International Trade & Economics: What Nobody Wants to Talk About

George Will had a column published in the Tulsa paper on March 18 concerning the Export-Import bank and some of the ramifications of its actions. Some of these are not necessarily apparent until one thinks through all the implications.  Nothing is ever as simple as it seems.  In his article, Will is commenting on a report by a native Australian – Sallie James – who now lives in Washington D. C. and studies trade policy for the libertarian Cato Institute.  Her report entitled “Time to X Out the Ex-Im Bank” apparently notes that while the Ex-Im Bank is picking American winners, it is also creating American losers.  It seems that the bank subsidizes export transactions with government guaranteed loans.  The guaranteed loans carry lower interest rates which makes US exports cheaper.  The case in point is that Boeing is the biggest beneficiary of the bank’s activities.  But by helping Boeing sell planes to China, India and other nations at cheap rates, it helps those airlines have lower expenses resulting in a competitive advantage with American airlines such as Delta, United, and American Airlines (which is currently in bankruptcy).  At the same time (in today’s Wall Street Journal) it is reported that the US has imposed tariffs on imported Chinese solar panels.  These imports have caused difficulties for US companies because they are cheaper.  The government thinks that one reason they may be cheaper is that the Chinese government has “provided unfair financial assistance”.

All of this causes one to think about the advantages and disadvantages of international “free trade” including the much maligned tendency of many US manufacturing companies to “outsource” work overseas.  That the US has difficulty competing in many different manufacturing areas has been well documented.  Many have condemned US companies for outsourcing manufacturing work overseas to (principally) Asian countries.  These companies have been accused specifically of greed and generally not caring about the American worker.  Maybe so, but there is also another perspective that people should understand.  As has been frequently noted, in under-developed or third world countries, labor is cheaper. This, of course, is the reason that the US has difficulty competing.  So the incentive for US companies to outsource overseas is to reduce costs, which could improve profitability and hence the accusation of greed.  But that is too simple.  What actually happens is that cost reductions generally have resulted not in higher profitability to the companies, but in lower prices to the US consumer.  One of the reasons we have enjoyed low inflation rates over the last 30 years is because of lower costs, much of which has been the result of outsourcing.  This, lower than expected inflation, was particularly true in the 90s and the early parts of this century when the US unemployment rates were running close to 3%.  In the 60s, 70s, and 80s, 4.5% to 5% was considered “full employment” and anything less than that was expected to cause inflation problems.  (Not all outsourcing has been to foreign countries, but that is a discussion for another time.)

There is little doubt that the US has lost a lot of its manufacturing to developing international companies and that has caused hardship and a lot of agonizing. But for the countries that have added jobs, it has been a plus.  A lot of people in those countries can go to work in a manufacturing plant at significantly more than what they were making before and still work for less than the comparable US employee.  People in the US with earnings at the poverty level could reportedly be making more than 98% of the population of the rest of the world.  So the outsourced work is helping those people.  Anyone who thinks of himself as a political Populist in this country should be happy because it is helping some of the world’s “common men” who need it the most.  But my guess is that they are not.

What seems to happen with the third world countries that have been able to improve their economy is that wages rise so that the competitive advantage becomes less.  But as incomes rise they consume more which, of course, helps demand for all types of products.  However, it is difficult to believe that developing third world competition will not at least flatten, if not lower, US wage rates.  But the US working population is aging in many are approaching retirement.  One result of that might be that we could not take all that manufacturing back even if we had to.   One thing that we might do to help is to allow more immigration.  Our choice might be to either import more people or continue export more jobs.  A lot of technical oriented companies would like to have the ability to hire more foreign immigrants with high-tech skills which we probably need to maintain our position in the world.  But we also should  also consider bringing in more wage earners who could be better off here working for more than they could  where they are, but less than the typical US worker might be happy with.  This would also help with some other problems that we face with an aging population.

In The World is Flat Thomas Friedman pointed out the interdependence we are developing with different parts of a product’s supply chain in different places.  Specifically, he was looking at Asia (China and India) and the US.  He pointed out that this economic interdependence could encourage peaceful resolution of differences.  I believe that a combination of improved standard of living and interdependent economies could result in a more peaceful world.  And as the third world economies improve and the people’s standard of living improve, we could all be better off in the long run.  But there would likely be dislocations in getting there (life is not fair).  If we can whether those difficulties, and keep the governments from messing it up by over reacting we might actually get there.  Nothing is as simple as it seems and nothing is ever easy, but we can make it if we persevere.

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About tjc13

BE - Chem Engineering, Vanderbilt Univ, MBA, University of Tulsa - Worked for an energy and chemical company for many years and then started a management consulting business working for both for-profit and not-for-profit organizations.
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