Sometimes it is not the import of physical goods themselves, but the export of technology embodied in goods, which represents a military threat. In the 1990s, bans on selling American products using advanced computer technology were lifted for sales to China, over the objections of U.S. military authorities. The military wished to keep such restrictions because this advanced technology would enable the Chinese military to acquire the ability to more accurately aim nuclear missiles at American cities. It was not economists but politicians who favored lifting such international trade restrictions. Economists have long recognized the national defense exception to free trade as valid where it applies, even though the national defense rationale has been used in many cases where it did not apply.
“Dumping”
A common argument for government protection against a competitor in other countries is that the latter is not competing “fairly” but is instead “dumping” its products on the market at prices below their costs of production. The argument is that this is being done to drive the domestic producers out of business, letting the foreign producer take over the market, after which prices will be raised to monopolistic levels. In response to this argument, governments have passed “anti-dumping” laws, which ban, restrict, or heavily tax the importation of products from foreign companies declared to be guilty of this practice.
Everything in this argument depends on whether or not the foreign producer is in fact selling goods below their costs of production. As already noted in Chapter 6, determining production cost is not easy in practice, even for a firm operating within the same country as the government agencies that are trying to determine its costs. For government officials in Europe to try to determine the production costs of a company located in Southeast Asia is even more problematical, especially when they are simultaneously investigating many dumping charges involving many other companies scattered around the world. All that is easy is for domestic producers to bring such charges when imports are taking away some of their customers.
Given the uncertainties of determining cost, the path of least resistance for officials ruling on “dumping” charges is to accept such charges. Authorities in the European Union, for example, declared that a producer of mountain bikes in Thailand was exporting these bikes to Europe below their cost of production, because he was charging less for the bikes in Europe than such bikes had been selling for in Thailand. However, since there are economies of scale, the Thai producer’s costs when selling huge numbers of mountain bikes in Europe were unlikely to be as high as the costs of other producers selling much smaller numbers of mountain bikes within Thailand, where there was far less demand for such a luxury item from a poorer and smaller population.
Indeed, this Thai producer’s own costs of selling small numbers of mountain bikes in Thailand were likely to be higher per bike than the costs of selling vast numbers of them in large orders to Europe. To sell bikes in Europe for less than bicycle producers charged in Thailand did not necessarily mean selling below the cost of producing bikes for the huge European market.{765}
This situation was not unique. The European Union has applied anti-dumping laws against bed linen from Egypt, antibiotics from India, footwear from China, microwave ovens from Malaysia, and monosodium glutamate from Brazil, among other products from other places.{766} Nor is the European Union unique. The United States has applied anti-dumping laws to steel from Japan, aluminum from Russia, and golf carts from Poland, among other products.{767} Without any serious basis for determining the costs of producing these things, U.S. government agencies rely on the “best information available”—which is often supplied by those American businesses that are trying to keep out competing foreign products.
Whatever the theory behind anti-dumping laws, in practice they are part of the arsenal of protectionism for domestic producers, at the expense of domestic consumers. Moreover, even the theory is not without its problems. Dumping theory is an international version of the theory of “predatory pricing,” whose problems were discussed in Chapter 8. Predatory pricing is a charge that is easy to make and hard to either prove or disprove, whether domestically or internationally. Where the political bias is toward accepting the charge, it does not have to be proven.
Kinds of Restrictions
Tariffs are taxes on imports which serve to raise the prices of those imports, and thus enable domestic producers to charge higher prices for competing products than they could in the face of cheaper foreign competition. Import quotas likewise restrict foreign companies from competing on even terms with domestic producers. Although tariffs and quotas may have the same economic end results, these effects are not equally obvious to the public. Thus, while a $10 tariff on imported widgets may enable the domestic producers of widgets to charge $10 more than they could otherwise, without losing business to foreign producers, a suitable quota limitation on the number of imported widgets can also drive up the price of widgets by $10 through its effect on supply and demand. In the latter case, however, it is by no means as easy for the voting public to see and quantify the effects. What that can mean politically is that a quota restriction which raises the price of widgets by $15 may be as easy for elected officials to pass as a tariff of $10.
Sometimes this approach is buttressed by claims that this or that foreign country is being “unfair” in its restrictions on imports from the United States. But the sad fact is that virtually all countries impose “unfair” restrictions on imports, usually in response to internal special interests. However, here as elsewhere, choices can only be made among alternatives actually available. Other countries’ restrictions deprive both them and us of some of the benefits of international trade. If we do the same in response, it will deprive both of us of still more benefits. If we let them “get away with it,” this will minimize the losses on both sides.
