Should the U.S. protect the consumer or the producer?
Should the U.S. protect the consumer or the producer? The question, in its most basic form, is where the truth of thought for proponents for free trade and proponents against free trade derive their ideas.
The desirability for free trade arrives at the competitive advantage domestic company’s gain within the market when they may freely trade amongst a global marketplace. Per se, companies may produce goods at a cheaper price and will, therefore, benefit the consumer who is paying a much lower cost for those goods. The wide variety of goods and services directly benefits the consumer and gives them the power of alternatives. The good from free trade arrives with the benefit of an increased living standard for the individual consumer, especially for those with lower incomes. It is within the consumer’s greatest interest to maintain their right of alternatives and to buy products from those who can sell it cheapest. Restrictions on trade, either through tariffs, quotas, etc, often hurt the very individuals they serve to protect. Consumers face increased costs (especially those in lower income brackets) and producers face far more expensive labor expenses.
The desirability for protectionism derives from the notion that the lower cost of produced goods will result in unemployment and an increased poverty state within that nation. Critics of free trade warn of the exploitations cheap foreign labor within developing countries provides for the American business, and that the resulting abandonment of U.S. workers will undoubtedly result in unemployment. While the production cost of goods may drop, the employee’s wage will also drop and in many cases will result in unemployment, as the weapon low skilled workers in neighboring developing countries hold over higher skilled workers in the U.S. is the ability to offer to work for less. It is within this area where free trade seems to fail more often than not, in which neighboring countries that have an unbalanced standard of living can afford to offer low prices that undermine U.S. workers. There is often a comparison between trading with developing countries and illegal immigration, and I think there is a good point to be made. The argument stands that if we were to have truly open borders, allowing free immigration into our country, workers from lower wage countries would flood into our country and compete for jobs, accept lower pay, and force existing labor workers to accept either lower wages or unemployment. When we accept free trade, the effect is the same. As opposed to exporting low wage workers into our country, we instead import the labor to the low wage workers in neighboring countries. This is why government action against free trade has gained so much popularity amongst special interest groups and labor unions, as the visible effects of a tariff seem to be extremely positive. The whole justification for the provision of a tariff today, or any government policy for that matter is to decrease the economic and social forces that push the low skilled individual into poverty.
But what is wrong with these arguments? It seems only moral to protect the American worker and their standard of living from the foreign workers who are willing to work for much less. The case itself seems strong, especially one of that surrounding the free immigration argument. The fallacy in both these arguments can be disputed in many ways. I think it is of extreme importance that those who act as proponents for protectionism do not act upon the misconceived notion that the issue the U.S. faces within the industrial marketplace is due to an unfair competitive advantage foreign countries holds over the U.S. labor force.
Firstly, this argument fails to represent the fact that allowing free immigration into our country would, in its greatest effect, results in increased competition across every single industry. In a free trade marketplace, only specific inefficient industries would be impacted, allowing businesses to reallocate resources towards efficient industries, boosting wages and increasing the living standards of their employees. The effect of unemployment due to the rise in imported products will be offset by the employment for producing products to export. The tendency to focus on the productive side of a marketplace and to neglect the consumption side of that marketplace is reinforced by the rhetoric I stated above: the benefits of reducing foreign competition through tariffs are immediate and visible to see, while the benefits of free trade are often dispersed and any immediate positive action within the marketplace is often hard to see. While it may seem so, free trade isn’t killing industries, and while factories do produce fewer toys, shoes, and clothing, the U.S. has turned its focus onto petroleum refining, fabricated metals, machinery, electronics, aircraft, and aerospace equipment, and the production of pharmaceuticals.
