Free Trading At the Bottom of the Barrel

The argument for free trade generally goes like this:

Open markets are good for developing nations because it opens up markets for their goods and create jobs in those countries. It lowers the cost for American businesses thereby making merchandise cheaper for the American people. The availability for cheaper merchandise is good for the American poor.

I can understand the principle of free trade but I wonder is it the Holy Grail of economics as many claim that it is. Ross Perot once said that the giant sucking sound that we would soon hear is jobs leaving this country if NAFTA passed. His company now outsources to India. The irony, huh? NAFTA did pass and supporters claimed that it would mean a standard of living increase for Mexicans and lower products here in the US.

So why are so many Mexicans still trying to cross the border to get to the US if the free trade zone produced more jobs in Mexico? My guess is that American companies don’t apply the same work environment and wages that they do to US employees. They simply do what the host country allows when it comes to work place safety, benefits and wages. Which isn't much.

The question I ask it this: Is the low cost of goods worth US jobs? The two don’t seem equivalent. Sure, free trade creates jobs here in the US, but is it a one-to-one ratio to the manufacturing jobs lost? America is still creating jobs but most of those jobs do not pay livable wages. What point is it to create a job that doesn’t adequately support an individual? There is also the argument that free trade opens markets for American goods. But what good is that if all of the American goods are manufactured in China?

Free trade may work well for developing countries, but when you looking down into the valley like the US is, it doesn’t seem to make much sense to participate. How do we compete with prison labor in China or slave labor in Mexico? The theory of free trade is that the world will reach an economic/standard of living equilibrium across the globe. That mean Americans will see their standard of living diminish and developing well see theirs increase. Again, that is not on a one-to-one ratio and Americans are losing faster than the rest of the world is gaining. So are cheap products worth lower wages and a lower standard of living? I don’t think it is. I don’t have any answers but I just think the free trade argument is something we should take more interest in understanding.

We are already to a point where pensions are a thing of the past and companies are losing ground because of the cost of healthcare coverage for workers. I also wonder if free trade is really raising the standard of living across the world. Mexico, with its corrupt system, is still a mess. China receives most of our manufacturing jobs and the disparity of the haves and have-nots in that country is increasing.

It seems to me that we are in a race to the bottom. Where $10 and $15 an hour jobs are the norm, pensions become extinct, healthcare coverage non-existent and the stagnant wages are just a fact of life. Certainly corporate profits will increase. The middle-class is already squeezed and free trade doesn’t provide much of a relief.

Discussion Starters

1. Do you believe free trade is good for American workers?
2. What industry is replacing our manufacturing base with equivalent wages?
3. Do you believe that free trade cost American standard of living?


27 Responses to Free Trading At the Bottom of the Barrel

  1. Mahndisa S. Rigmaiden Says:
    02 01 06
    James, I think you have some misconceptions about how free trade affects developing nations. For some insight into what I mean, see the video by the CATO institute on Africa and how it might be affected by trade liberalization. This is at the bottom of my post here.

    Ultimately a blending of free markets and some protectionism helps economies grow. However, there is a delicate balance between the two. For example, we REALLY have high steel tarriffs, or once did and the EU was pissed about it. US steel is somewhat protected by our government, yet we can still import steel from other places. OKay I will answer your questions now. I believe the answers to your questions are quite complex.
    1. Do you believe free trade is good for American workers?
    Yes and No. I believe that free trade is a good and a bad thing for American workers. Free trade ups the ante and produces more competition. Americans who have the ability to evolve and piece disparate things together for a skill set will suceed, while Americans who aren't evolving in how they approach their careers will be left in the dust. I see more of a consultant/contractor economy evolving. So while the manufactoring jobs have been outsourced, other markets open up. It is up to us to keep up.
    2. What industry is replacing our manufacturing base with equivalent wages?
    Now I am unsure of the dichotomy that the question presents. This is because many programmer jobs were outsourced, but then a plethora of computer architect and developer jobs opened up in the wake of that exodous. So again, it is almost as if things balance out...
    3. Do you believe that free trade cost American standard of living?
    Yes, free trade can cost Americans who aren't willing to compete (or don't have the means to compete) in quality of life. However, it can also increase quality of life for Americans who do wish to comptete...Excellent post James. You have been on fire lately!!!
  2. Mahndisa S. Rigmaiden Says:
    02 01 06

