Some sensible words from a liberal economist:
REAL WORLD ECONOMICS: Free trade trade-offs always pay off - by Ed Lotterman
Is it bad for the economy if the state of Minnesota and others pay outside vendors for services provided by workers overseas?
Should the state act to ensure that goods or services it purchases come only from the U.S. -- or even from Minnesota?
For 227 years, the standard economics answer to those questions has been no. Trade is broadly beneficial to societies. Limitations on trade, in services as well as goods, are harmful.
However, over the same two centuries, many have rejected that answer. From the point of view of economics, there is nothing new in the current controversy over "offshoring." It is, however, a good opportunity to revisit basic issues.
Since Adam Smith, virtually all economists agree that international trade results in greater satisfaction of society's needs than not trading. All also agree that some people within any society may be hurt when moving from a situation of no trade to one of trade. The gains to society, however, virtually always outweigh the losses. Economic history repeatedly bears this out. ...
Over time, government restriction of trade follows a pendulum swing. The Smoot-Hawley tariff of 1930 was the last high tide of protectionism. Ratification of the GATT's Uruguay Round negotiations a decade ago marked the end of a 60-year swing away from Smoot-Hawley.
The pendulum is accelerating downward again, this time toward trade restrictions. Controversy about Minnesota buying IT-related services abroad is only part of a broader complex of complaints about the effects of trade. Witness issues in this week's South Carolina presidential primary -- where all candidates blamed trade for that state's employment woes.
What is different from past controversies is that services play a much larger role than in the 1920s or 1890s or 1830s. Trade in services per se is nothing new; insurance was a major export of the 13 colonies well before the American Revolution. But domestic providers of computer programming, customer assistance and telemarketing have faced sharp foreign competition only in the last 10 years or so.
As usually is the case, something other than public policy changed. Despite much public Sturm und Drang about NAFTA and the WTO, U.S. trade barriers have not fallen significantly in the last 40 years.
Technology and foreign competitiveness are what has changed.
When a telephone call to India cost $15 a minute, no software producers would hire Indians to tell confused U.S. customers which computer icon they needed to right-click. When the cost is 1.5 cents a minute, the situation is different.
As is usually true, government procurement purportedly represents a special case.
Maintenance workers at a private college where I teach zip around in small, imported pickups. Similar pickups were rare when I worked at the University of Minnesota because state institutions generally buy U.S.-made vehicles. There seems to be an analogous sentiment that while a private firm may contract to have software written in Asia, Minnesota state agencies should not.
Advocates of restrictions on offshore procurement of services argue that the lower costs of programming or customer-service purchased abroad is offset by unemployment compensation paid to U.S. workers who might have gotten the contract, lower tax revenues from the same workers, and so forth.
This is an important question. If domestic producers lose business to foreign competitors, what will happen to the domestic workers and other resources no longer employed?
Economists argue that the domestic workers and facilities can switch to producing other goods and services. There will be short-term losses as some workers are unemployed and even as some firms fold. State budgets may suffer. These short-term losses, however, inevitably are less than the longer-term fiscal losses that result from a less competitive economy insulated from trade competition.
Ben Franklin famously argued, "No nation was ever ruined by trade." He was correct. There are many examples of nations adopting trade restrictions that caused stagnation.
Trade opponents invariably argue that any current situation is new, and that historic lessons do not apply.
The 1970s complaint, "Importing oil is one thing, but importing cars is different," is transformed into today's, "Importing cars is one thing, but importing Web site design is different."
The explanation as to why any current situation is different often takes on a Yogi Berra-ish logic, as in "Nobody ever goes there anymore, it is too crowded." If some customer service and Web design work goes to India, or if some housewares manufacturing goes to China, and those countries have populations in the billions, then inevitably all IT and manufacturing jobs will move abroad and no one in the U.S. will have work anymore.
Economies simply don't work that way.
British economist Alfred Marshall may have emulated Charles Darwin in espousing the argument that "nature does not take leaps," but history bears Marshall out. There is no historical example of a nation where overall employment or average incomes fell because of greater trade. Changes induced by trade inevitably are smaller and more gradual than alarmists fear.
Before working ourselves into hoarseness however, economists must realize that trade policy is a pendulum, and it currently is swinging against us. As much as we may dislike it, we are likely to see more protectionism in the next few years than less. The nation will survive.