5 Myths About Globalization, Free Trade, And Protectionism
1) “Protectionism” or “isolationism” limits consumers to inferior products.
The statement I often hear uttered goes something like this. “It promotes bad products and drives up the price.” This is a false notion usually derive from good economics’ worst enemy “common sense”. What really happens is a country like the US develops things like autos, electronics, and other durable goods inside an economy that requires wage, environmental, and safety standards. These are things that are part of the moral fabric that make up our nationality. Then economies without such standards duplicate the process with out all that overhead. The more restricted economy must then attempt to produce at a disadvantage. In the end a product requires a certain amount of labor hours to produce. That is a constant. So are the costs to be safe and environmentally sound. R&D and quality assurance are not constants and can be re-budgeted to compete. So in order to keep up with the “unleveled” playing field, a producer has only a few choices. Cut the cost of R&D, quality assurance, or both. They could also buy most of their parts from the less regulated economies. We have seen plenty of this. Left alone internal competition would have yield the required quality from the markets. Probably even better products. In reality, external competition often drags down quality advancements.
2) Globalization helps emerging economies.
This is a common and self righteous and pompous assertion that usually comes from people who think that they have the best way of life and everybody else should be like them. The truth of the matter is that globalization gets a lot of wealth in the hands of very few. It hurts the people in the consumer economy by reducing their ability to maintain a previously enjoyed standard of living. (Study: Men in Their 30s Make Less Than Their Dads. http://www.npr.org/templates/story/story.php?storyId=10438943) Moreover, it reduces local ability to demand fair compensation by forcing them to compete for jobs un an unfair playing field. Their cost of living and level of comfort was promoted by their collective innovation.
It is equally damaging to the economy where the new factory or industry is established unnaturally. It hurts the economies that the new industry invades by raising the cost of living for people who hadn’t developed it themselves. It does this by giving a small percentage of people in the developing countries jobs that pay better then the sustainable environment that had existed previous to industry. Anybody who is not fortunate enough to get one of these jobs becomes disadvantaged through no fault of their own. A better description of this can be found on the post, Economics from the CEO perspective (http://logicandpolitics.blogspot.com/2008/12/economics-from-ceo-perspective.html)
You will find that people often have to work for the companies and their culture will have been changed because of it. “You will be assimilated. Resistance is futile”. If I have lost you on this, it is quite simple, higher paying jobs and lower environmental and safety practices do not help the “emerging economy”. Often those people would be quite happy to live out their lives as they had for thousands of years. To say, “they are not like us and they should be.” is a rather selfish and damaging cultural view.
3) The advanced economies need the consumers of the 3 rd world economies they are competing with.
People often say things like, “look what the world buys from the US. What if the world stopped buying soda, fast food, and Microsoft products from the US.” Generally these are low cost items that are A) not durable goods and B) have a better profitability at the distribution point. Meaning that even though they are “American Products” their real source of wealth goes to the people who sell them. I can not think of too many durable goods that are coveted overseas. If everybody pulled back and didn’t allow trade, there would be winners and losers. With in the economy there would be a labor shuffle. But the US would be a definite winner. Want proof? Look at the trade deficit. That simply means we are consuming more then we produce. You can not do that in a completely isolated economy. It is a matter of the US consumer only need so many cars and they have plenty of internal producers to supply them.
4) Globalization helps by supplying low cost products to the poorer members of the advanced economies.
This forsakes a really obvious logical flaw. PEOPLE WITHOUT JOBS CAN’T BUY ANYTHING, NO MATTER HOW CHEAP IT IS. The reason some of the people are poor in this country is because they can’t find decent paying jobs. Wal-Mart loves this logic. “We supply inexpensive goods to people who otherwise couldn’t afford them.” They can’t afford them because you are buying goods from the people who took their jobs!! Here is another reality dope slap for you. People with jobs will pay more for products if they have to. They might grumble, they might even start email chains telling everybody to not buy the product for one day. However, they will still buy it because they can. People who are unemployed and have no income can’t buy even the less expensive product. In order to purchase the things they really need, they will have to rely on the government to give them resources to do it. Look US citizens will dam and chastise people who employ illegal immigrants, children slaves, and unsafe environmentally hazardous productions techniques. They will even sue the hell out of companies if they find them in their neighborhood. But they will run, not walk, down to their nearest Wal-Mart to buy products made under these exact same conditions if not morally more reprehensible. That choice shouldn’t exist. We are addicted to low cost like crack. Like crack it feels good when we do it, but is destroying us in the end.
5) The great depression was caused by isolationism.
There are lost of people who make this claim, yet it is one that has never been backed up by any notable (by that I mean one with a track record of being right) economist. The idea that the reason we didn’t have jobs was because the US restricted industries from selling their products around the world to people who didn’t have money to buy them is ludicrous. We are talking about the 1920’s. The world was way less developed and much larger, logistically speaking, then it is today. The cost to move stuff back then would have been enormous and not worth doing. Who was going to buy the American automobile, and on what roads were they going to drive them? There was no China or India with billions on population wanting to buy our junk. What does happen when the US opens is trade barriers is an initial surge in new economy buying product they never knew existed. That is followed by a feverish period of the new consumers reverse engineering, and then start producing their own version much cheaper.
What we needed to get out of the Great Depression was to create jobs. Then along came the great job creator, war. Workers willing to work for low wages, in unsafe conditions, with very few benefits is the ideal situation created by war. You cut the unemployment rate at both ends. You create jobs and reduce employable population. Goodbye depression. Then again, every economic policy has its equal and opposite reaction, but that is for another post.
In the 1920’s we were isolationist because population and technology limited us to it. Today we must return to it because economics demands it. What Obama should do (aside from the million other things I have suggested in previous posts) is set a trade deficit limit. “These rules apply once the deficit reaches ‘X’ amount of dollars and/ or another country owns ‘Y’% of our national wealth.”
We are facing an economic meltdown in the US. It is affecting the world. No other country could have such a meltdown and have the same influence. That in and of itself sets us apart. For those who have ever flown on a commercial airline, you might recognize the following set of instructions. “In the event of an emergency, oxygen masks will drop from the ceiling. Please secure your own before helping the person next to you.” This is to ensure that you do not pass out in the attempt. Here in the US we need to do whatever it takes to secure out own economic prosperity before we start back helping to bring our brand of prosperity to the world.
If you want to know who would actually loose wealth to the US taking a more isolated approach, look at who is complaining. What you will see is that the people who we hold the largest trade deficits with are the biggest complainer. What would you tell the person on the other end of the line if your credit card company called and said that you are not spending enough? That is basically what the opponents to “protectionism” are doing.