    And this whole thing about Americans who don't wish to compete or don't have the means to compete is a serious issue. There is a large segment of our population who is retired and those with disabilities severe enough such that they cannot work. In a nearly free market, we must consider those who cannot take care of themselves. Charity is good, but charities cannot cover all of the expenses for these needs. The question is, who should? In that sense I don't believe that a free market is the panacea that some tout it to be. However as I previously stated, more free market emphasis with SOME protectionism is the best way to go. We are slightly skewed towards big business now and if we can focus on worker rights a balance might be achieved.
  3. jan brauner Says:
    Hey James and Mahndisa:
    James, your posts have been intriguing and I appreciate you letting me express my opinions, even though I am not the "flavor of the month."

    As to trade, I draw a distinction between free trade and fair trade. Obviously, copyright infringements, dumping, slave labor, restrictionism that subverts trade agreements, knock-offs, and so on impact the ability of our country to compete on a level playing field.Countries that engae in unfair trade practices should feel the brunt of sanctions.

    On the other hand, when I look at countries which imposed severe restrictionist policies, there was an overall economic deficit to the society.Ergo, I conclude that we do not want to become heavily weighted in that direction.

    The reality is that we are in a global society, though I still believe very much in borders and a national concept.

    We must reconfigure, reeducate, and do what Americans do best: innovate, problem solve, express compassion, and get the hell out of the way of those who are productive.
  4. Jaimie Says:
    This comment has been removed by a blog administrator.
  5. James Manning Says:
    Thanks for the input. I have very little knowledge of this subject outside of the debates I've overheard and reading newspapers. I think Jan probably hit home my point when she mentioned fair trade. China is a not a fair trade partner. We ship our manufacturing jobs and they in turn produce cheap products. But I wouldn't trade a job for cheap products. They have all types of trade barriers and from what I've read, operating in China is a logistical nightmare. So there are some issues there.

    I have to wonder about the education factor, Mahn. If we're losing manufacturing jobs, losing programming and engineering jobs is a consultant/contractor industry large enough to support the thousands of jobs that we lose? How do we create an educational system capable of retraining the workforce of entire industries?

    I look at the labor reports every month and it seems to me that we are creating a low wage service industry economy. Most people who lose their jobs in manufacturing end up taking a pay cut with less benefits. How do we reverse that?
  6. Mahndisa S. Rigmaiden Says:
    02 01 06
    "have to wonder about the education factor, Mahn. If we're losing manufacturing jobs, losing programming and engineering jobs is a consultant/contractor industry large enough to support the thousands of jobs that we lose?"

    James NOW THAT IS THE QUESTION!!! I don't know the answer to that. Obviously educating the masses and doing vocational changes in curriculum would be useful. And the aspect of service economy creation is occuring because of cartels, such as Walmart. Basically cartels undermine the free market by cornering it. By Walmart advocating for an increase in minimum wage, they are effectively trying to push out smaller businesses that cannot afford to pay more than the federally set minimum wage. This is a concern. But like I said before, for every programming job that got outsourced, a new developer/architect position opened up. These positions are actually higher paid positions than programmers and they innovate. In that sense I agree with Jan. We need to shift a bit and focus on doing what made us great: INOVATING!!! Great post:)
  7. James Manning Says:
    I need a better understanding of economics because this is kind of fascinating to me. I'm going to have to do some research because I know that there is a lot of information out there on this topic. Sifting through it all is a daunting task.
  8. Diane S. Says:
    I've never really studied economics, and maybe there are subtelties that escape me, but shipping our manufacturing jobs to sweat shops in third world countries isn't doing anyone any good that I can see.

