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Current Trade Deficit:    
Why Globalization Critics Were Right All Along
Alan Tonelson
Wednesday, July 16, 2003
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Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).
A funny thing has happened as the country has become increasingly worried about the flight of high-skill, high-wage information technology jobs to low-wage countries like India. Along the way, it has become crystal clear that globalization critics were right all along in arguing that trade agreements like NAFTA were devastating America's manufacturing base and workforce.

How do we know this? Just look at news coverage of the info tech job exodus, which tends to include statements like this one from a July 14 Associated Press article: "The hemorrhaging of tens of thousands of technology jobs in recent years to cheaper workers abroad is already a fact of life -- as inevitable, U.S. executives say, as the 1980s migration of Rust Belt manufacturing jobs to Southeast Asia and Latin America."

Or this statement from a June Barron's series on this latest outsourcing wave: "[R]estructuring and global competition could limit the wage growth of white collar workers in the same way it did to their blue collar counterparts when manufacturing began to move outside the U.S. a generation ago."

Indeed, one of the Barron's articles was titled "Will US Manufacturing Go to Zero?" And it explicitly blamed "the liberalization of world trade and the emergence of nations like China, India and Mexico as centers of manufacturing and technology for US firms" for "speeding up the decline" of US industry.

In other words, the new conventional wisdom bears out the worst fears of labor unions and environmental groups and economic nationalists. They repeatedly warned that opening the U.S. market indiscriminately to developing countries -- the hallmark of the globalization decade of the 1990s -- could only send many more jobs abroad than it created in the United States, and drive down the wages of America's remaining workers.

The critics explained that the enormous oversupply of skilled or highly trainable workers in third world countries would result in stagnant and even declining wages in Asia and Latin America, in particular, even as workers in these globalizing regions produced ever more sophisticated, high-value goods. Thus it would be decades at best before third world workers could become customers for America's remaining industries, and thus re-balance trade flows. And by the time these customers had appeared, the U.S. economy would have lost too much productive and innovative capacity to generate a revival, and unprecedented deficits and debts could well have sparked a financial crisis.

Some globalization critiques -- including my own book, The Race to the Bottom -- also exposed the main fallacy of promises that American workers would always stay beat the competition by re-educating and re-training themselves for the highest tech jobs. We critics observed that white collar "New Economy" jobs had already begun streaming to low-wage countries, and that these countries also recognized the importance of educating and training their own workers in order to attract high-value investment

As American companies talk about sending abroad even Wall Street research and analysis jobs, it can be difficult to recall how vigorous the debate was over globalization's impact on U.S. manufacturing -- and how confidently globalization cheerleaders derided the critics' contentions.

There was Princeton economist and New York Times columnist Paul Krugman, who in 1996 dismissed opponents of current globalization policies as "entirely ignorant men" who are "startlingly crude and ill-informed." One year later, Krugman even claimed that the world is witnessing "a convergence between wages [in low-income countries] and in the West through a process of leveling up, not leveling down."

There were Ivy League economists Robert Lawrence and Matthew Slaughter, who concluded in 1993 that trade had "nothing to do with the slow increase in average compensation" in developed countries like the United States. There was Lawrence again in 1998, scolding critics that "America's growing links with the rest of the world are not responsible for slower average income growth, higher unemployment, or the productivity slowdown....The charge that American workers and companies must compete on an unlevel international playing field reflects a misunderstanding of what trade and exchange are all about."

And there was Krugman's New York Times colleague Thomas Friedman, petulantly complaining that "the anti-globalization movement...is still with us, arguing that free trade and global integration cause stagnating wages. (Wrong. What primarily hurts lower-skilled workers is rapidly advancing technology that replaces them with machines, computers, and voice mail, not free trade.)"

Even then, of course, Friedman's focus on low-skill workers was decades out of date. But the unsustainable bubble expansion of the 1990s gave these expert opinions credibility.

Nowadays, of course, Friedman is wrapped up in post-9-11 security issues. Krugman has anointed himself as an expert on everything from weapons of mass destruction to energy regulation. Slaughter seems to have vanished, at least from the media.  And Lawrence has been reduced to a pleading incoherence.

"If foreign countries specialize in high-skilled areas where we have an advantage, we could be worse off," he told Business Week in February. "I still have faith that globalization will make us better off, but it's no more than faith."

It's critical to remember, however, that domestic manufacturing has millions of workers and enormous amounts of capacity left. And like info tech and other white collar service jobs today, most manufacturing jobs have fled to third world countries not because of natural law or some inevitable process, but because trade agreements pushed hard by the U.S. government have actively encouraged outsourcing.

Liberalizing trade with the third world was important to U.S. multinational companies not mainly for opening fast-growing, potentially huge foreign markets for their U.S.-made goods. The third world's poverty was too big an obstacle to that goal's success. Instead, trade agreements ensured that the U.S. market would remain open to goods -- and now services -- that these companies were increasingly producing abroad (whether fairly and lawfully traded or not).

Reduce or shut off the outsourcers' access to American customers, and much of this production will feel powerful incentives to come home.

It's also critical to remember that the Bush administration's trade policy objectives -- finalizing the Chile and Singapore free trade agreements, extending NAFTA to the rest of the Western Hemisphere, and reaching a new, third world-tilted global trade agreement -- can only accelerate the flight of manufacturing jobs and production and vital technologies abroad.

So let's be grateful both for the new attention to info tech job loss and for the acknowledgments that this version of globalization has been killing American manufacturing. But let's also remember that the fight to save American industry is anything but over.



Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).