QuoteOriginally posted by: PatConsider the importation of a widget in which the sole competitive advantage (of the exporting country) is lower labor costs.> Is this a net benefit to the economy which is importing the widget?The economy gains on the supply side because the widgets are cheaper by the difference in labor costs (less the extra transportation,packaging, and handling costs). This is both a direct benefit -- money saved can be spent elsewhere -- and an indirect benefit -- cheaperwidgets, means there will be more areas in which using a widget gains more value than the (new lower) cost of the widget.The economy loses on the demand side, as the wages (costs paid for labor) leave the economy. Again there are direct costs (the forgonewages paid to labor cannot be used to purchase any goods and services) and a multiplier (purchasing goods and services would transfermoney to the providers of the these goods and services, who in turn would also purchase goods and services, etc.)Analyzing aggregate changes in GDP misses a lot of the figurative and literal richness of the effects of trade. Yes, it is true that trade means that M widget makers might lose their jobs. Yet N*M widget buyers benefit from lower widget prices (with N increasing with increasing widget making productivity). Trade makes widgets more affordable so more people, especially poor people, can buy and enjoy widgets. Thus trade increases consumer surplus (which isn't measured in the aggregate GDP). Moreover, trade creates a differentiated market with discount imported widgets and high-end domestically-made widgets. Finally, trade creates jobs in transportation which actually tend to pay similar wages to those in manufacturing.QuoteOriginally posted by: PatThe question is under which circumstances would the trade still be (net-net) beneficial to the economy?I think it is ethically questionable to define "the economy" as just one nation's economy as if the humans living in low-cost-labour countries mean nothing. The unit of analysis should be the entire world, not just one selfish nation. The very clear pattern of the past few decades has been one of increasing standards of living in all those poor export-driven countries. But if we accept (and defend!) the rights of voters (widget workers, widget consumers, and widget traders) to be selfish, then the simple fact that consumers of widgets plus traders of widgets almost always outnumber domestic makers of widgets means that voters should tend to favour cheaper widgets (i.e., trade). QuoteOriginally posted by: Pat> Said another way, few people would argue that making trade free-er (eliminating trading barriers) is stimulative in the short run ... stored wealth can be used to purchase more products as they become cheaper. The question is whether the overall reduction on the demand side is a depressing force in the medium term: Mightn't the reduction in wages decrease the aggregate buying power of the economy? And what would the long term outlook be? If there are always places in the world where people are willing to work for subsistence wages, doesn't this mean that if trade was perfectly free, then all labor would be priced at subsistence wages? After all, skilled labor is just labor with a few years of experience. I.e., is the pricing power of labor just transportation costs? If so, does this mean that the eventual outcome is poverty for nearly everyone, a higher fraction of the population in proverty each generation as transportation costs are relentlessly driven down.If we believe that trade diminishes the aggregate economy of the importer, does it not boost the economy of the exporter -- creating wage growth for the exporter? The funny thing is that "subsistence wages" grow over time because the definition of subsistence becomes more lavish over time. Those who live on "subsistence wages" in the EU and US have a lifestyle that would be the envy of most of the people on this planet and almost all of the people who have ever lived throughout history. And, today, those who have a "subsistence wages" in the coastal cities of China have a much higher standard of living than those who live in rural China and those who lived in those same cities a few decades ago. Just look at the growth of the BRIC economies both overall and at the median wage level. The UN's own estimates of Human Development show huge gains in almost every single low-cost-labour country (and in almost every high-wage country, too).The only condition under which subsistence wages would stay perpetually low is if the population growth rate in the low-cost country exceeds the country's economic growth rate (and remember that this low-cost country is potentially serving 7 billion consumers so the opportunities for growth are vast).QuoteOriginally posted by: Pat> If we were headed down this path, what would the economy look like? Wouldn't it look a lot like today's economy, where there is ever more stringent competition for a decreasing number of jobs that ensure "middle class" life style? With governments trying to repair the demand side of the economy by running huge deficits, and using direct and indirect transfers to keep the demand side -- and economy-- inflated?The Western governments face a triple challenge. It's not just the effects of world trade that make their economies seem moribund, it's also their increasingly unfavourable demographics (aging populations) plus the after-effects of the credit bubble which created 5-10 years of artificially-high growth rates. I fear that the Western governments will keep trying to artificially maintain the standard of living created during the good times while eschewing the kinds of long-term investments that could actually create a better economy. Borrowing money for direct consumption (i.e., high spending on social welfare & pension benefits) seems very unlikely to create the level of fundamental growth in the tax base that will be required to repay their sovereign debts.QuoteOriginally posted by: Pat> And yes I have studied economic history. Besides the depression, there is also the industrialization of Japan in the 50's & 60' (which was achieved by severely restricting imports), the industrialization of the US between, say, the 1850's and 1900's (which was also achieved by taxing imports), etc. In fact wasn't one of the key proximate causes of the US civil war exacty this issue (harsh import duties imposed to protect the industry of the North and the belief in the North that a free man should not have to compete economically with slave labor)Self-sufficiency is a strategy that may have worked in the past, but cannot work today (except if a country wishes to remain a backward agrarian economy in which almost no one lives at the modern "middle class" standard of living). Far too much of today's economy depends on specialized materials and specialized manufacturing systems that are only available at the global level. A small economy simply cannot produce the same range of "middle class" products (e.g., cellphones, cars, appliances, consumer electronics) as efficiently as the global economy. Even the modern middle class diet now depends on free trade to provide the full range of food stuffs (e.g. bananas, citrus, year-round fresh veg, imported cheeses, wine, spices, etc.)
Last edited by Traden4Alpha
on November 22nd, 2013, 11:00 pm, edited 1 time in total.