Trade & Jobs Jude Wanniski November 28, 2003

Memo To: SSU Students
From: Jude Wanniski
Re: Guest Lecture: Jobs Overseas?

Are American jobs -- especially in manufacturing but also in high-tech software -- being exported to the developing nations? With this a hot topic in the current political season, Lew Rockwell addressed the subject at his website this week and the effort was so exceptional in its clarity that I asked if he would be the SSU guest lecturer this week and he agreed. The full text runs below, but can also be found at his website http://www.mises.org/fullstory.asp?control=1385

Jobs Overseas?, Another Attempt to Explain
By Llewellyn H. Rockwell, Jr.

The Bush administration has slapped high duties on Chinese TV sets for the alleged problem of "dumping"—which increasingly means selling at prices lower than sets sold by established firms.

Let's leave the issue of dumping for now and examine the claim that jobs are being shipped overseas, which is usually what is said when great foreign products appear in US stores. A number of people have observed that TVs are no longer made in the US. The implication is that at least the Bush administration recognizes a problem. The jobs that used to go into making TVs have effectively been shipped overseas. Why not act?

International economic historian Sudha Shenoy (University of Newcastle) has been at the offices of the Mises Institute, and this topic has come up quite often. She has found herself astounded at the lack of knowledge over trade issues in the US, and alarmed by growing protectionist sentiment. I'll offer a response to the above in a manner that follows a number of points that she has been making about trade.

Let's first watch our language. Jobs are not being shipped, and Americans are not somehow being stopped from making TVs. TVs can still be made in the US. Everyone and anyone is free to invest the money, hire the workers (bidding them away from other pursuits), buy the parts, build the sets, and put them on sale. That the same processes are undertaken in China has no bearing on anyone's freedom to do it here. If you want to make an all-American TV, no one is stopping you.

And yet, as with any other product, the US TV maker must still face the issue of persuading people to buy. The question comes down to the price people are willing to pay for your TV sets versus the prices charged by the competition. To try to sell them at a price that justifies your investment and worker salaries means they would sit on the shelves unsold because the same product or better is available at a cheaper price. You will have to lower your price to sell them, and will end up selling at a loss.

Now, you are free to continue to make losses, or produce TV sets that nobody buys, employing workers and dumping capital into the project, but you must eventually come to terms with the fact that you are not going to make a profit. That you are unique in choosing an economically unviable path would not be surprising. Investors are not so stupid that they continue to pour scarce resources into production (which is always and everywhere directed toward the final end of consumption) that makes no sense.

Now, is it a problem that American consumers (and businesses that import and sell TVs retail) have access to lower priced TVs than can be made in the US? Not at all. It is great for the buyers of TVs and it is great for the economy in general because this frees up capital and labor to be employed in better projects. To force the situation to be otherwise would imply sheer waste: deliberately raising the price of TVs by restricting supply or taxing non-US TVs. This is precisely the Bush administration policy, and it accomplishes nothing but destruction. It is only putting off the inevitable and taxing people in the process.

Then we come to the question of why it is possible to make TVs more cheaply in China than the US. It is a matter of the widening circles of the division of labor. China finds itself in a stage of economic development that allows it to specialize more and more in manufacturing at the expense of agriculture, even as the less developed nations are specializing more and more in agriculture. While this is taking place, more advanced nations are finding it economically advantageous to specialize in the production of goods and services that require more advanced labor skills and more capital expense.

In short, China (as well as South Korea, Indonesia, Malaysia, and many other booming economies) is finding itself in the position that the US was in the early 20th century, while the less developed nations are taking on tasks that used to be performed by the US in the early 19th century. It is globalism of economic processes that account for why the world, and not just the single nation, is the relevant domain to consider in understanding this.

These long-term trends of economic development are part of the blessing given to the world by the free mobility of capital. And so long as markets are free, they are also perfectly capable of adjusting. It is not only good for people around the world that prosperity is rising and the division of labor is expanding; it is good for the US. To wall ourselves off does nothing but subsidize waste.

What about workers who lack the job skills to fit into the higher and higher levels of sophisticated production in which the US is specializing? Because of the existence of scarcity, there will never be a shortage of jobs to do, so long as we live in time and not eternal bliss. The phrase "shortage of jobs" can only be colloquial; there is never a shortage of things to do. It is only a question of price, and the best way to raise the wages is to make sure that people do what they are most suited to do—which can only be known by letting markets work.

High-level production such as the US specializes in refers not to every job but only the dominant industries; within each there also exists a sophisticated division of labor. Not every employee at Microsoft designs software; the firm also provides jobs to packers, shippers, artists, gardeners, and a thousand other professions. Not every employee of the financial industry is a bond trader; rather, a profitable bond business provides jobs to ever widening circles of employment.

Now, some people have been drawing attention to the supposed uniqueness of the current moment in international trade, in the following sense. US companies are not just foregoing certain production processes in order to allow them to be done by the Chinese. Instead, US firms are moving their plants to China, not to sell to the Chinese, but in order to re-import their products into the US to sell.

Is this a uniquely troubling situation? Again, not at all. US business owners have observed a profit opportunity and seized it. The alternative is that US business not notice the opportunity and let others get there first. This would hardly be something to celebrate. It is a testament to the acumen of US businessmen that they can go anywhere in the world, take advantage of local economic conditions and then sell to anyone else in the world. It so happens that American consumers are in a great position to buy the best products from everywhere in the world (so long as their government lets them). Thus do we see the end result of American capital producing for Americans in countries especially suited to host the process, while the US itself hosts ever more sophisticated production.

In the Winter 2003 issue of the Austrian Economics Newsletter, due out soon, Professor Shenoy discusses how the US is just now coming to terms with the long-run trend toward greater levels of development around the world, and why the US had better get used to it and make the adjustment. The Bush administration has done its best to slow down economic development via tariffs and every other manner of protectionism. But this is only delaying the inevitable.

There is no surfeit of wonderful trends in our time, but the progress being made through global trade (progress at home and abroad) is certainly one of them. Leave it to government to try to rob us of the blessings of prosperity and peace that come from trade. And it is no different with trade than with every other area of life. We can permit the market to work or we can hobble it with taxes as it eventually gets its way in the long run. That is our choice. As Professor Shenoy would say, the free market is not perfect, but it is always better than the results that come from any attempt by government to make it better.

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Llewellyn H. Rockwell, Jr., is president of the Mises Institute and editor of LewRockwell.com. rockwell@mises.org