Saturday, December 27, 2003

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Protectionism never tasted so sour

The Chicago Tribune had another story this week on the outsourcing of American manufacturing jobs. The cause? American protectionism:

BRYAN, Ohio -- Here in what could be called the candy cane capital of the world, residents like to boast that food doesn't get more American than this old-fashioned, red-and-white striped confection.

That's because more than 90 percent of those peppermint canes are consumed within the United States. And nearly all were made domestically as well.

But no more.

In the last three years, nearly half of all U.S. candy cane production has shifted to Mexico, industry experts say.

That's true of the candy cane maker based in this northwest Ohio town, Spangler Candy Co., which recently opened a plant in Juarez that generates half of Spangler's striped treats.

But the story of the Mexican candy cane isn't your typical tale of American manufacturers chasing lower wages. It's more about the cost of sugar than the cost of labor.

Because federal tariffs and subsidies push the price of U.S. sugar far above what it fetches on the world market, candy cane makers such as Spangler are opening factories overseas, where sugar can cost 6 cents a pound compared to 21 cents back home....

Other makers of hard candy have followed a similar pattern, at least in part because hard candy, unlike chocolates which can use corn syrup substitutes, are so sugar-intensive.

In Chicago, for example, Brach's Confections plans to shut its plant in 2004, forcing about 1,000 workers out of their jobs. The Chicago area, the center of the U.S. confection business, has lost an estimated 3,000 candy-related jobs since 1998.

The good news -- if the Central American Free Trade Agreement is passed, manufacturers that rely on sugar as an input of production would no longer have the same need to relocate.

posted by Dan on 12.27.03 at 10:53 AM


Its not just the confectionary market that the US government and jobless souls should be worried about, coming to a theatre or already screening is the outsourcing of intellectual knowledge work offshore to India and China.

With the emergence of InfoSys and WiPro of India, many tech-based jobs such as call-centers, software development will soon be moving away from US shores.

The flexible labor market will further add to jobless woes.

Nicholas (Malaysia)

posted by: Nicholas on 12.27.03 at 10:53 AM [permalink]

I disagree, Nicholas. As pointed out by Brad DeLong, offshoring is not leading to job-loss, but to job-shift. And a flexible job market will ease this shift and so prevent the destruction of jobs. The demand for jobs in the IT sector is still increasing by the way, ofshoring notwithstanding. In fact, the Bureau of Labor Statistics predicts that job growth to 2010 in the IT-sectors will be three times that of the whole of the economy. There still will be plenty of IT-jobs around in the U.S.: the globalization of it-production and it-jobs will improve the diffusion of IT in the economy (lower prices) and thus U.S. economic performance, creating jobs.
Anyway, it's quite ironic that in the case of the article in the Chicago Tribune, it's not free trade, but protectionism that is causing companies to move offshore. But in contradiction to the offshoring of it-jobs to India and China i fail to see what can be beneficial here for the U.S. economy.

posted by: ivan on 12.27.03 at 10:53 AM [permalink]


The actual numbers suggest a far more nuanced process with regard to outsourcing than is commonly perceived.

posted by: Dan Drezner on 12.27.03 at 10:53 AM [permalink]

Every time the "it's not so bad" defense arises for the outsourcing issue, it seems to mention the "dynamic and fluid" economy will easily accomodate and absorb those who've lost their jobs as all the saved money will encourage corporations to invest and grow. Has anyone writing these reports actually been left without a job and tried just hopping back into the "dynamic" industry de jour? My guess is no.

