side) advantage. In other words, each nation will specialize in producing and exporting products from those domestic industries that have a “comparative advantage” in costs of production relative to the costs of production of the same products produced in other nations.
    Comparative advantage between nations’ industries is determined by supply side relationships regarding the productivity of labor measured by the amount of labor time required to produce a unit of specified output. Thus for example if less labor time is required per unit of oil and gas produced in Russia than the labor time that would be required to produce the same volume of energy in Germany, then economists say Russia has a comparative advantage relative to Germany in producing these fossil fuels. Consequently free trade in the energy market will benefit both Russia and Germany in obtaining energy at lower real cost in terms of labor time input per unit of output. Any government interference with a free trading market between nations following the law of comparative advantage will reduce the economic prosperity of the producing nation from reaching its potential optimal production output given its supply of capital and labor while consumers in the trading nations will have to pay more for their consumption of the output of industry.
    In 1819 the classical economist David Ricardo developed the concept of the law of comparative advantage to justify the importance of free trade among nations. Since Ricardo, economist advocates of international free trade have invoked the need for each nation to specialize in the domestic industry (industries) that has a real comparative advantage in terms of fewer labor hours input necessary to produce output to assure an increase income and wealth in the face of each trading nation’s supply constraints whie still roviding full employment for all its residents..
    To further comprehend the basis for this classical law of comparative advantage, assume there are two nations A and B and two industries #1 and #2. Before free trade occurs, both nations are assumed to be producing output from both industry #1 and industry #2. The law of comparative advantage states that Nation A should specialize solely in production in that industry (say industry #1) for which it has the greatest production real labor cost advantage compared to production costs of the same industries #1 and #2 located in nation B. The law then states that Nation B should specialize only in production from industry #2 where it may have a smaller cost advantage, or at least a lesser cost disadvantage relative to industry #2 in Nation A. This result of Nation A’s specialization entirely in industry #1 production should occur even if Nation A also has an absolute production cost advantage in industry #2 relative to the costs of industry #2 in Nation B.
    In other words even if Nation A has an absolute real cost advantage in both industries compared to the costs of these industries in Nation B, if Nation B has a comparatively smaller cost disadvantage in industry #2 than its cost disadvantage in industry #1 as in nation A., then Nation A should concentrate its resources on production in industry #1, producing all that domestic market demands and exporting to Nation B all the product of industry #1 that the residents of Nation B demand in the market. Nation B should concentrate its resources on production in industry #2 – where it has the smaller cost disadvantage –to meet all Nation B’s domestic demand plus export demand to Nation A of the product of industry #2. The resulting geographical industry pattern of industry #1 as located only in Nation A while exporting #1 product to Nation B, and industry #2 located only in Nation B and exporting #2 product to Nation A.
    According to the law of comparative advantage, employing all available productive resources in both nations to this industrial geographical pattern will produce more total units of output of #1 and #2 available for use by all the inhabitants of both nations. In the absence of free trade, both nations would have factories producing #1 and # 2 products. Even if each nation fully employs all their domestic workers, the total global production of #1 and #2 units of output will be less the total that will occur with free trade. In other words with full employment in both trading nations, there will be more total global output produced and available for the populations of both nations to consume in a free trade marketing system operating under the law of comparative advantage. In this analysis both nations gain from free trade as opposed to marketing results that will occur if there are government restrictions on trade.