    A lot of folks like to talk to about education as the magic bullet for poverty, but even an economically uneducated idiot like me knows that we could send everyone in America to Harvard for an MBA, but someone's still gotta wash the dishes when you go out to eat. So the question becomes, does that person deserve a livable wage? Not a mansion. Not a Rolls Royce. Just housing outside of their second hand car parked where ever seems the safest for the night?
  9. Dell Gines Says:
    Actually I have to correct a few misconceptions on a variety of issues raised.

    1. Mexicans are still trying to cross the border not because of free trade, but because they can make more money here, and by default America is supporting the Mexican economy, and keeping the pressure off the Mexico government to reform their economic sysem. We are essentially rewarding their bad behavior towards their people.

    2. "Is the low cost of goods worth US jobs?" 99+% of all employer companies are small businesses. Here is some recent data:

    "· Small businesses represent 99.7 percent of all employer firms.

    · Over the past decade, small business net job creation fluctuated between 60 and 80 percent."

    So the question is not about outsourcing, it is about what can we do to encourage more entrepreneurialism within the States to generate jobs and wealth. There is no theoritical limit as to how large an economy can grow.

    3. " Is the low cost of goods worth US jobs?" It is not an either or. If you reduce the cost of goods, you create the ability to purchase more goods and employ more individuals, it is a balancing act. If I pay $10 for American made and $5 for china, that means I have $5 five less to spend on something else. Typically even if something is Chinese made it is American sold, meaning that if we up the price we reduce American workers selling product.

    4. "it doesn’t seem to make much sense to participate."

    It actually makes a heck of a lot of sense to participate, research the economic law of comparitive advantage, this demonstrates why free trade with developing countries benefits both sides.

    I could go on and on on this one, but I have to get back to work.
  10. Maverick Says:
    I have to agree with Dell...part of the reason that you see free trade the way that you do, James, is because we do not have a pure example of free trade...

    I have a Master's degree in Economics...that is just said because I am going to throw out some concepts and I want people to know that I am putting out valid theories and not just my opinion...

    Free trade would work if we had true free trade. But like someone mentioned before, we impose many tariffs on various goods that are sent to the United States. In the process of free trade, specialization comes about due to comparative advantage. What comparative advantage state is that if I can make 10 TVs and 5 chairs in an hour and you can make 1 TV and 2 chairs in an hour, though I have the absolute advantage in terms of production over you, it would be more efficient if I strictly produced TVs and you produced chairs...

    Now the problem lies in the fact that people in the US are not open to specialization. We would like people to be able to do any job, even if other countries are more efficient at doing that job than we are. So we practice protectionism in part because we try to conserve these jobs and in part because we have not figured out how to easily retrain people to allow them to switch industries. There is a high cost to retraining in this country and therefore, if we outsourced many of our jobs, we would have to incur that cost of education once again. So when we eliminate some of the barriers to education, we make it easier for people to move to jobs that America specializes in and the outsourcing of jobs would not be as much of a problem...

    Minimum wages are also technically a barrier to free trade. Because a person cannot make below a certain wage in the United States, then people are not being paid their actual market value...they are more than likely being overpaid (regardless to what you believe). The market theoretically will determine what wages are. But if I am forced to pay you more than you are worth (not in terms of personal value, but rather in terms of equilibrium of supply and demand), then I cannot hire as many workers as I would like to/need to hire. This is partially why some jobs are being outsourced. If the job were highly skilled, then the skill would help to determine the market value and those with more skill would be paid more. But for jobs where the skill is equalized across workers, the workers in essence bid the wage down until it is at a point where the amount that I am willing to pay is exactly equal to the amount that workers are willing to accept...

