Inspired by Pablo's excellent post on Free trade, I have decided to write my own.
There is a meme among both conservatives and liberals about how bad free trade is and how it destroys communities. The rhetoric may be slightly different from the liberals, who mostly care about the poor people who are forced to work in the Chinese factories, while the conservatives are worried about Michigan being transformed into a ghost state because of all the industries leaving.
They are both wrong.
Short note on the working conditions in Chinese factories: Those workers still make about 8 times as much as the average Chinese farmer. And working on a Chinese farm, without any modern technology or hospitals nearby, is also associated with certain work-related injuries and diseases.
This post, however, is not about bleedhearted liberals. It is about misguided - and I am being generous when I'm using that word - conservatives.
Free trade, far from turning Michigan into a ghost state, actually saves jobs. How? Differentiation.
Let me explain: Suppose we have a firm in Detroit which has its entire customer base in Michigan - this means that all their customers are from Michigan and the firm cannot sell anything to anyone outside the state.
What does this mean? It means that the demand for the firm's products depend largely on the local economy and consumer preferences in Michigan. If Michigan experiences a recession, your business may go bust even if you haven't done anything wrong (even good companies fail in recessions). Also, if consumer preferences change in Michigan, you're screwed (this means that people, for one reason or the other, are no longer interested in your product).
However, imagine this scenario: Consumers in Michigan are no longer interested, but in Illinois, they are craving your product. What do you do? Well, you sell to them instead. In the US, you can do this fairly easy. And so, instead of laying off all your staff and putting an "out of business" sign on your door, you and your company survives.
So, would anyone consider it a bad thing? That this business can sell to consumers in Illinois and thereby survive? No? Well, neither do I. But what if this causes a company in Illinois to go bankrupt? Would it then be right for Illinois to block this Michigan company from entry? Of course not. If the local Illinois company cannot survive, it is because it's not efficient enough, it has too high costs or they are trying to force customers to pay a price they are no longer willing to pay since the Michigan company came to town.
At the same time, the companies in Illinois who may not be able to find customers in Illinois at the movement is able to sell to those in California, and the businesses of California is able to sell to consumers in Texas. This creates better opportunities for companies to survive: Even if they can't find demand in their home region, they can find it elsewhere. Also, it enables companies to grow and become larger than they could if they were restrained to their home states. And big companies are in general more efficient than small, mostly because of economies of scale (for example, they can buy things in bulk and get better prices). This means that prices become lower and real wages higher (meaning we can buy more for the same amount of money).
This, as you may understand, makes us richer. Being able to sell to a bigger base of customers makes demand smoother and firms won't be dependent on what people in just one geographic area thinks.
So what does this have to do with free trade? Well, everyone would agree on what I have said above. Free trade within America is great - it's wonderful that you don't have to live in Kentucky to eat at KFC, isn't it?
What opponents to free trade do not understand is that this argument extends to the global market as well. If an american company can sell their products to Japan and China, that will make them stronger, lower their costs (again, because mass production is cheap), and help american consumers get richer as well. It also means they won't fail just because American consumers are buying something else at the moment.
But wait... that's not what free trade is about, is it? Of course American companies should be able to sell their products abroad, that's not what protectionists are against. They just don't want any non-american company to start up in America.
The problem is, trade is a two-way street. You want to export something, you import something too. If the US blocks the rest of the world from exporting to them, the rest of the world just might retaliate. Trade wars would go rampant. We've already had those in Europe several times, and they never brought anything good to anyone. See, in Europe, up until right after World War II, we had a philosophy popularly called "Beggar thy neighbour" - the only way for a country to get rich is to make another country poor. That's why we had so many wars: We were convinced that the only way we could become rich was by stealing someone else's wealth. The motivation behind Hitler's many wars was just that: Lebensraum. We cannot live in harmony with other people, we need to take what they have so that we can have more. No way co-operation (which is what trade is) could make everyone richer, that's not happening. Theft is the way to go if you want to escape poverty (of course, the wars were so expensive that even if you won, you'd still make a net loss).
And so, Europe endured endless trade wars and real wars as well. Free trade after World war II is what ensured that one European country would ever go to war against another again. We depend on one another, and so we try not to bomb each other's factories because then our own shops will be empty too.
This of course goes for America too: If other countries depend on you, chances are they won't attack you.
What does trade really do? It makes the market more efficient and makes sure resources are allocated efficiently. If you can produce clothes cheaper in China than in America, then they will be produced in China. That way, consumers are better off. Jobs do disappear in certain industries, but only to be created in others. You see, when American consumers can buy clothes for half the price they used to have, they get more money to spend on other products - including of course American products. This means that jobs do not disappear; they are relocated to other sectors where the US still has a competitive advantage. To produce clothes in the US when they can be produced for a fraction of the cost in China would mean wasting valuable resources. If the US has to produce its own clothes, it cannot produce its own computer chips - computer chips which are unlikely to be produced elsewhere either because few countries other than the US have the skilled workforce necessary to do so.
So, is everything just fine then? Of course not. There is a lot of suffering caused by outsourcing, but mostly because people cannot change their skill set just like that. Just because the car plant you worked at got shipped off to China doesn't mean that you can suddenly turn into a programmer. You may have worked there your entire life and may not know any other skills than those necessary to work at that specific plant. The question we need to ask ourselves is; why is that? How come people aren't prepared to be laid off? How come they specialise in just a few skills, which renders them virtually unemployable when they are laid off and cannot find a job where those exact skills are required?
It is because they have been told since the day they were born that the government would take care of them, that life is about self-realization and that they should develop whatever skills they want, not the skills that are in demand. And when they get laid off and their skill set suddenly becomes worthless, they expect the government to step in and fix it for them by setting up tariffs.
The truth is, many of the companies which outsource are close to bankruptcy at the time they do so. They have only two options left: Laying off all their workers and go out of business or laying off all their workers and move to China. The difference is that one option leaves consumers with one brand less to choose from and with higher prices (since the company will be extinct, there will be less competition). It is also done by companies which doesn't believe the United States has a bright future and wants to get out before the country collapses completely (a view that is not completely unfounded).
Moving to China is not an easy decision. It is extremely risky actually, and it wouldn't be done unless it was absolutely necessary. What is it that makes it absolutely necessary? Instead of attacking free trade, let's try to answer that question. Stopping companies from outsourcing or from buying from foreign countries will only be counterproductive. Why do companies outsource? Most conservative protectionists say that it's the low salaries in countries like China that causes outsourcing. In order to bring our industries back without tariffs, they say, we will have to cut our wages to 70 cent/hour or similar.
Is that so? No. See, wages depend mainly on productivity. An american worker can produce much more than a Chinese can. That depends on many factors, but the ability to read (which is significantly lower among Chinese) is a significant one. The problem is not so much the salaries, as the regulation and hostility that corporations face from the US government. Just simply complying with the tax code costs hundreds of billions every year. And then we have all the other regulations too.
The total cost of doing business is higher in the US, but it has more to do with a corporate tax that makes Europe look conservative and a tax code so complicated Soviet would have been proud of it. Yes, wages for industry workers may have to fall somewhat for the industries to come back, but most of all they must become tied to productivity and wage cuts in times when productivity is low (during recessions, for instance) must become an accepted practice.
I could go on and on about this. And Yes, I know China is into currency manipulation which has to be stopped - that is one instance where tariffs may be justified, supposing that you can calculate how much their currency is actually worth.
Beggar thy neighbours doesn't work. It's been tried several times in Europe. There are no winners; just beggars.