Even more effective disguises for international trade restrictions are health and safety rules applied to imports—rules which often go far beyond what is necessary for either health or safety. Mere red tape requirements can also grow to the point where the time needed to comply adds enough costs to be prohibitive, especially for perishable imports. If it takes a week to get your strawberries through customs, you may as well not ship them. All these measures, which have been engaged in by countries around the world, share with import quotas the political advantage that it is hard to quantify precisely their effect on consumer prices, however large that effect may be.
CHANGING CONDITIONS
Over time, comparative advantages change, causing international production centers to shift from country to country. For example, when the computer was a new and exotic product, much of its early development and production took place in the United States. But, after the technological work was done that turned computers into a widely used product that many people knew how to produce, the United States retained its comparative advantage in the development of computer software design, but the machines themselves could now be easily assembled in poorer countries overseas—and were. Even computers sold within the United States under American brand names were often manufactured in Asia. By the early twenty-first century, The Economist magazine reported, “Taiwan now makes the vast majority of the world’s computer components.”{768} This pattern extended beyond the United States and Taiwan, as the Far Eastern Economic Review reported: “Asian firms heavily rely on U.S., Japanese and European firms as the dominant sources of new technology,” while the Asian manufacturers make “razor-thin profit margins due to the hefty licensing fees charged by the global brand firms.”{769}
The computer software industry in the United States could not have expanded so much and so successfully if most American computer engineers and technicians were tied down with the production of machines that could have been just as easily produced in some other country. Since the same American labor cannot be in two places at one time, it can move to where its comparative advantage is greatest only if the country “loses jobs” where it has no comparative advantage.
That is why the United States could have unprecedented levels of prosperity and rapidly growing employment at the very times when media headlines were regularly announcing lay-offs by the tens of thousands in some American industries and by the hundreds of thousands in others.
Regardless of the industry or the country, if a million new and well-paying jobs are created in companies scattered all across the country as a result of international free trade, that may carry less weight politically than if half a million jobs are lost in one industry where labor unions and employer associations are able to raise a clamor. When the million new jobs represent a few dozen jobs here and there in innumerable businesses scattered across the nation, there is not enough concentration of economic interest and political clout in any one place to make it worthwhile to mount a comparable counter-campaign. Therefore laws are often passed restricting international trade for the benefit of some concentrated and vocal constituency, even though these restrictions may cause far more losses of jobs nationwide.
The direct transfer of particular jobs to a foreign country—“outsourcing”—arouses much political and media attention, as when American or British telephone-answering jobs are transferred to India, where English-speaking Indians answer calls made to Harrod’s department store in London or calls to American computer companies for technical information are answered by software engineers in India. There is even a company in India called TutorVista which tutors American students by phone, using 600 tutors in India to handle 10,000 subscribers in the United States.{770}
Those who decry the numbers of jobs transferred to another country almost never state whether these are net losses of jobs. While many American jobs have been “outsourced” to India and other countries, many other countries “outsource” jobs to the United States. The German company Siemens employs tens of thousands of Americans in the United States and so do Japanese automakers Honda and Toyota. As of 2006, 63 percent of the Japanese brand automobiles sold in the United States were manufactured in the United States.{771} The total number of Americans employed by foreign multinational companies runs into the millions.
How many jobs are being outsourced in one direction, compared to how many are being outsourced in the other direction, changes with the passage of time. During the period from 1977 to 2001 the number of jobs created in the United States by foreign-owned multinational companies grew by 4.7 million, while the number of jobs created in other countries by American-owned multinational companies grew by just 2.8 million. However, during the last decade of that era, more American jobs were sent abroad by American multinational companies than there were jobs created in the United States by foreign multinationals.{772} Not only is the direction of outsourcing volatile and unpredictable, the net difference in numbers of jobs is small compared to the country’s total employment. Moreover, such comparisons leave out the jobs created in the economy as a whole as a result of greater efficiency and wealth created by international transactions.
Even a country which is losing jobs to other countries, on net balance, through outsourcing may nevertheless have more jobs than it would have had without outsourcing. That is because the increased wealth from international transactions means increased demand for goods and services in general, including goods and services produced by workers in purely domestic industries.
Free trade may have wide support among economists, but its support among the public at large is considerably less. An international poll conducted by The Economist magazine found more people in favor of protectionism than of free trade in Britain, France, Italy, Australia, Russia, and the United States.{773} Part of the reason is that the public has no idea how much protectionism costs and how little net benefit it produces. It has been estimated that all the protectionism in the European Union countries put together saves no more than a grand total of 200,000 jobs—at a cost of $43 billion. That works out to about $215,000 a year for each job saved.{774}
In other words, if the European Union permitted 100 percent free international trade, every worker who lost his job as a result of foreign competition could be paid $100,000 a year in compensation and the European Union countries would still come out ahead. Alternatively, of course, the displaced workers could simply go find other jobs. Whatever losses they might encounter in the process do not begin to compare with the staggering costs of keeping them working where they are. That is because the costs are not simply their salaries, but the even larger costs of producing in less efficient ways, using up scarce resources that would be more productive elsewhere. In other words, what the consumers lose greatly exceeds what the workers gain, making the society as a whole worse off.