    I know that was long winded, but the point is this. You can't really judge these economic concepts based on their real world applications because they are never applied in their pure form in practice. People always criticize capitalism, but we don't have pure capitalism in this society. Just as we don't have pure democracy (you don't even directly vote for the president). So it is the interference that causes these concepts to not work as planned...
  11. Mahndisa S. Rigmaiden Says:
    02 02 06

    Hey there again:
    "So the question becomes, does that person deserve a livable wage?"
    Diane S. your statement shows that you have little understanding of economics. As Maverick pointed out, in a sense minimum wage and living wage are barriers to true free trade. Ultimately protectionism (unless for commons such as infrastructure and steel etc) sucks for economies. Many of us wonder what the problem is with Africa. Well it is PROTECTIONISM and TRIFLING BS!
    I also take issue with the discussion of sweat shops not doing good. Although we think of the working conditions as being deplorable, the GOVERNMENTS of these countries have a responsibility to make laws ensuring worker safety. If the company doesn't have to follow OSHA rules by law, then why would they? That is on the lawmakers of said country. Next is that if someone made zero cents per hour and now make fifty cents per hour, they are coming up and have increased their income by fifty fold! So all of this is a matter of perspective.
  12. James Manning Says:
    Maverick and Dell,

    I know you guys are well tutored in this area and I know the principles may very well be correct, but am I not correct in saying that what you call equilibrium is a race to the bottom for many American workers. Isn’t that happening with a lot of manufacturing jobs? If they want to keep their jobs, they have to give up their pensions, give up benefits, accept wage cuts, pay more of their healthcare cost. They are in competition with slave shops that provide nothing for their workers.

    And the retraining theory seems off because if you look at the labor reports, most of the jobs that are created are in the service industry. An industry that does not require any special skill sets. What are we retraining them to do?

    I think the minimum wage argument is flawed. I think the minimum wage sets a starting point on the value of work. It is protections for workers from being exploited. That is the reason so many companies look for illegal immigrants to do jobs. They can exploit them.

    America is at the top looking down. Why should we support a system that says, we are going to erode our standard of living dramatically to make small incremental increase in the standard of living for others? How do we fairly compete with countries that have universal health coverage (we haven’t discussed the cost to businesses in providing healthcare) and have no environmental or workplace laws? How can we look for equilibrium in the market when there is no equilibrium in the social conditions that factor into the cost of goods and services?
  13. Mahndisa S. Rigmaiden Says:
    02 02 06

    James, the government should set a minimum wage for government work. Private companies should be accountable for worker safety, which is regulated by the government, but shouldn't be held to set minimum wage standards by the government (unless they are being subsidized by the government). I think that is a fair compromise. I think at the crux of the debate is what rights workers and consumers have in a capitalist society. We have a lot of power, but seldom exercise it. For example if everyone who thought Walmart engaged in abusive worker AND market practices didn't shop there, they would be out of business. But hypocrisy abounds and my pocketbook is oft more of a concern than things I only hear about...In the end the bus boycotts ended due to damn near bankruptcy, nothing more...
  14. Dell Gines Says:
    "That is the reason so many companies look for illegal immigrants to do jobs. They can exploit them. " - James

    Considers this though bro...if they were truly being exploited, they would stay in Mexico to work, so obviously the cost benefits of being an illegal alien and working for less than an American would benefit them more than what their own country has to offer.

    The greater question then would be should we be in the business of supporting another countries workers?

    Maverick is right, and I am glad he explained comparative advantage cuzz I was way to lazy.

    But onto your concept of equilibrium, there is no such thing per se when theoretically there is no limit to economic growth, therefore as specialization, improved technology, and various other innovations occur, and an increase in free trade increases, you should actually see a upward movement in the US economy and the standards of living of all who participate not a decrease.
  15. James Manning Says:
    Dell, I would say they are being exploited. If we have rules and regulations the govern the workplace, then we should believe in the universally. The only reason we have safety rules is because the government mandates them. Trust, if companies could get away with dumping chemicals in the water supply if it saved them money, we'd all have cancer right now.