    This comparative advantage argument for “free” trade is based on the presumption that opening a nation’s domestic market to imports from a foreign nation that possesses lower real costs of production due to supply productivity advantages not available in the domestic economy benefits the inhabitants in both nations. The result would be that labor in each nation was used in its most efficient manner.
    In Ricardo’s famous wine-cloth free trade example, it was the climate that gave Portugal its absolute as well as its comparative lower labor input necessary to produce grapes for wine than the labor necessary to produce grapes for wine in England. If the labor per hour to mass produce units of cloth in Portugal was much lower than in England, then Portugal would have an absolute cost advantage in the production of cloth as well as wine. Nevertheless the law of comparative advantage would argue that all the cloth for the market in both countries should be produced in England, while Portugal produced all the wine for both countries since it had the greatest comparative real labor cost advantage in the agricultural production of grapes.
    Even if the production of both wine and cloth per unit of output was cheaper in Portugal than England, it would be beneficial for Portugal to concentrate its resources into all the production of grapes to wine where it had the greatest savings in labor time per unit of output – a real cost advantage. Similarly even if it cost more to produce wine and cloth in England, the latter should use its resources in the production of cloth where it had the least cost disadvantage rather than allocating some of its resources to producing grapes for wine where the relative cost disadvantage in England was even greater than in Portugal.
    Assuming the market demand was sufficient to absorb all wine and cloth produced, the result would be greater total production of wine and cloth for the same number of labor hours worked in the two nations then if each nation domestically produced both wine and cloth. This total supply increase due to free trade made possible an increase in the quantity of wine and cloth available to consumers in both England and Portugal.
    In Ricardo’s time, agricultural products and minerals were a very large share of total international trade. Divergences in production costs among nations due to climate and the non-random geographical distribution of natural resources were obviously very significant. This meant that certain products were relatively cheaper to produce in one country than another. Consequently, Ricardo’s law of comparative advantage was largely applicable for explaining the desirability of free trade patterns between nations that would exist in the 19th century.
    With the growth of mass production manufacturing industries in the two centuries since Ricardo, however, manufactured products makes up a larger portion of international trade relative to minerals and agriculture than it did during Ricardo’s time. The geographical location of industrial production is often determined on a somewhat different basis than comparative relative real labor costs in term of labor time necessary to produce a unit of output in any industry. In mass production manufacturing industries, differences in money costs of production among nations are not normally reflective of differences due to nature’s climatic or mineral endowment associated with nation A vis-a-vis nation B. In mass production industries, the same technology typically is used in production of any particular industrial product at any geographical location on earth. Accordingly, the amount of labor time per unit of manufacturing output is equally efficient anywhere on the globe where a particular manufacturing industry’s factories are located. Differences in costs across nations in mass production manufacturing industries are primarily due to money differences in the money wage rate ,fringe benefits, and each nation’s legislation requiring enterprise to provide civilized treatment of workers compared to the same items costs in another nation.
    Keynes recognized this possibility when he wrote
    “A considerable degree of international specialization is necessary in a rational world in all cases where it is indicated by wide differences in climate [and] natural resources…. But over an increasingly wide range of industrial products… Experience accumulates to prove that most modern mass production processes can be performed in most countries and climates with equal efficiency.”
    Today, given the existence of multinational firms and the ease with which they can transfer production technology internationally, any differences in relative costs of production in any particular industry is more likely to reflect national differences in money wages (per hour of labor) plus the costs of providing “civilized” working conditions such as a safe and healthy environment for workers, limiting the use of child labor, the costs to the enterprise of providing health insurance and pension benefits for employees, etc. Today in any free trade international system, where mass manufacturing and service industries are a significant portion of total trading volume among nations, global industrial free trade patterns are more likely to reflect differences in wages, occupational safety and other money labor expenses that a nation’s labor laws require enterprise to bear, rather than real efficiency costs of production associated with either national differences in climate or difference in the availability of natural resources.
    In the 21st century, low transportation and/or communication costs has made the delivery costs in providing many goods and services to distant foreign markets very low. Consequently, mass production industries that use low skilled workers , semi-skilled workers, or even, if available, high skilled workers are likely to locate in those nations where the economic system values human labor life the lowest, at least as measured by the compensation paid per hour of labor and the cost of the work environment provided to protect the safety of workers.
    Long ago most developed nations passed “civilized” labor legislation that made unsafe “sweatshop” working conditions and the use of child labor illegal. More recently, enterprises in these developed nations have been made to bear the costs of not dumping pollution into the environment. Yet such sweatshop, low wage and free pollution conditions typically still exist in most less developed nations. Consequently, the promotion of free trade competition among mass production industries favors the location of factories in nations that have little or no civilized regulations preventing sweatshop conditions, child labor use, wages below some legislative minimum, etc. This means that in developed nations with high paid workers and civilized workplace and pollution controls rules and regulations, free trade threatens the economic lives and civilized welfare conditions of workers and their families in developed nations as mass production manufacturing facilities can be outsourced to these nations that still permit what the developed nations believe are uncivilized working and pollution conditions. Labor in such civilized labor conditions are not free to compete with the costs of labor in nations that still permit sweatshop factory environments.
