June 1, 2012

Globalization is Good

Globalization is a tough sell.  Even a lot of conservatives bristle at the idea of letting some Vietnamese worker make shoes at a labor cost of $0.22/hour to be sold in America at $110 per pair.  It seems like both a ripoff of the labor effort and a rip off of the American consumer.  Not to mention the fact that it enables a lot of offshoring of manufacturing jobs in America, thus eroding America's industrial base.

Liberals vehemently oppose globalization on the grounds of child labor abuses and unfair trade practices.  But Swedish writer Johan Norberg takes a look at why globalization and capitalism have lifted millions out of poverty and why anti-globalization protesters are on the wrong side of the argument, and ultimately history.

Show this video to a liberal and their head will spin and they will retort with cries of "Lies!" and "That's just propaganda!"   Or perhaps they really do get it and their protests are merely a cover for union-driven protectionism.  Unions first, consumers second.

Conservatives on the other hand are a tougher sell.  I'm not talking laissez faire libertarians here.  I'm talking more the "America first" conservatives.  The notion of the American economic engine being hampered by international competition is a daunting perception to overcome.  But in reality, competition is not the problem.  The problem is over-regulation.  The economic landscape in the United States is one dotted with legislation, regulation tax complexity etc., and as a result a host of unintended consequences and skewed realities.

Consider this - would you rather get on a space shuttle built in Vietnam or the United States? How about an airplane built in Brazil (which aren't necessarily bad by the way) or by Boeing in America?  Need a battleship? Are you going to ask the US Navy or the navy of Ethiopia? There are inherent advantages to the American worker and production systems.

As you go down the list in terms of product complexity you get into circumstances where the choices aren't so obvious. Cars for example - German, Japanese, American and even Korean and Swedish and others are viable. But that's where the distortions (not only from America but from other countries as well) kick in.  Union rules, minimum wage laws, companies not being allowed to set up factories in states that they want, as well as government subsidies.

When you get all the way down the list to textiles and the garment industry, we are not talking about high tech jobs.  Why not let them be made in countries with cheap labor to benefit consumers around the world.  It's called specialization and comparative advantage.
Ricardo also opposed the protectionist Corn Laws, which restricted imports of wheat. In arguing for free trade, Ricardo formulated the idea of comparative costs, today called comparative advantage—a very subtle idea that is the main basis for most economists’ belief in free trade today. The idea is this: a country that trades for products it can get at lower cost from another country is better off than if it had made the products at home.

Say, for example, Poorland can produce one bottle of wine with five hours of labor and one loaf of bread with ten hours. Richland’s workers, on the other hand, are more productive. They produce a bottle of wine with three hours of labor and a loaf of bread with one hour. One might think at first that because Richland requires fewer labor hours to produce either good, it has nothing to gain from trade.

Think again. Poorland’s cost of producing wine, although higher than Richland’s in terms of hours of labor, is lower in terms of bread. For every bottle produced, Poorland gives up half of a loaf, while Richland has to give up three loaves to make a bottle of wine. Therefore, Poorland has a comparative advantage in producing wine. Similarly, for every loaf of bread it produces, Poorland gives up two bottles of wine, but Richland gives up only a third of a bottle. Therefore, Richland has a comparative advantage in producing bread.

If they exchange wine and bread one for one, Poorland can specialize in producing wine and trading some of it to Richland, and Richland can specialize in producing bread. Both Richland and Poorland will be better off than if they had not traded.
 The argument that the theory means that everything ends up getting produced in China is not reality.  They cannot produce everything, nor are they (or will they ever) be the best at producing everything.  They will never beat the Swiss at making Swiss Cheese for example. They will never make tanks for the U.S. military. The real question is whether they will make so much as to create a permanent trade imbalance.  Will all that flows to China be raw materials for production of goods there? No.

The United States has comparative advantage in a number of areas and could have even more without some of the burdensome intrusiveness of government over-regulation and excessive business taxation.  The challenge for the United States going forward is to both push those comparative advantages further, and to discover and develop new areas of comparative advantage.  Luckily, that is something American ingenuity has always excelled at.

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