Thursday, March 29, 2007

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Latest trade tidbits

1) Remember the hints of a trade deal that came out earlier this week? Over at US News and World Report's Capital Commerce blog, James Pethokoukis has more juicy details about the how this may or may not play out. As a general rule, if Dave Sirota is this exercised about it, then it must be a good thing for trade liberalization.

2) A point in the Democrats' favor -- a new Survey about trade and regulatory standards:

Strong majorities in developing nations around the world support requiring countries that sign trade agreements to meet minimum labor and environmental standards, a multinational poll finds. Nine in 10 Americans also support such protections.
Sounds good, but the survey question seems awfully vague ("Overall, do you think that countries that are part of international trade agreements should or should not be required to maintain minimum standards for working conditions?")

3) Brad DeLong links to subscriber-only stories about heterodox economic takes on trade, so I don't have to. First, there's Dani Rodrik's Financial Times op-ed:

Which is the greatest threat to globalisation: the protesters on the streets every time the International Monetary Fund or the World Trade Organisation meets, or globalisation's cheerleaders, who push for continued market opening while denying that the troubles surrounding globalisation are rooted in the policies they advocate? A good case can be made that the latter camp presents the greater menace. Anti-globalisers are marginalised. But cheerleaders in Washington, London and the elite universities of north America and Europe shape the intellectual climate. If they get their way, they are more likely to put globalisation at risk than the protesters they condemn for ignorance of sound economics.

That is because the greatest obstacle to sustaining a healthy, globalised economy is no longer insufficient openness. Markets are freer from government interference than they have ever been.... [N]o country's growth prospects are significantly constrained by a lack of openness in the international economy. Even if the Doha trade round fails, poor countries will have enough access to rich country markets to achieve what countries such as China, Vietnam and India have been able to do....

Globalisation's soft underbelly is the imbalance between the national scope of governments and the global nature of markets. A healthy economic system necessitates a delicate compromise between these two. Go too much in one direction and you have protectionism and autarky. Go too much in the other and you have an unstable world economy with little social and political support from those it is supposed to help. If there is one lesson from the collapse of the 19th century version of globalisation, it is that we cannot leave national governments powerless to respond to their citizens. The genius of the Bretton Woods system, which lasted for about three decades after the second world war, was that it achieved such a compromise. Some of the most egregious restrictions on trade flows were removed, while allowing governments freedom to run independent macroeconomic policies and erect their own versions of the welfare state. Developing countries were free to pursue their own growth strategies with limited external restraint. The world economy prospered like never before.

I'm unpersuaded There are two huge difference between the 19th century version of globalization and the cuurrent era: there was much more labor mobility back then, but the size of government -- and welfare policies in particular -- were vastly smaller. As much as peopole like to fret about their disappearance, at best the growth of these measures are slowing. As Tyler Cowen implicitly points out here, the growth of markets has led to a corresponding growth in government. So even if I accepted Rodrik's premise, I think we're a long way from where he thinks we are.

4) DeLong also links to a Wall Street Journal front-pager from yesterday about Alan Blinder's fears about offshoring:

Mr. Blinder... remains an implacable opponent of tariffs and trade barriers. But now he is saying loudly that a new industrial revolution -- communication technology that allows services to be delivered electronically from afar -- will put as many as 40 million American jobs at risk of being shipped out of the country in the next decade or two. That's more than double the total of workers employed in manufacturing today. The job insecurity those workers face today is "only the tip of a very big iceberg," Mr. Blinder says....

Mr. Blinder's job-loss estimates in particular are electrifying Democratic candidates searching for ways to address angst about trade. "Alan, because of his stature, provided a degree of legitimacy to what many of us had come to feel anecdotally -- that the anxiety over outsourcing and offshoring was a far larger phenomenon than traditional economic analysis was showing," says Gene Sperling, an adviser to President Clinton and, now, to Hillary Clinton. Her rival, Barack Obama, spent an hour with Mr. Blinder earlier in this year....