    In today’s globalized world where developed economies have civilized labor legislation while underdeveloped nations put a much lower value on providing civilized conditions for workers, the result is that free trade encourages profit seeking multinational enterprises to shut down productive facilities in developed nations such as the United States and outsource labor demand to foreign underdeveloped nations. This has contributed to domestic unemployment problems and the hollowing out of the middle class in most developed nations..
    On the other hand, in those domestic production processes where communication and/or transportation costs are very high and immigration legislation limited the importation of cheap labor (e.g., personal services such as servants, waiters, barbers, etc.) there cannot be any significant free trade foreign competition with domestic places of employment. Significant employment opportunities can still exist in these personal service industries of developed nations even though legislative regulations exist which require working condition standards, minimum wages, etc. Nevertheless, if free trade outsourcing displaces a growing number of workers from previously high paying mass production industries in developed nations, then the competition by displaced manufacturing workers for the remaining existing domestic personal service jobs in non-tradeable production processes is likely to depress wages in these activities, or at least prevent the wage of employed workers from rising significantly over time. It is, therefore, no wonder that the share of wages in United States gross domestic product has been declining in recent decades as the United States has engaged in more free trade agreements with nations that continue to have sweatshops manned by low paid workers. If a foreign nation had factories that employed slave labor, would economists in the United States still champion the need for free trade?
    As we crossed the threshold into the twenty-first century, Keynes’s analytical framework indicated that the argument for complete free international trade as a means of promoting the wealth of all nations and their inhabitants cannot be rationalized on the ubiquitous application of the law of comparative advantage. Comparative advantage may still exist for minerals, agriculture and other industries where productivity is related to climatic conditions (e.g., tourism) or mineral availability. Production in these climate and natural resource related industries, however, are often controlled by the market power of cartels and/or producer nations’s governmental policies designed to prevent market prices from falling sufficiently to just cover the “real” costs of production associated with climate or natural resource availability. Those industries for which the law of comparative advantage might still be applicable are often largely sheltered from international competitive forces by cartel or government power. These industries reap monopoly rents over and above a competitive return on their production.
    In the production of oil, for example, since the 1970s the OPEC cartel has created and maintained a large difference between the market price for crude oil and the costs of producing oil in countries such as Saudi Arabia and other middle eastern nations. Consequently the profits to the OPEC cartel including what economists call “monopoly rents” has, for decades, been very large. This cartel maintained price was so much greater than the potential cost of producing oil from shale that American and Canadian enterprises had an incentive to find ways to develop the technology for production of oil from shale and still make a significant more than competitive profit at the world price supported by the OPEC cartel. This new competition from shale oil has tended to reduce (but not eliminate) the OPEC cartel’s control over price of oil significantly in recent years even though the price may be still much greater than the costs of production from oil wells in countries in the Middle East such as Saudi Arabia.
    . The growth of multinational corporations in mass production industries and the movement towards a more liberalized free trading system in the final decades of the twentieth century encouraged business enterprises in developed nations to transfer their production technology in order to “outsource” production, i.e., to search for the lowest wage foreign workers available in order to reduce production costs and enhance corporate profits. The availability of “outsourcing” to cheap foreign labor also acts as a countervailing power to help corporations constrain any rising money wage cost for domestic workers organized by labor unions in developed countries.
    Indeed in the early years of the 21st century, the rapidly developing industrial structure of many nations (e.g., China, India, Southeast Asia) can be largely attributed to the competitive search by multinational firms to utilize low wage foreign workers to compete with the high wage workers in developed nations to produce the identical goods and services under the same technological production processes. This outsourcing search for cheap foreign labor has created the equivalent of an “industrial reserve army” of workers in foreign nations that has constrained and sometimes even reduced the real wage growth and living standards of workers in developed nations.
    In the early decades after the second world war transportation and communication costs as well as manufacturing production processes between nations was still significantly large. There was also national government restrictions on trade using tariffs and import quotas. In this environment, labor unions in mass production industries in developed economies could easily obtain increasingly high wages for the unionized workers. This brought about increasingly high domestic unit labor costs in developed nations. These rising costs initially acted as a spur to encourage corporate managers to search for innovative domestic investment ways to improve domestic labor productivity and thereby reduce labor costs per unit of output. With the growth of multinationals and the removal of many restrictions on the international trading of mass produced manufactured goods, high domestic labor costs now are more likely to encourage managerial practices such as outsourcing, rather than encouraging investment in research and development to provide productivity enhancing new technology to lower domestic unit labor production costs in the developed nations. Under current conditions, it is often cheaper to outsource using existing technical production processes overseas then incur the higher cost of searching for further technological improvements in production processes to reduce unit production costs in developed nations. Consequently, the larger profits attributable to outsourcing have not been plowed back into as much research and technological development even if, in the long run, it is technological improvements in productivity that provide the basis for raising all living standards.
    Under the rules of free trade today, there is less of an incentive for managers to pursue innovations to improve domestic labor productivity in any mass production industrial sector as long as inexpensive foreign labor can “do the job” with the existing technology and transportation and/or communication costs are relatively small. The decline in the rate of growth of domestic labor productivity in many developed nations since the 1970’s can be, at least partly, related to this phenomena of emphasizing the use of cheap foreign labor vis-a-vis the search for domestic production process improvements by the private sector.

