Freedom to Trade

Protectionist Predicts World Breakdown

by Brink Lindsey

Brink Lindsey is an adjunct scholar at the Cato Institute and an international trade attorney in Washington, D.C.

Among the most pernicious protectionist fallacies is the notion that open markets cause a "race to the bottom" in which wages in rich countries are dragged down by competition from poorer countries. In the United States, that fear focuses on American companies that "ship jobs overseas" by opening facilities in low-wage countries.

That fallacy underlies efforts to make access to U.S. markets contingent upon observance of labor standards. President Clinton took that route by tacking a labor (as well as an environmental) side deal onto NAFTA. His insistence on repeating the error in other agreements has gummed up the grant of new fast-track negotiating authority for years now. At the multilateral level, the United States and European Union have been pushing for a World Trade Organization role in harmonizing labor policies.

William Greider’s recent book, One World, Ready or Not, vividly illustrates the wrongheaded thinking that drives such policy initiatives. Assuming the Cassandra role for the new global economy, Greider claims "internal contradictions" plague the emerging borderless world, "propelling the world toward some version of breakdown." According to Greider, chronic oversupply, in particular, "the global overabundance of cheaper labor," is the chief problem.

"Shipping high-wage jobs to low-wage economies has obvious, immediate economic benefits," Greider concedes. "But, roughly speaking, it also replaces high-wage consumers with low-wage ones. That exchange is debilitating for the entire system."

Over the past 10 to 15 years, two revolutionary political developments created the alleged instability: (1) the Soviet bloc collapsed, and now struggles to integrate into the international economy; (2) developing countries abandoned old policies of autarky and began encouraging foreign investment. Thus, the labor pool available to the world market economy increased by billions in a relatively short time. Meanwhile, continuing improvements in transportation and communications make it easier for multinational enterprises to open plants around the world.

Greider and others see the liberation of human capabilities and energies as an ominous threat. In fact, it is a fantastic windfall.

The misguided fear of low-wage countries reflects the general protectionist tendency to see work as an end in itself. In that view, a nation’s wealth depends on profitable businesses that pay high wages. Anything threatening those businesses or those jobs threatens the nation’s standard of living.

In reality, the process of capitalist wealth creation runs in the opposite direction. As Adam Smith pointed out in The Wealth of Nations, consumption is the end of production, not vice versa. We don’t drive cars to give people in Detroit something to do; people in Detroit build cars because they think we want to drive them. Effort for its own sake, or just to keep busy, is economically meaningless.

Capitalism–on a national or international scale–creates abundance by encouraging people to maximize the value of their efforts. The ongoing process of doing more with less creates wealth.

When companies move production operations to cheaper locations, they do more with less. That is the same principle as investing in labor-saving equipment. When investing in new equipment or a foreign plant reduces costs, it increases productivity and generates wealth. Eliminat-ing jobs in the process does not equal declining living standards. On the contrary, the only way to raise real wages and living standards over the long run is by increasing productivity or learning to do more with less.

Accordingly, the rapid infusion of billions of new minds and hands into the global economy presents an historic opportunity for rich and poor countries alike. From our perspective, the vastly expanded labor pool functionally equals some fantastic new piece of labor-saving machinery. Yes, hardship hits some when jobs are eliminated whether by plant relocation or automation. However, there is no alternative to "creative destruction" if we want to continue growing and prospering. The fear mongers denouncing cheap labor as a threat are nothing more than latter-day Luddites.


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