Mr. Blinder says he agreed with Mr. Mankiw's point that the economics of trade are the same however imports are delivered. But he'd begun to wonder if the technology that allowed English-speaking workers in India to do the jobs of American workers at lower wages was "a good thing" for many Americans. At a Princeton dinner, a Wall Street executive told Mr. Blinder how pleased her company was with the securities analysts it had hired in India. From New York Times' columnist Thomas Friedman's 2005 book, "The World is Flat," he found anecdotes about competition to U.S. workers "in walks of life I didn't know about."....

At the urging of former Clinton Treasury Secretary Robert Rubin, Mr. Blinder wrote an essay, "Offshoring: The Next Industrial Revolution?" published last year in Foreign Affairs. "The old assumption that if you cannot put it in a box, you cannot trade it is hopelessly obsolete," he wrote. "The cheap and easy flow of information around the globe...will require vast and unsettling adjustments in the way Americans and residents of other developed countries work, live and educate their children."... In that paper, he made a "guesstimate" that between 42 million and 56 million jobs were "potentially offshorable." Since then he has been refining those estimates, by painstakingly ranking 817 occupations, as described by the Bureau of Labor Statistics, to identify how likely each is to go overseas. From that, he derives his latest estimate that between 30 million and 40 million jobs are vulnerable.

He says the most important divide is not, as commonly argued, between jobs that require a lot of education and those that don't. It's not simply that skilled jobs stay in the US and lesser-skilled jobs go to India or China. The important distinction is between services that must be done in the U.S. and those that can -- or will someday -- be delivered electronically with little degradation in quality. The more personal work of divorce lawyers isn't likely to go overseas, for instance, while some of the work of tax lawyers could be. Civil engineers, who have to be on site, could be in great demand in the U.S.; computer engineers might not be.

Mr. Blinder's warnings, and his numbers, are now firmly planted in the political debate over trade.

DeLong believes that Blinder "has very smart things to see about 'outsourcing.'" I think Blinder is unbelievably smart, but if he's basing his numbers on the same logic he applied in his Foreign Affairs essay, then with all due respect I don't think he has very smart things to say about outsourcing. In the FA essay, Blinder assumed that any job that could be done over the electronic transom:
a) Will be done electronically;

b) Will be done electronically by someone living outside the United States;

c) This job shift will happen incredibly quickly;

d) The U.S. economy will fail to create new jobs or job categories in response.

Yeah, I got problems with just about all of these assumptions. Greg Mankiw, on the other hand, simply believes that Alan Blinder has been turned by the dark side of the force... which converts Greg into Luke Skywalker.

UPDATE: Tyler Cowen's take on Blinder: "When our economists start preaching that we should look to economists and higher educators to predict the new, growing economic sectors, I again think that the Chinese are not the major problem."

posted by Dan on 03.29.07 at 04:12 PM


Nothing new here. Drezner has always been blind to the problems inherent in globalization. This is not to say that free trade is bad. But I think it's pretty clear to all except Dan that companies are scouring their payrolls looking for jobs that can be done by a contractor in a cheaper country, and that the US economy has only retail sales jobs to take the place of the lost programming/telephone support/insurance adjuster/etc jobs. Many economic experts say it should be expected that the effective increase in the supply of low-cost labor at all skill levels should depress wages while increasing profits. What is so difficult to understand about that?

I agree that eventually, the US economy will adapt, and that gradually China will respect workers' rights and the environment more, but the long run will not arrive soon enough for many Americans. By the way, it's not clear what exactly IS the US' comparative advantage that will produce this miracle. It seems to me that we oought to be more concerned about enhancing our competitiveness.

posted by: OpenBorderMan on 03.29.07 at 04:12 PM [permalink]

1 of 7 homes in Cleveland is in foreclosure proceedings, and real incomes are declining steadily. Why? The decimination of light and medium manufacuturing, the slow motion suicide of domestic auto makers, amd the difficulty of making a living on an $8 an hour job.

Michigan is worse than Ohio.