    So either you believe in the rules or not. So if I apply the rules to one employee and not the other because they lack power or are desperate - then I consider that exploiting.

    I still say, I get the economic philosophy that ya'll are talking about. I just don't see things playing out well for us in reality. So the question I ask, what do we do about the reality that the economy is producing low wage jobs, middle class wages are declining, outsourcing is taking manufacturing and computer jobs and healthcare is becoming a burden on corporations with small businesses completely unable to provide healthcare for their employees?
  16. Maverick Says:
    James, your argument about the minimum wage being the starting point for the value of work is kinda flawed. The reason that we keep having to raise the minimum wage is because of the price of goods rising relative to our income. And the reason that keeps rising is because we keep raising the minimum wage...

    Think about this. In China, the average income per year is around $900 US dollars. Now, if someone makes a couple thousand dollars in China, they are wealthy. But if you are single and make less than $14,000 here, you are in poverty. That is because the value of your work is being overstated because of the minimum wage. In the 1970's, the minimum wage was a little more than $2.00...did that make you poor for making that. No, because the prices were lower relative to the wages. So the wage itself means matters what the prices are relative to your income. If you made $0.50, you are looking at it as if you are not worth anything. But if prices were lower and you could accumulate many things that you wanted with that wage, then the absolute value of your wage does not matter...

    Outsourcing is taking manufacturing jobs because America has become exceedingly more efficient in other areas. We are moving away from low-skilled, manual labor towards other technology-intensive fields. So the bad thing about free trade is that those who do not want to migrate to other fields get left behind. Some of the reasons they don't switch may be barriers to education, lack of diversity of industry in that area, etc. But free trade is not always exploitive. We have to stop always thinking in terms of America as the base economy and everyone else relative to it. Many people come to the US on visas, make hundreds of thousands of dollars and then go back home to their country with more intellectual capital as well as finances. How do you feel about that?
  17. James Manning Says:
    First, I believe that America is a land of opportunity so people come here, legally, have every right to make the best of it - and if they choose to return to their homeland, that's cool with me. Heck, I'd like to retire and move to the Dominican Republic.

    I think outsourcing is taking place because it is a lot cheaper to pay $6.00 a month to an 11 year old working 14 hours a day in a hell whole than it is to pay $18.00 plus benefits to a father in a South Carolina plant. Certainly there are a lot of efficiencies in the American economy and the computer eliminated the need for a lot of jobs.

    But lets look at other cost contributing to the higher cost of operating in the US. There is the compliance to safety and health regulations. There are OSHA requirements and healthcare cost. We have to include taxes and workers comp.

    We compare that to China. It is a logistical nightmare but they dump poison directly into their rivers. Their air quality is horrendous. A lot of industries offer no benefits and workplace safety issues are ignored. The have an increasing disparity between economic classes. American companies comply with the Communist government to ignore human rights violations for access to their expansive market. This is what Americans are competing with. I don’t think it’s cool that we participate in this.

    And why does the government give tax breaks to companies that outsource? Why is there 5 story building in the Grand Cayman Island that is used by 12,745 American corporations? These are companies that outsource jobs, avoid paying taxes, but receive tax incentives from our government.

    Maybe in theory, everything ya’ll presented is true. But the application is a mess and American workers are getting the short end of the stick. (Oh, can I mention that Bush cut student loan program so those workers that need to return to school have less money to do so)
  18. Maverick Says:
    China's violations of various free trade concepts is a whole other topic that deviates a little from the free trade discussion. I agree with you about focusing on China...the fact that they constantly steal intellectual property and tie their currency to ours is a very negative thing for the American economy. But it is not as simple as saying "we are not going to trade with you." Our trade deficit with China is cut China off at this point would be murder because much of our economy is being sustained on the spending on imported goods, which China supplies a large amount of...