Further, the notion against free trade fails to recognize that a prospering society has no direct relationship with the number of jobs available within that economic marketplace. If the number of jobs available was the cause of prosperity, then the very existence of technology should be banned. Many changes within an economic marketplace are due to technological advances and innovation within an industry. This is better known as creative destruction and is an essential fact of the capitalist state. This is the principle driving force behind industrial economic progress, and while technological advances destroy current jobs and businesses, it in return creates a more abundant and productive economy. In 1910, roughly 12 million American workers were employed in the agriculture sector. As advancements of agricultural technology were made, nearly 3/4 of these jobs were lost, where today the agriculture sector employs less than 2.5 million people. The invention of the barcode scanner in the early 40s reduced labor requirements for cashiers and baggers by 15 percent, introducing a cut in employment across supermarkets and stores in general across the country. (See Witt, Bowden) The same could be said about factory workers in the automobile industry after Henry Ford’s invention of the assembly line in 1913 and for workers in the steel industry after the invention of the Bessemer process in 1856. (See Capitalism in America) The invention of Netflix has disrupted the video and disc rental industry and has forced hundreds of businesses to close. Blockbuster, the largest video rental business in the nation, employed over 173,000 employees in 1999. It continued to peak until Netflix was invented in 2005 – and in less than a decade, employment within the company has decreased over 93 percent. (See Perry, Mark) The effect of improving technology and a free trade marketplace has the same result; they both reduce the number of jobs available, but in return create better ones. The obsession over job creation will not result in the prosperity among a society, as the creation of better labor standards does not arrive from the protection of those current jobs, but comes with the innovation and technological advances within an industry. We don’t just want jobs; we want efficient labor workers that enable an industry to generate goods and services at a very low price. In a sense, we want to work less to produce more. By using protectionist policies, jobs that are saved in the meantime come at an enormous cost as opportunities shrink and input costs swell for trade industries. The fight against technological advances is no new story, and since the late 1800s, labor unions formed following the same reasoning current unions form against free trade. Those labor workers who lose to economic change form together out of moral indignation and fight to retain their obsolete jobs. They do everything they can to turn their temporary advantage into a more enduring one, and often lobby the government to produce some sort of affirmative action that reduces competition. You have a concentrated effort for the special interest of labor unions that are fighting the societal general interest of individuals. It is sufficient to say that these manufacturing industries have declined in employment due to their own success: As these markets increase their productivity rate, fewer workers are needed to produce manufactured goods. Stephen J. Rose, an economist at the Urban Institute, researched manufacturing employment between 1960 and 2015, comparing the results of both a free trade and protectionist marketplace. What he discovered was that “By 2015, there would have been more than 27 million additional manufacturing workers if the 1960 manufacturing share had been sustained. In contrast, if the trade deficit were wiped out in 2015 because of more domestic production, an additional 2.8 million workers would have been employed in manufacturing. Thus, the manufacturing jobs lost because of our 2015 trade deficit represent only 10 percent of the job losses that occurred because of productivity gains, which led to higher production to meet the demand for physical goods, investments, and exports.” (See Urban Institute)
Another good point to make is that many people don’t realize the actual product assembly is a small portion of the final price. The largest portion of jobs surrounding the production of manufactured goods includes retailers, advertisers, insurance companies, and the finance sector. With exception to the retailers, these jobs more often than not pay very high wages. Free trade may result in a loss of manufacturing employment positions, but just as I stated above, the decline in these jobs within a specific industry was already evident due to technological advances. It is of severe importance to understand the complete employment chain and their impact on a products final sale. Many offshore manufacturing companies make very little profit and contribute very little to the final sale price of a product, as the majority of this pricing arrives from contributions made in the United States.
There is a further objection against the U.S. trade deficit, and while the phrase itself sounds unjustly bad, many economists find it to be a good thing. The phrase by definition means is that a nation will export more than it imports, but the reality is that this is a very unfavorable situation. The goods and services that a nation exports to a country abroad are not available to them. The gain for a nation comes from what goods and services they can import, such as T.V.s, cars, and clothing, as it provides them with materials and product each individual can use. What the nation exports are the costs of gaining those imports, and so the proper objective for any nation should be to always gain as large a volume of imports as possible for as little volume of exports possible. It’s a simple rule: you want to have as many goods coming in for as little going out. Moreover, the deficit itself is then funded by the nation with a trade surplus, which, in its most basic form, means the country with the trade surplus is financing that nation’s economy. This result is positive. The reason the U.S. trade deficit has received widespread opposition from the Labor Unions is due to the notion that it hurts the American Labor force. This, however, is not true. If a trade deficit hurts U.S. labor workers, a rising trade deficit should be directly proportioned with an increase in unemployment among an industrial market. However, there is no relationship between unemployment and trade deficits, and in many cases, it seems to prove just the opposite point, whereas the trade deficit increases unemployment goes down. Stephen J. Rose, an economist at the Urban Institute promoted this point, stating clearly that “the 1980 share of food production employment was one-half as much as its 1960 employment share despite that industry having a negligible trade deficit. Other (nonautomotive) transportation industries (mainly airplanes) had a strong trade surplus, but its employment share declined by nearly a third. On the other hand, leather and apparel had the highest level of imports but still had its employment share rise. Finally, other industries had large declines in employment and little or no trade deficit. The very weak relationship between an industry’s trade balance and its declining employment share is another indicator of the small effect trade had on manufacturing employment during these years.” He further states that “In fact, when trade deficits are higher, unemployment tends to be lower. In the 1960s, our trade surplus was declining, and instead of rising, our unemployment rate was falling. From 1987 to 2002, our trade deficit grew while our unemployment rate fell. From 2006 to 2009, the trade deficit fell, and our unemployment rate rose.” (See Urban Institute) This statement directly disputes the claim made by those who criticize the trade deficit.