After a worker loses a job, healthcare, pension and home, shopping at Wal-Mart does not compensate, except in the minds of some economists.

posted by: save_the_rustbelt on 03.29.07 at 04:12 PM [permalink]

Clearly we are creating new jobs, mostly in healthcare and government. We will just need more taxes to pay for the healthcare and more government to administer it. All solved. Now you can go back to sleep.

posted by: Lord on 03.29.07 at 04:12 PM [permalink]

Blinder also assumes that not only will the job shift happen incredibly quickly, but that somehow this incredibly high productivity, equal to that of the US and other advanced economies, that he's predicting for China and India will neither lead to higher wages nor a massive increase in the wealth of the entire world to be shared, or if it does at least not in the short run.

I think it's rather bizarre to assume that the one thing would be so incredibly fast but the other response so slow.

But I think it's pretty clear to all except Dan that companies are scouring their payrolls looking for jobs that can be done by a contractor in a cheaper country, and that the US economy has only retail sales jobs to take the place of the lost programming/telephone support/insurance adjuster/etc jobs.

Astonishingly, really, that so many of my new graduate friends have taken jobs programming at Google, Microsoft, Amazon, and a host of smaller companies that are all expanding in the US. How can that be, given your statement? Amusing that you think that telephone support is better than retail sales.

The wages for offshoring jobs have gone up, and in the long run you get what you pay for.

posted by: John Thacker on 03.29.07 at 04:12 PM [permalink]

Agreed - interpretations of "minimum working standards" are massively divergent event between e.g. the USA and France, let along for someone living in a hut trying to feed 6 ill relatives than for someone in corporate america who is annoyed that they cant buy a newer car or live in an area where their child will go to a better school...

Having said that, people around the world also have different impressions of the costs of labour standards - I work in Lesotho (less well known but bigger population than Botswana, Namibia or Swaziland) for the Ministry of Finance, and despite the long queues for textiles jobs, many despise the chinese for running the factories that offer these jobs - anti-chinese industry is a hot electoral ticket...,2172,145742,00.html

Its a complex world out here! None of us should forget that.

posted by: george on 03.29.07 at 04:12 PM [permalink]

Some quick thoughts on prqacticalities, based on my own experiences with working with personnel outsourced to India.

1. Retention has become a real problem. Intelligent people who do the arcane thing you have trained them at are much more valuable to a competitor, who is suddenly quite willing to pay them more.

2. because retention is a problem, productivity growth is not happening at the expected rate. If you are always having to train people, they are going to be slow to pick it up.

3. English is a real problem. Yes, the folks we work with in India speak English. They just don't speak it in a way that we Americans find easy to understand. The written English is also a bit eccentric. This makes communication (which is essential in a successful outsourcing project) really hard -- thus declines in roductivity.

Now, the economics of the tasks we have India do requires that we outsource. They are often well- educated, and so much cheaper. But the price for using them keeps rising. And the comunication problem (which is just going to be worse with the Chinese) makes it really tough to assign them complicated tasks? (How can I discuss the work project if I have to get them to repeat things twice?)

posted by: Appalled Moderate on 03.29.07 at 04:12 PM [permalink]

I just got a call from one "Kevin Watson", offering me some financial deal or another. Even pesky phone-solicitation has been outsourced.

Now, I used to ride to work on a bus route that also served a major phone bank operation in San Diego -- let's just say that if these people are outsourced, they don't have a lot of personal or financial resources to fall back on. It's not likely they will be getting one of those better jobs that comparative advantage enthusiasts are always going on about.

posted by: Mitchell Young on 03.29.07 at 04:12 PM [permalink]

John Thacker, The fact that you can find a counter-example does not prove your theory. I know lots of people whose jobs were outsourced. They found other jobs, generally in sales, and always at a lower wage. But even more important is the overall statistic that median income is down in the US, even though average income is up. It doesn't take a PhD in econ to figure out what that means.