    However, Chinese workers are not being exploited half as much as workers in other places. The pros and cons of free trade are different depending on who you are looking at...
  19. James Manning Says:
    I don't want to stop trade with China. That's not reality. I just don't want to give American companies incentives to give away our jobs. The low cost of labor is incentive enough. The American worker is being asked to sacrifice for corporate profits. I don't think that's cool.
  20. Little Miss Chatterbox Says:
    This is one of those issues that I have very mixed feelings on. I see both sides. Tony Snow did a good job one time of explaining all the benefits of Free Trade and it made a lot of sense.

    But my husband worked for a steel company for 5 yrs. and as a result was very against free trade. And he made some good points as well.
  21. James Manning Says:
    Chatter, I understand free trade to an extent. I recongzine that we gain jobs when Honda and BMW build plants on American soil and that the Big Three automakers have to compete. And for developing countries that are agriculturally based, it makes sense for them to be allowed to import their goods to the US without taxing them because we want to protect our farmers.

    But I have problem competing for jobs because we can't compete on that level. And I haven't found a good explanation how it is good for America that Wal-mart is now the number one employer in the US.
  22. jan brauner Says:
    It's really really late, but I just wanted to mention that I wrote a blog piece on minimum wage. In one sense, I was trying to provoke thought, and get people to expand their economic perceptions. It is somewhat experimental, in the sense that I ws trying to take a contrarian opinion, and bolster it with eonomic undergirding.I'll send it to Dell, to see what he thinks.The coolest thing about this is that we are engaging in substantive dialogue, without race bashing, in recognition that we are all fascinated by the subject, and are hungry for the truth. I find people that truly engage in subjects in this manner are so exciting...
  23. Rashid Muhammad Says:
    Wow, I completely clicked on the wrong link when I responded to this post. It was redundant to what was posted here anyway but I do have some additional thoughts.

    I'm personally of the feeling that US policy is not pro-business enough. What many people think is pro-business is actually pro hegemony. While there is an undeniable advantage to having stability in corporate entities, many policies used to promote this completely undermine newer entities that could prove to be much better and more effective.

    One of those policies is Intellectual Property law, it needs complete overhaul. It is one of the single biggest legal drags on US innovation in everything from the arts to sci-tech. Copyright and patent law is severely broken and inadequate for the day and time in which we live. Now it is primarily corporate welfare and legal extortion that slows industries to a grind and promotes complacency and "businesses" with org charts that look like law firms.

    Also there is education. While I think that the idea of accountability in public education is a good thing, I think that education based around standardized tests are bad. The old "mechanical" model of learning is out. The jobs of the new world will require the ability to think not just regurgitate. The computer is one of the worst things to happen to education as now people seem to see technology as a panacea and end in itself as opposed to a means to an end of superior cognitive functionality.

    I see it every day in higher ed so I can only imagine what it's like on the primary and secondary levels.
  24. jan brauner Says:
    You said something very intresting about creative thinking v. regurgitating. My daughter works with a team from India (Dell), and though they are extremely well versed in the computer, they become bewildered about creative problem solving if it involves something "out of the box."

    On the other hand, it is fair to say that unless one has basic facts at one's disposal, one has insufficient knowledge to use it creatively. There has to be a balance.

    However, I have noticed, when blogging, that most people who comment see the world in rigid metrics.For example,all standardized testing is bad, or all lack of it is bad....One of the reasons I enjoy Mahndisa, is that she truly explores the ideas of others, and I have only identified two other individuals who do that.
  25. Mahndisa S. Rigmaiden Says:
    02 05 6

    Hey there Jan: Thanks:) I feel the same about you too. Things are far more complex than just Black and White!
  26. Rashid Muhammad Says:
    Jan: I don't mean to imply that standardized testing is bad in and of itself, just that it shouldn't be the end all be all - especially given the new market challenges that we as Americans are facing.
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