There is often an outcry that many workers without a college degree rely on manufacturing employment to make a living. I do believe in lower income possibilities for labor workers, but what so many fail to remember is the great number of employment positions available in nonmanufacturing industries, such as construction, transportation, warehousing, mining, and utilities. The two types of workers fall into two categories: those with high skills, and those with low skills. The unfortunate fact of the matter is, lower skilled blue collar job employment opportunities are shrinking, and so I think it is of utmost importance for the U.S. to expand the opportunities given to (in particular) low skill workers by providing better education. As the manufacturing industry decreases in employment over time, those with low skills must begin to offer a higher level of skills. The provision of opportunity for lower skilled people to increase their living standards must first start with an increase in the quality of good education. You won’t solve anything by making these low skilled people fight for jobs they cannot get because of the lack of proper education. According to the Borgen Project, “Studies show that each extra year of schooling can increase a person’s salary by 10 percent later in life. This means that a country’s GDP can increase by 1 percent annually by providing education to its entire population. Increasing a country’s GDP creates innumerable opportunities for trade and development.” (See Hillestad, Sam) It is entirely unfeasible to not provide a better education. There is a direct correlation between academic success and career success, and even historically the United States economy has shown dramatic improvements when the importance of a good education has been placed upon the people. By educating the entire population, the economy will naturally be boosted. Educational institutions should further provide more targeted apprenticeships and vocational and technical training programs for workers who are unlikely to earn a four-year degree.
The positive economic growth sustained in a free trade marketplace is blatantly obvious. Reduced consumer pricing and an increase of alternatives are within the individual’s best interest. The evidence strongly suggests the minor impact the manufacturing sector took due to free trade, as the U.S. trade deficit has no real relationship pertaining to the loss of manufacturing jobs and makes up only a small portion of the increasing unemployment rates. Moreover, technological advances can strongly account for the slow increase of unemployment within the U.S. industrial marketplace. The manufacturing marketplace played a dominant role in our countries history between 1920 and 1960, but as time passed employment within this sector has shrunk dramatically and these numbers continue to shrink to this day. Trade deals and tariffs will not reduce the decline in employment, but will only sufficiently provide us with few momentary economic returns.
Hillestad, Sam. “The link between poverty and education” , The Borgen Project, 24 August 2014 https://borgenproject.org/link-poverty-education/ Accessed 15 December 2018
Rose, Stephen. “Is Foreign Trade the Cause of Manufacturing Job Losses?” Urban Institute, April 2018, https://www.urban.org/sites/default/files/publication/97781/is_foreign_trade_the_cause_of_manufaacturing_job_losses_2.pdf Accessed 15 December 2018
Perry, Mark. “The ‘Netflix effect’: an excellent example of ‘creative destruction,” AEIDEAS, American Enterprise Institute, 6 August 2015, http://www.aei.org/publication/the-netflix-effect-is-an-excellent-example-of-creative-destruction/ Accessed 16 December 2018
Greenspan, Alan and Wooldridge, Adrian. “Capitalism in America”, New York: Penguin Press, 2018. Print Accessed 15 December 2018
Witt, Bowden. “Wages, Hours, and Productivity of Industrial Labor,” Monthly Labor Review 51 no. 3, U.S. Bureau of Labor Statistics, U.S. Department of Labor, Sept. 1940, https://www.jstor.org/stable/41818153?seq=1#page_scan_tab_contents. Accessed 16 December 2018