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The Angry Economist

India, Bush, And The Future Of Foreign Trade
Posted by William P. McGowan, Ph. D. on Mar 12, 2006 - 7:46:00 PM

UNITED STATES— With his recent trip to the Near East, George Bush has succeeded in breathing new life into the controversial topic of outsourcing by telling the students and professors at India's equivalent of the Harvard Business School that America was not afraid of Indian competition, but welcomed it.  This contrasts dramatically from the reaction here at home, where Bush's speech was denounced as another example of selling the American worker down the river.

The controversy is over what is known as "outsourcing." You know, you call customer service for that gadget you just bought, and you're talking to someone in Punjab province of India.  Critics of outsourcing claim it is a means of impoverishing the majority of American workers for the benefit of a very few, eliminating jobs here in the United States and moving them abroad because they can be done cheaper.  Opponents of globalization are also correct in that it creates job dislocation here, but these are micro-economic effects that contribute to our country's macro-economic health.

A good local example is the Los Angeles Basin and the Cold War.  At the very end, after Reagan had been petal-to-the-metal on Pentagon spending for more than seven years, the Los Angeles military industry was humming to the tune of $3 billion a year.  This was great while it lasted, but because the economy was so focused on a single industry and a single customer, it was highly vulnerable to the kind of change that inevitably followed the collapse of the Berlin Wall.   Suddenly, a robust economy was decimated; people lost jobs, homes, and marriages.  There was painful dislocation.

But then, a funny thing happened.  Things got better.  Smart people found new things to make, and sell.  Over time, they began to prosper, and like most capitalist economies, voids get filled.  Today, the Los Angeles basin is one of the most economically diversified in the world. And in the end, the microeconomic of the Los Angeles basin contributes to the macro economy of the nation as a whole.  

And so it is with international trade.  While critics will correctly point out the microeconomic and social pain created by capitalism of this variety, they fail consistently to address the macroeconomic benefits. And time after time, history has proven that trade increases economy activity, which in turn leads to higher standards of living for both countries involved in the transaction.   This was formally recognized in policy with the creation of the General Agreement on Trade and Tariffs (GATT) at an economic conference at a place called Bretton Woods near the end of World War II.  Named after the resort in New Hampshire where the conference was held, the conference gathered the world's greatest economic and political minds in order to identify the causes of the Great Depression and the concurrent rise of totalitarianism. 

Their conclusion was that protectionism had caused both. By the time when the conference was held in 1944, most economists had agreed that the Great Depression and the rise of totalitarianism was caused by a rolling global recession made worse by politically motivated trade barriers. In order to make sure that never happened again, the policy makers had their first "round" of GATT treaty negotiations. Though these treaties frequently get bogged down in localized politics over which industry needs "protection," the running system of treaty negotiations HAS improved living standards and political stability wherever it is tried.  Trade kept Europe from going Communist in the late 1940s and made it the vibrant society it is today; it defeated communism in the 1990s, freed millions from political oppression, and created entire new markets and services.

That this process is affecting American workers should be no surprise, because no one said capitalism is perfect.  Over the last fifty years, we've seen large-scale experiments with alternatives to capitalism, and the results weren't pretty. Capitalism may be unfair, and through outsourcing may create economic "victims," in macroeconomic terms, no one's found a better alternative.






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