Tuesday, June 3, 2014

Unfair Advantage and Foreign Trade

NOTE: These seven essays were reproduced from my defunct blog Random Notes as they will be cited in my soon to be posted essay on common sense and pragmatism.

In my last post I mentioned the argument advanced for many protectionist measures, that other nations enjoy an "unfair advantage" in terms of labor costs, and so we must "protect" our workers against them. Now, most often this is advanced in terms of the accusation that China uses slave labor, so I will address that first. However, it often is also advanced against nations which simply have lower labor costs than the US. I have addressed this before (see postscript), but will go into it one more time. Finally, there is the allegation that our "pro-labor" legislation increases our costs, and thus we need protectionist measures. As this is the only allegation which has even a hint of truth to it, I will deal with that last, explaining why it is partly correct, but that the protectionist conclusions do not follow.

Let us look first at slave labor. I will not go into the question here whether China, or any other nation, actually uses slave labor. It is of little consequence to the argument whether slave labor actually exists, or whether it is currently practiced at all, so there is no reason to argue which nations have slavery, either de jure or de facto. So, please no comments about false allegations, I am not supporting allegations that China uses slave labor, simply passing along an argument commonly heard.

What we do know is that slavery did exist, both as explicit slavery and as implicit slavery in the form of serfs, whose conditions may have involved some nuances that differentiated them from slaves, but who were effectively slaves. And what history teaches us is that slave-based nations had two traits in common. They were largely agrarian and they were the nations prone to industrialize latest in their regions. Look at the Ottoman Empire and Russia versus Britain and France. Or even western German states versus the Junker dominated lands of the east where serfdom prevailed. Or the American south versus the north. Or Brazil versus Argentina. In every case, both sides started out largely agrarian, but the slave-holding or serf-holding territories stayed agrarian while the non-slave lands tended to industrialize.


Because, to put it simply, slavery tends to be profitable only in agrarian settings. And even then it cannot compete with industrialized agriculture. However, int he early stages of industrialization, slave-driven agriculture is profitable enough that it draws investments from industry, tending to concentrate capital in slave-driven farms and starving industrial ventures. Which is why industrialization simply never took off in slave based economies. (In each case above there were other factors, legal, governmental, cultural, and so one, all of which served to keep industrialization from taking root. But slavery and the economic advantages during relatively primitive periods of farming were a major factor in keeping industrial ventures from taking off.)

So, why did slavery not make the move into industrialization? Simple, the costs are higher than free employees. In agriculture it is easy for a single man to supervise dozens of slaves. In the detailed work required of industrial workers, the amount of supervision rises greatly. Unless you have a supervisor for every two or three slaves, it is far too easy for slaves to either do nothing to return quite substandard work. Even with that high level of supervision, slaves still produce at a dreadfully low rate, as we can see from the output of slave labor camps in Germany during the Second World War. Slaves simply do not produce very much or very high quality. And when you add in the costs of supervisors, as well as the fact that you must pay for food, housing, medical care, and so on for slaves, the costs end up being higher per unit of output than a comparable free worker. Which is why slave labor never really made the leap form agriculture to industry1.

Nor does slave labor really produce in terms of agriculture. Under primitive conditions, even under early modern conditions, the low yields of all labor make the low yields of slaves harder to differentiate, and so slave labor may be profitable. But once we move into the era of industrial farming, we run into the same problem we have with industrial use of slaves. Industrial farming, like industrial production, requires skills and careful application of labor. So we once again run into the situation where the amount of supervision rises relative to the number of slaves, and the output of slaves falls rapidly against free labor. 

Which is why I do not worry about the "unfair advantage" of slave labor. Slave labor is an anachronism, and one which only seems profitable until one performs a cost-benefit analysis. Slavery may have been profitable under pre-industrial conditions, at least in agriculture, but it was never profitable in manufacturing, and certainly not once the industrial revolution took place. Even in modern mechanized farming, a few free workers cost less and produce more than any number of slaves. All of which means it is absurd to "protect" our labor against slave labor, as the nations employing slaves are paying HIGHER labor costs, not lower. If anything, they should be protecting their slaves against competition from OUR workers.