    The use of the classical comparative advantage analysis as a justification for letting free markets determine outsourcing, trade and international payments flows can be dangerous to the health of economies of developed nations especially those that restrict the use of child labor, provide their workers with civilized working conditions, and simultaneously provide a high wage standard of living. Such civilized nations will not have any absolute cost advantage in the production of tradeable goods and services vis-a-vis nations where sweatshop conditions including low wages prevail.
    In sum, if capital is mobile internationally, as long as the underdeveloped nations have an absolute labor cost advantage in mass producing all tradeable goods because it has available a large additional supply of cheap labor, then the classical theory justification in claiming free trade agreements provides gains from trade for all nations is not applicable. Given abundant available cheap labor supply of unskilled and skilled workers, the less developed nations will attract foreign capital from the OECD nations to employ these workers to produce most, if not all, the tradeable goods and services that can be profitably sold globally. The developed nations will be left mainly with employment in industries that produce goods and services that are not tradable across national boundaries.
    Of course, the proponents of free trade have an almost religious belief that despite the loss of high wage manufacturing jobs in developed nations due to outsourcing over recent years, the developed nations will develop (yet unspecified) higher skilled jobs in some advanced technology sector. The labor force in countries such as China and India will not have sufficient skills or education to be competitive in this forthcoming new technology high value product sector. Thus, the often heard comment that, in the long run, outsourcing is good for the developed economies with high cost labor forces assumes that unemployment will not be a significant problem as new, still unforeseen higher-skilled jobs will miraculously appear in developed nations such as the United States.
    In a recent study regarding what happened to workers whose high paying manufacturing job were outsourced, it was found that after two years only one out of three of these workers ended up in a new job earning as much or slightly more than they had at their lost job. The other two thirds of the displaced workers earned significantly less or were still unemployed. Moreover most of these workers suffered severe damage to their self-esteem and to their mental health. In some cases this led to marriage breakups and other serious personal consequences.
    .Why did not most of these displaced workers find these new high value jobs that free trade advocates argues must be coming to America? The conventional wisdom is that it is the displaced workers’ own fault for their being eligible only for lower paying less value productive jobs. An unemployed worker or a displaced worker needs only to pursue more education and they will always get a better job we are told without a smile on the face of the perpetrator of this innocent fraud! A call for better-educated workers as the remedy for workers displaced by outsourcing is a measure of a mind that has not thought through the problems of trade patterns in a freely trading global economy where child labor, unsafe working conditions, environmental damaging production, and a host of other factors that are devastating to the progress of a good civilized society.
    Unless the governments of developed nations take deliberate action to secure and maintain full employment in their domestic economies, free trade has the potential to impoverish a significant portion of the population remain unemployed and those workers who are re-employed are forced to accept a real wage that is closer to being competitive to wages being paid to the abundant supply of unskilled and skilled workers in cheap foreign labor countries. Surely, politicians in developed nations should be made aware of these potential bad results that can occur from blindly applying the classical theory explanation of the benefits of free trade to today’s problem of job outsourcing.