Another reason for public support for protectionism is that many economists do not bother to answer either the special interests or those who oppose free trade for ideological reasons. The arguments of both have essentially been refuted centuries ago and are now regarded within the economics profession as beneath consideration. For example, as far back as 1828, British economist Nassau W. Senior wrote, “high wages instead of preventing our manufacturers from competing with foreign countries, are, in fact, a necessary consequence of the very cause which enables us to compete with them. . . namely, the superior productiveness of English labour.”{775} But economists’ disdain for long-refuted fallacies has only allowed vehement and articulate spokesmen to have a more or less free hand to monopolize public opinion, which seldom hears more than one side of the issue.
One of the few leading contemporary economists to bother answering protectionist arguments has been internationally renowned economist Jagdish Bhagwati, who agreed to a public debate against Ralph Nader. Here was his experience:
Faced with the critics of free trade, economists have generally reacted with contempt and indifference, refusing to get into the public arena to engage the critics in battle. I was in a public debate with Ralph Nader on the campus of Cornell University a couple of years ago. The debate was in the evening, and in the afternoon I gave a technical talk on free trade to the graduate students of economics. I asked, at its end, how many were going to the debate, and not one hand went up. Why, I asked. The typical reaction was: why waste one’s time? As a consequence, of the nearly thousand students who jammed the theater where the debate was held, the vast majority were anti-free traders, all rooting for Mr. Nader.{776}
Because the buzzword “globalization” has been coined to describe the growing importance of international trade and global economic interdependence, many tend to see international trade and international financial transactions as something new—allowing both special interests and ideologues to play on the public’s fear of the unknown. However, the term “globalization” also covers more than simple free trade among nations. It includes institutional rules governing the reduction of trade barriers and the movements of money. Among the international organizations involved in creating these rules are the World Bank, the International Monetary Fund, and the World Trade Organization. These rules are legitimate subjects of controversy, though these are not all controversies about free trade.
Chapter 22
INTERNATIONAL
TRANSFERS OF WEALTH
The financial industry is the most cosmopolitan in the world because its product, money, is more portable and more widely utilized than any other.
Michael Mandelbaum{777}
Transfers of wealth among nations take many forms. Individuals and businesses in one country may invest directly in the business enterprises of another country. Americans, for example, invested $329 billion directly in other countries and foreigners invested $168 billion in the United States in 2012, {778} which is both the source and the recipient of more foreign investment than any other country. Citizens of a given country may also put their money in another country’s banks, which will in turn make loans to individuals and enterprises, so that this is indirect foreign investment. Yet another option is to buy the bonds issued by a foreign government. Forty-six percent of the publicly held bonds issued by the U.S. government
are held by people in other countries.{779}
In addition to investments of various kinds, there are remittances from people living in foreign countries sent back to family members in their countries of origin. In 2012, 250 million migrants around the world sent remittances of $410 billion.{780} In 2011, a survey in Mexico found that one-fifth of the 112 million people in that country received money from family members in the United States, for a total of nearly $23 billion.{781} Nor is this a new phenomenon or one confined to Mexicans. Emigrants from India sent $64 billion and emigrants from China sent $62 billion back to their respective countries in 2011.{782} As with money sent back to other poor countries, this has a significant economic impact. As the Wall Street Journal reported:
Money sent home from abroad accounts for about 60% of the income of the poorest households in Guatemala, and has helped reduce the number of people living in poverty by 11 percentage points in Uganda and six percentage points in Bangladesh, according to World Bank studies.{783}
Money sent back to Lebanon equals 22 percent of that country’s Gross Domestic Product. Remittances to Moldova equal 23 percent of that country’s Gross Domestic Product and, for Tajikistan 35 percent.{784} International remittances have long played an especially important role for poor people in poor countries. Back in the 1840s, remittances from Irish immigrants in America to members of their families in Ireland enabled many of these family members not only to survive in famine-stricken Ireland but also to immigrate to the United States.{785}
Other international transfers of wealth have not been so benign. In centuries past, imperial powers simply transferred vast amounts of wealth from the nations they conquered. Alexander the Great looted the treasures of the conquered Persians. Spain took gold and silver by the ton from the conquered indigenous peoples of the Western Hemisphere and forced some of these indigenous peoples into mines to dig up more. Julius Caesar was one of many Roman conquerors to march in triumph through the eternal city, displaying the riches and slaves he was bringing back from his victories abroad. In more recent times, both prosperous nations and international agencies have transferred part of their wealth to poorer countries under the general heading of “foreign aid.”
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