Do most "studies" count going to work for minimum wage in a different industry (say food service) for a former middle-aged IT worker as a "successful" transition? Or is this a "what's best for the people, not individuals" situation? (Where 'people' seems to mean the richest; or consumers buying ever-cheaper goods at WalMart, as that's now all anyone can afford(?))

posted by: TG on 12.27.03 at 10:53 AM [permalink]

I for one, welcome my new Walmart overlords.

posted by: anne.elk on 12.27.03 at 10:53 AM [permalink]

Amusing dead-pan sarcasm there anne.elk

First of all folks, forecasts of hiring are notoriously inaccurate. Balance that against the fact that unemployment for computer related people is twice as high as it was two years ago, and you'll quote a fact that has emotional resonance with the facts on the ground as experienced by people in IT. As a matter of fact, IBM has just announced that it is yes going to follow the trend and out-source jobs to India and China. Now, Catherine Mann's paper which Dan here references at least tries to make a productivity argument for it, but her IT growth numbers are pretty anemic - far lagging GDP growth instead of leading it as tech jobs once did.

Frankly, unemployment numbers may be imperfect and they may lag but if there were all that many jobs out there we'd feel it both in our personal lives and in the numbers. There isn't. The Economy is purring along in general, but manufacturing and tech simply haven't recovered and are still losing jobs to overseas outsourcing. And all the hand-waving with speculative numbers and soft-pedaled results isn't going to change those facts.

There is this assumption among productivity proponents and market liberalists that the benefits from "competition" must always flow to the United States. However this is a completely unfounded and irrational assumption and prejudice. Because of its past unique position as a global marketplace dominator, the USA has traditionally reaped the benefits of globalization. There is nothing written in stone or economics that states this must continue to be this way. And it won't, not for much longer. Even now the balance tips.

posted by: Oldman on 12.27.03 at 10:53 AM [permalink]

Good point on sugar prices. Florida does a wonderful job of coddling the sugar growers and lobbying like hell for sugar-price protections.

posted by: Slartibartfast on 12.27.03 at 10:53 AM [permalink]

ivan: thanks for the additional info. BTW, Malaysia's looking to introduced anti-outsourcing legislations here. Something to ponder back here in KL.

Dan: You have an incredibly informative site. Great for getting in touch outside of Malaysia.

BTW, if you guys are looking for good scoop on Asia, try out a fellow Malaysian blogger, Jeff Ooi at htttp://


posted by: Nicholas on 12.27.03 at 10:53 AM [permalink]

I'm sorry to be negative about this, but CAFTA if ratified will have minimal effect on domestic sugar prices. That's because the other nations involved are minor producers of sugar, and because the small increase in import quotas they will be granted will be phased in gradually.

Even so the new agreement will face Congressional opposition, and sugar will be one reason. Getting 90% of what they want is not enough for sugar industry leaders who understand that on a level playing field they not only lose to but get wiped out by lower-cost producers in Latin America (especially Brazil), Australia and elsewhere. Brach's Confections is not the first story of jobs lost for the sake of sugar producers, and it will not be the last.

posted by: Zathras on 12.27.03 at 10:53 AM [permalink]

I have worked in the IT industry for almost 20 years, and the market for IT pros is still pretty slow. I have a number of friends in the industry who are still out of work. As far as this "job shift" goes, I'll believe it when I see it.

posted by: Steve on 12.27.03 at 10:53 AM [permalink]

“As pointed out by Brad DeLong, offshoring is not leading to job-loss, but to job-shift. “

Are we talking about the same Brad DeLong who served in the Clinton administration? Robert Reich, another Clinton appointee, just wrote an excellent article in last Friday’s Wall Street Journal entitled “Remember the elevator operator? Jobs become extinct.” I completely agree with both DeLong and Reich in these particular instances. Ironically, though, I’m a Republican who will be voting for President Bush in 2004. Are there any Democrat presidential candidates who currently share these views? I don’t think so. Alas, DeLong and Reich are too conservative according to those Democrats dominating their party’s presidential nominating process. One wonders how that will work out on election day.

posted by: David Thomson on 12.27.03 at 10:53 AM [permalink]

TG touched on it in response to ivan, but I have to agree that the "job-shift" answer is looking suspiciously hollow at the moment.

I'm not ready to give up on the idea altogether partly because without it we are pretty much screwed anyway, and also because I think there is enough of a trend there to say that in general it is accurate. However, the folks hanging their hat on this idea seem to be glossing over the aspects of mitigating factors and the possibility of a sped up cycle of job-loss that might outstrip our timely ability to recreate new industry as a replacement.