Which brings me to my second topic, competition form workers who labor for "a dollar a day" or some other number which sounds absurdly low, until we consider local incomes and cost of living. This has been, traditionally, the bread and butter of protectionists, the argument they favor above all others. "How can you expect our men and women to compete against sweat shops in <fill in the favorite nation of the day> who get paid ten cents a month and still have a million people lined up for every new job?"  Which raises the question why EVERY US firm has not moved there if the labor is not only cheap, but efficient, and there is such a surplus2.

I have written about this many times, so I will skip the most obvious argument, that work is a means to an end, not an end in itself, or at least I will simply point out the obvious that most of us live our live sin complete opposition to the protectionist view of reality. For example, if we won the lottery, would we continue to work so as not to be "enslaved" to the factory workers and farmers? Or would we live a life of idle leisure, happy that others were providing for our needs? Likewise, so most of us buy cars, clothes, food, and so on made by others, or make all our possessions ourselves to avoid being "victimized" by the manufacturers? You can see form this how strange protectionist theory is when applied to individual actions. And, while that is not always a perfect guide, in this case it is does point out some of the illogic of protectionism3.

Even if we leave all that aside, there are still legitimate reasons to question the protectionist arguments about "low cost labor" overseas. We need to ask why labor costs less overseas, why we do not see every manufacturer flee to other nations, and whether or not there is some real benefit to using that low cost labor.

The simple fact is that wages are based largely on the amount of value a worker provides, and the amount of value a worker provides is, in large part, determined by the capital investment in that worker, both in terms of the tools put at his disposal, as well as education, transportation infrastructure, even health care assets made available. And that is why wages are low in some nations, and high in the US. The US invests a fortune in each worker, even the most unskilled use a massive quantity of education and transportation spending. As a result, even the most uneducated US worker is, on average, better educated than the workers in many nations, and the transportation and health care resources available make labor more reliably available, production easier, and generally benefits the manufacturer.

So, if US labor is so much more productive, then why would companies go overseas? The reason there is simple. For jobs which do require educated labor, but do require a lot of work, such as stitching, or even some assembly work, it simply is cheaper to employ poor, uneducated labor. Even without minimum wage laws, the US would be too expensive for much clothing work. So, it makes more sense to ship those jobs overseas, using US labor for work which requires a higher productivity per worker hour, or requires more education. In these cases, the increased productivity of the US labor is not important enough to overcome the higher cost.

And that, in the end, is the truth of the "unfair advantage". In some cases the low cost of labor, despite the low productivity, is an advantage, in others is not. And so some tasks, mostly low skill, high labor jobs, go to other nations while others stay here. Just as some industries, such as banana growing, are easier in other nations, so some types of labor are better done in other nations. It does nto give another nation an "unfair" advantage, it just means that nations have various strengths and weaknesses. And, as economic theory proves, we are better off when we take advantage of those relative strengths, letting each nation do what it does best, maximizing overall wealth. Just as I don't make my own car or clothes, leaving it to those who are good at such things, we are better off letting seamstress work be done elsewhere.

Which brings me to the one legitimate, or partly legitimate argument, that regulations make us non-competitive. And this somewhat true, as I touched upon with my mention earlier of minimum wage laws. The increased costs we experience due to OSHA regulations, EPA regulations, SUTA, FUTA, FICA and other laws and regulations which add to the cost of labor do have an impact on US competitiveness. Similarly, our minimum wage laws cut us out of competition at the low end of the skill spectrum. This is a legitimate complaint, though I disagree that the solution is to be found in tariffs.

First, though "pro-labor" laws do add to US labor costs, they do not ahve that much effect. We compete primarily with those nations investing an equal amount of capital in their labor, which means the wealthier European and Asian nations for the most part. And those nations, even more than the US, have laws which add to the cost of labor. If anything, the US has more lenient laws than much of Europe. Which means, even if we do increase the cost of labor, in terms of the skilled labor markets in which we compete, we do not have much of a disadvantage if any.