    • September 25, 2018 at 12:06 am

      The tribal leaders of all villages, towns, cities, families, countries, and nations settled their differences with more transparency and honour. The politicians of all counties (rich and poor) know exactly what their business is. What has been outsourced in an endless chain of order and disorder is exactly that. Plus, a more visible hierarchy of helplessness and hopelessness has been created. It is global, and it outsources nothing but the worst of all wars, with a shifting focus of hatred from one group of foreign slaves to another. Kenynes was an intelligent system’s manager. Hitler did shoot himself upon foreseeing defeat. The current politicians have even less conscience that all above put together, considering that we do now live in the 2018. It makes one miss the old fashioned Nazis! You knew where you stood or fell.

    • Prof Dr James Beckman, Germany
      September 25, 2018 at 8:14 am

      Pragmatically, Paul, if we don’t have free trade as now practiced, it is unclear if we have much of an option beyond a friendlier, less aggressive form of Trumpism. I can envision three large economic blocks–North America, EU & a Chinese-led Asian three-way battle for economic/technical dominance. America & Asia will be tech equals, with Europe being both a fine consumer & fabricator of mechanical systems. Things become very uncertain due to advances in basic science & resultant technology, which are extremely expensive & require similar language/culture.

      • paul davidson
        September 25, 2018 at 4:55 pm

        Free trade in manufacturing as it is practiced involves using the same technique of production in any nation. The cost advantage will go to those nations that value labor life the lowest in terms of money..

        For example in the USA, we have passed legislation which I called civilized labor laws –which require entrepreneurs to treat THEIR HIRED WORKERS IN A CIVILIZED MANNER –IN THE SENSE THAT CHILDREN UNDER 14 CAN NOT BE EMPLOYED, THE WORK ENVIRONMENT MUST BE SAFE, EMPLOYERS CAN NOT REQUIRE WORKERS TO LABOR MORE THAN 40 HOURS A WEEK WITHOUT INCREASING PAY FOR HOURS ABOVE 40, ETC. ANY FACTORY THAT VIOLATES THESE CIVILIZED LABOR LAWS WE CAN CALL A “sweatshop” factory. US law says such sweatshops can not be used in USA territory and Any product produced in sweatshop conditions can no be sold in the USA. If we require foreign entrepreneurs to meet the same civilized labor conditions that we require of employers producing in the USA — then we are promoting competition under equal protection of the laW!

        The USA would not permit importation of pharmaceuticals to be sold in the USA if these products do not pass the testing of the Pure Food and Drug Administration! Why not use the same treatmsnt for products produced under illegal sweatsgop conditions!

      • Prof Dr James Beckman, Germany
        September 26, 2018 at 7:40 am

        Paul, if the US Congress agreed with us, life would be easier. Come November we have a chance to make that happen, do we not?

  5. Prof Dr James Beckman, Germany
    September 25, 2018 at 7:58 am

    Paul, thanks for the clear economic statement! If one thinks of economics & technology as branches of politics, and each nation with its own national culture, things are much clearer, it seems to me. America & Europe are largely controlled by economic elites, the top 1% with all their supporters in the top 20%-40%, it seems. The option? Perhaps only government by one political party, as in China, Russia, Iran & various other nations. The Trumps & Orbans provide the window dressing, but they depend upon economic elites for financial fire power.
    As we look at the 2016 US vote: we see how Russia is likely to have swing the election–more is in store: https://www.newyorker.com/magazine/2018/10/01/how-russia-helped-to-swing-the-election-for-trump. I read this yesterday; research done by a 71 year old academic. Thus, while we speak of “hard tech” like autonomous driving, we have the greater peril from blending social media with basic social psychology, as the Nazi’s prepared the way & Mr Trump practices.