After participating in this debate for years, I have come to the conclusion that this is a religious dispute, in the sense that the facts are irrelevent to some people. Thacker and Drezner will only believe when THEIR jobs are affected.

posted by: OpenBorderMan on 03.29.07 at 04:12 PM [permalink]

Lord: very concise, thank you

posted by: save_the_rustbelt on 03.29.07 at 04:12 PM [permalink]

It sounds as if Rodrik's biting comment about globalization's champions hit a nerve with Dan, whose otherwise convincing arguments in favor of trade liberalization have always had a sour garnish of obtuseness as to the negative consequences of that liberalization.

For the record, I don't find Rodrik that persuasive either -- for one thing, he elides over the fact that during the Bretton Woods era "developing countries" meant Japan and Europe. The majority of countries (and a vast majority of people) were indeed implementing "...their own growth strategies with limited external restraint," but they were failing miserably. One can question whether that was the fault of the Bretton Woods regime; actually, it pretty clearly was not. That still begs the question of whether anything like Bretton Woods is practicable now, in a much larger and more diverse world economy that incidentally has lifted hundreds of millions of people out of poverty.

With respect to Blinder, again, I tend to agree with Dan's view that Blinder is unduly alarmist, but "alarmist" is not the same as "completely wrong." I do believe the American economy is able to respond to globalization by creating new jobs; I do think that predictions of a sudden great sloshing of millions of high-paying tech and service jobs to India and China overlook a number of significant factors. But only parts of such predictions need to happen to cripple political support for further trade liberalization (indeed, this crippling is a process well underway already), and economists who watch complacently from the sidelines offering reassurances that all will come right are at a minimum not helping the cause of trade liberalization as much as they think they are.

posted by: Zathras on 03.29.07 at 04:12 PM [permalink]

Blinder also assumes that not only will the job shift happen incredibly quickly, but that somehow this incredibly high productivity, equal to that of the US and other advanced economies, that he's predicting for China and India will neither lead to higher wages nor a massive increase in the wealth of the entire world to be shared, or if it does at least not in the short run.

Quickly is a relative term. Quickly over the workspan of an individual, yes, but that is still decades. Of course he knows it will lead to higher wages and greater wealth but when there is such great disparity, higher wages will still be very cheap, and by far most of the wealth created will end up there and in a very few hands here.

posted by: Lord on 03.29.07 at 04:12 PM [permalink]

Blind, blinder and blindest.

US business, not just manufacturing, has been outsourcing for at least two decades and NOT just offshore. It has focused on "non-core" tasks, loosely defines as all of that that is outside of the main business of the business, ie. from facilties management and other real estate activity to HR; "mail room," including copying etc; to payroll; one should get the picture. The vast/lion's share of this work does not go overseas/to countries with lower labor costs, but to US based service firms which specialize in the various disciplines, which are able to accomplish the tasks more effieciently and usually more professionally and certainly with less bureaucracy.

BTW, these outsourced jobs, often transferred from one org to another org, don't typically consititue "new" jobs but they're certainly not burger flippin jobs, either and they're NOT in the magnitude of blind, blinder and blindest predictions.

posted by: John Corn on 03.29.07 at 04:12 PM [permalink]

Daniel, you need to update your book recommendation and book-o-the-month segments!!!!! Totally off topic, I know.

posted by: Average Joe on 03.29.07 at 04:12 PM [permalink]

Many in the software industry are finding out-sourcing to be penny-wise/pound-foolish. Unless/until the management is out-sourced too, the communication delays eat the cost savings. It's slowly becoming clear that unless your product is not time-to-market-sensitive, it's worth paying for local production (again, moving the whole enterprise off-shore would also solve this problem, but that doesn't seem to be happening).

The decimination of light and medium manufacuturing,

You should look at some stats: The US is manufacturing more than it ever has, hardly decimation. The labor involved is far less (and the population has grown, I don't know if per capita we are doing better or worse), but that has as much to do with automation as off-shoring.

the slow motion suicide of domestic auto makers

And whose fault is that? Toyota seems to be doing just fine manufacturing in the US. The UAW is having a hard time organizing in the South because the wages (non-union at Toyota and union) are just about equal. They are emphasizing "security" - yeah, that's working out. (source: WSJ last week some time).

posted by: mrsizer on 03.29.07 at 04:12 PM [permalink]

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