Likewise, minimum wage laws do not have serious impact on our export market4. Most minimum wage tasks do not relate to the export market. As I said above, we tend to export in areas which relate to high skilled, low labor products, which are not the minimum wage task. Minimum wage tasks in the US tend to be those service jobs and agricultural tasks which are for domestic consumption, not for export, nor producing good which compete with the import market. So the total elimination of the minimum wage laws, while good for our economy, would have little, if any, impact on our foreign trade situation.

Even if we did have a disadvantage from our minimum wage laws, or our labor cost increasing regulations, the solution is not to add a protective tariff. That is simply piling one bad "solution" upon another. Rather than fixing one bad law by adding another, would it not make more sense to simply fix the original problem? As we are a wealthy nation, with an educated work force, would it not be better to let workers shop around, forcing the market to provide safety provisions that the workers demand, rather than imposing universal "safety" regulation designed by an outsider, unaware of the needs of either employees or employers? Rather than adding tariffs to keep our "pro-labor" laws, it would make more sense to simply remove unemployment insurance, social security, OSHA, EPA, and so on, making us more competitive while simultaneously reducing the size and cost of government.

All of which brings me back to my original point. Rather than trying to "correct' other nations' "unfair advantage", we would be better off to take advantage of the cheaper good such "unfair" advantages provide. With free trade and minimal governmental involvement, we can enjoy the many benefits trade brings us in our role of consumers. However, it seems many would rather focus on our other role as producers and call for many anti-competitive interventions, which both deny us cheaper goods, and, as a result of the retaliatory actions of other nations, often deny us the outlets we need in our role as producers. 

All of which is a very round about way of saying protectionism, far from "protecting jobs" often ends up costing us more jobs than it supposedly saves, and makes us, even in the limited terms used by protectionists, worse off than before we started.


1. It is noteworthy that the nations which have sued slave labor in industry have been the ones which were most authoritarian. As the authoritarian nations already saw a low return due to their counteproductive incentives, and as they were effectively already paying for the upkeep of all their citizens anyway, the costs of explicit slavery were no more than the costs of implicit slavery under authoritarianism, making it not so much a losing proposition for them, as simply a lateral move, making explicit what was already implicitly true.

2. Recent arguments make this statement even more absurd, as they focus on outsourcing to India. Protectionists seem to create a caricature India, based on their experience with fairly well educated immigrants from northern India. In their mind, India is full of unemployed PhDs, all speaking impeccable English and yet willing to work for ten cents a day. Somehow they conflate the relatively wealthy and educated north with the relatively poor south, assuming the more prosperous north has the low wages and low cost of living that prevails in the south. And that creates quite a potent straw man against which they can argue. 

3. Even with a national perspective, protectionism makes little sense. Let us suppose all the nations of the world were to provide for our every need, and demand no goods in return, just IOUs. Would we be better or worse for it? We would have all the goods we could ever want and would have lost nothing. Again, reductio ad absurdum is not always valid, but it does point out that protectionism often errs by confusing means and ends.

4. The minimum wage does have more impact on domestic labor, leading tot he use of much illegal foreign labor in high labor tasks which must be performed domestically (construction labor, gardening, harvesting, etc.). 



Rather than fill the above with links, I am going to link to all my posts on protectionism here:
Exploiting Workers?
The Shortcomings of Pragmatism
The Theory That Wouldn't Die
Beware Populist Deception
Fear of Trade
The Limits of Econometrics
The World's Oldest Myth
Authoritarian Oil Talk
I Have Seen The Light
Free Trade, Employment, Outsourcing, and Protectionism
When Help Hurts
Pragmatism Revisited
Misplaced Blame and A Power Play
Remember I Predicted It
Inescapable Logic
Smaller Government , Fair Weather Friends and Special Cases
Cheap Lighters, Overseas Dumping and Monopolies
Jobs, Jobs, Jobs, and More Jobs
Capital Investment
Fairness and the Free Market
More Proponents of Protectionism
John Stossel Imitates Me Again
Has No One Heard Of Lord Say?
Retaliatory Tariffs
Clarfiying My Argument
The Limits of "Scientific" Management
The Endless Cycle of Intervention
Exploited Labor
Planning For Imperfection
Protectionism Right and Left
I think that covers the topic pretty well. If I omitted anything, please post it in the comments, so I can update the list above.

Originally posted in Random Notes on 2009/04/21.

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