  6. September 25, 2018 at 7:29 pm

    It is astonishment that Paul Davidson believes he can preach people (including professional economists) with his knowledge of trade theory that he must have gotten as an undergraduate student (perhaps some 50 years ago). Although his arguments contains many insightful observations, his account of the classical theory of comparative advantage counts several wrong explanations. To cite only an example, we read:

    >As long as the technology in industry #1 in Nation A requires less labor time per unit of output than labor time required per unit of output in the same industry in Nat[i]on B, the Nation A has a comparative advantage and should employ its resources in producing from industry #! w[h]ere it is most efficient in real terms. (The second sentence of the post September 24, 2018 at 10:18 pm)

    It is easy to see his error. He assumes that Nation A has an absolute advantage in #1 industry and claims A should specialize in industry #1 because A has an comparative advantage in industry #1 relative to B.

    Apart from this simple misunderstanding of classical theory of comparative advantage, he ignores all development of trade theory after Ricardo. He seems to believe that he can argue all trade problems in the 21st century by his simple 2-country, 2-industry theory. However, there was a big development both in (1) interpretation of Ricardo’s chapter On Foreign Trade and in (2) pure theory of international trade. If he has studied these developments, he should have gotten a better argument and insight on the problems.

    See for example

    (1) Faccarello, G. 2017 A calm investigation into Mr Ricardo’s principles of international trade. In Senga et al. (eds.) Ricardo and International Trade. Routledge.

    (2) Shiozawa, Y. 2017 The new theory of international values: an overview. In Shiozawa et al. (eds.) A New Construction of Ricardian Theory of International Values, Springer.

    • Prof Dr James Beckman, Germany
      September 26, 2018 at 8:00 am

      Yoshinari, you touch on real issues, as a firm can develop a patentable product or component in any country & patent it throughout the world. As is the rule today, other firms license its use in components within their own products. A Trump talks about US tech, but in reality the income is shared with component patent-holders. The largest Chinese cellphone manufacturer, Huawei, says 10% of its components come from firms whose principal nation of registry is the US. The balance come from firms registered in China, So Korea, Japan & Taiwan.

    • September 27, 2018 at 4:53 am

      Dear Professor Dr Beckman

      the questions of technology are still important, and even essential now, if we see the technology itself in a proper way. Among them the question of product patents. Production technique or production process know-how is another.

      If we read how Paul Davidson understand production techniques, we see the deeper problems of his “trade theory.” Let me cite only two parts from his long post (September 24, 2018 at 10:58 pm):

      (A) [A1] In mass production industries, the same technology typically is used in production of any particular industrial product at any geographical location on earth. Accordingly, the amount of labor time per unit of manufacturing output is equally efficient anywhere on the globe where a particular manufacturing industry’s factories are located. [A2] Differences in costs across nations in mass production manufacturing industries are primarily due to money differences in the money wage rate ,fringe benefits, and each nation’s legislation requiring enterprise to provide civilized treatment of workers compared to the same items costs in another nation.

      (B) Today in any free trade international system, where mass manufacturing and service industries are a significant portion of total trading volume among nations, global industrial free trade patterns are [B1] more likely to reflect differences in wages, occupational safety and other money labor expenses that a nation’s labor laws require enterprise to bear, [B2] rather than real efficiency costs of production associated with either national differences in climate or difference in the availability of natural resources.

      For the convenience of quotation, I have inserted marks in brackets.

      [A1] shows that Davidson has a very shallow acquaintance of with production techniques. He is right in observing that processes used in modern manufacturing do not depend on climate or on geographical locations. However, he is committing a serious error to suppose that the efficiency of those production techniques is all the same. Physically measured labor productivity (i.e. labor time per unit of product) changes enormously from country to country and from firm to firm. Efficiency in input materials (measured as the inverse of input coefficients) differs also. These differences of production techniques determines the wage
      rate differences between nations. (See my paper: The New Theory of International Values. The core of the new theory is to show how wage rates differences across nations emerge by the interactions of each nation’s set of production techniques.)

      Lacking these fundamental knowledge on productivity and efficiency, Davidson attribute all the differences of cost (measured in values) to the differences of wage rates between nations. [A2]

      Quotation [B] is a simple repetition of [A], except that he argues in the contrary way in this quotation. [B2] exposes the similar claim as [A1] and [B1] as [A2].