So sure, people tend to go where the jobs are, but we seem to be relying on trend observations of the agrarian and manufacturing industries as a model by which we should expect the Service/IT sector shift to take place, but what happens when this model is vastly altered? Specifically, what happens when this industry transition is not only sending "old industry" jobs overseas, but just skips the part where the "new industry" jobs start here and they get shipped as well? At least to me that seems to be what is happening right now.

posted by: Waffle on 12.27.03 at 10:53 AM [permalink]

Eeew, yuck, say it ain't so joe.

posted by: anne.elk on 12.27.03 at 10:53 AM [permalink]

Go tell all the people in south Louisiana that they make too much $$ for growing and processing sugar cane! You allow sugar imports and you're gonna lose jobs in the domestic sugar cane industry or either they'll be the same jobs paying much less than they do now....what's it gonna be??

posted by: TheRover on 12.27.03 at 10:53 AM [permalink]

People in south Louisiana, you make too much $$ for growing and processing sugar cane.

That goes for cane growers in Florida and beet growers in Wyoming, too. These guys benefit for decades from what may be the least defensible program in the entire federal government, and now wail piteously about the ruin that awaits them if they have to compete without massive federal protection from any foreign competition. The domestic sugar industry is not IT, or autos or even steel. It is simply uncompetitive against foreign competitors unless the federal government stacks the deck, something that not only American consumers but more competitive American producers of other farm commodities pay the price for, since American ag protectionism is emulated by governments throughout the developed world. Sugar producers, some of the largest of whom aren't even Americans, think they are entitled to all the help they can get. They aren't.

posted by: Zathras on 12.27.03 at 10:53 AM [permalink]

When we talk about IT jobs being off-shored, are these jobs chiefly sustainable long-term jobs that had existed before the .com boom of the late 90's, or are they jobs that sprouted and flourished in the hothouse atmosphere of the .com boom? How does the present IT job situation compare with that before the boom?

posted by: Chuck Bearden on 12.27.03 at 10:53 AM [permalink]

I don't know enough to give a comprehensive answer to Chuck Bearden's question. But here's a thought: the rapid technological change during the boom led to very low expectations in the area of post-sale customer service. Consumers of IT products typically had lots of questions, but product turnover and declining prices for new products meant that if they didn't get their questions answered it was often as easy to buy something else as it was to persist with efforts to get help from their original vendor. So consumers had little incentive to demand good customer service, and for the most part they didn't get it.

Many of the IT jobs being outsourced to places like India involve customer service. Outsourcing jobs to a labor force halfway around the world is a big step for a company to take, one companies that thought excellent customer service was key to their future might be expected to think twice about. IT companies typically do not think this way; they feel compelled to provide basic customer service but for the most part still think in terms of the boom years' rapid product turnover as a more critical element of their business strategy.

posted by: Zathras on 12.27.03 at 10:53 AM [permalink]

How does the present IT job situation compare with that before the boom?

I entered the IT field in the mid-80s and this is by far the worst market I have ever seen. We are talking about college-educated people that have been out of work for years. I think you will see fewer young people in this country going into IT or engineering fields. The layoffs are too long and frequent and companies systematically weed out workers over 50.

posted by: Steve on 12.27.03 at 10:53 AM [permalink]

Wait, how do "subsidies push the price of U.S. sugar" up? The non-recourse loan subsidies are a downward pressure on the price. The tarriffs and, if it's still going on, price fixing, sure, and nevermind the the FDA's stevia lockdown to protect the aspartame and sugar industries, etc.

But this isn't going to be affected by CAFTA: the only reason we're even persuing CAFTA is because the FTAA won't come together because Brazil and others want an end to US ag subsidies before entering the agreement. The USG wasn't willing to cut subsidies for the FTAA, nevermind the WTO, I can't imagine them ending ag protectionism and dumping for something as measely as CAFTA.

posted by: buermann on 12.27.03 at 10:53 AM [permalink]

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