      The argument like Paul Davidson is ear-pleasing, because it appeals to the consciousness of the listeners. We all worry when we hear of sweat shop, polluted work place, and low wages. Of course, it is necessary that work conditions in less developed countries must be improves. But the main problem does not lie there. Low wage rate of a country is the consequence of low productivity (physically measured) and not vice versa. If we forget this crucial point, all our policies do not work well, because they are based on a wrong diagnosis.

      • Prof Dr James Beckman, Germany
        September 27, 2018 at 7:43 am

        Thanks for your remarks, Yoshinori. I often use the use test in cell phones & autos. Try the Huawei vs Apple, both manufactured in China using components often produced in China but patented to firms around the world. The Apple is superior in some ways, but at 40% higher price in China & Europe. My engineering friends indicate this superiority is due to design & some better components which Huawei does not have access to. I won’t go into specifics, but workers’ final assembly skill does not seem to be an issue.
        On vehicles, try the German vehicles assembled in China with those produced there by Chinese firms–take your pick as there are many. Design & components explain the superior ride & handling to an extent I am told, but the ability of workers to provide a personal “fit & feel” seems involved as well. This is manufacturing experience, shown again by Elon Musk who can’t produce his vehicles to nearly the same standards. Musk lacks the complete range of plant production experience over all skills that for example the Japanese, South Koreans & Germans possess.
        So relative worker competence seems involved in at least the vehicles. Chinese iPhone assemblers are paid $650-$850 a month: https://www.huffingtonpost.com/…/pegatron-iphone-workers_us_573dcb39e4b0aee7b8… (May, 2916). Their competence seems adequate, as complaints about iPhones normally deal with component matters like battery strength. On autos I can’t find any reliable recent information, but the Conference Board reports that in 2013 general manufacturing wages in China were 11.3% of America’s (Table 4): https://www.conference-board.org/ilcprogram/index.cfm?id=38270#Table4. It seems obvious to me that under the “fit & feel” standard of assembly line competence, the superior foreign supervision & perhaps hand tools makes a considerable difference, but that some of the difference in pay obviously relates to lesser skill levels. Yet the larger part in mfg worker pay differences between nations must also relate to the standard of living in each country, & what it costs to enjoy that level. This is another topic as I think we all agree.

      • September 27, 2018 at 10:35 am

        In the previous post, I argued mainly production techniques. Of course, product techniques matter too. The latter, however, is more difficult to treat theoretically than the former.
        That is why I constrained myself to argue only production techniques. We cannot tell which is more important. Both are important.

      • Prof Dr James Beckman, Germany
        September 27, 2018 at 3:30 pm

        Absolutely agreed, my friend.

  7. September 27, 2018 at 1:25 pm

    Sapiens 10,000 years-ago invented government and religion to address such issues as these. Government directly through power and force, and religion indirectly through moral codes. Even without the understanding we have today from the science of evolution and cultural adaptation, those who created the United States, and most other democratic societies over the last 300 years took steps to control wealth and those who held it, along with creating codes of conduct to ensure political and economic egalitarianism. They understood then and understand now that democracy could not and would not survive otherwise. The danger arises in contemporary times because both these cultural inventions are now controlled by the members of the Sapiens community they are intended to control and channel into activities beneficial to Sapiens’ societies. The species murders itself.

  8. Prof Dr James Beckman, Germany
    September 27, 2018 at 3:28 pm

    Hi, Jayati, I take the view that the genie has left the jar, that is, that technology allows us to cover the world with communications instantly, take us around the world in not much more than 48 hours (I have done it many times), & send mass-produced goods/services as fast as their value suggests. It’s not going back, as even “closed” borders will be penetrated by bribery or tech. Witness the tens of billions in illegal drugs which mysteriously find their way into the US annually.
    Given that reality, I would use government’s taxing power to attempt to redress the plight of the losers as they examine their relative position contrasted to the winners. And it is relative, is it not? In the West very few are sleeping in caves & living off worms, unless they are fleeing people or pursuing their own value system, it seems to me.

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