More Trade Myths Exploded

Opponents to free trade frequently make the argument that free trade costs American jobs. This line of rhetoric has been popular among isolationists of the left and the right since NAFTA and before.

Daniel Griswold of the Cato Institute finds that the numbers for these claims just don’t add up. He references this Deloitte and Touche study on US foreign trade that finds that American foreign direct investment in the Third World (where these American jobs are supposed to go) makes up only 9% of the total volume of US foreign direct investment.

The reasons?

As many American companies can attest, investing profitably in China and India remains a challenge—because of their underdeveloped infrastructure and legal systems, undereducated workforces, remaining trade barriers, and limited consumer markets. American companies invest less than $2 billion a year in China, and far less in India. That compares to the nearly $200 billion invested each year in our own domestic manufacturing capacity, and $100 billion a year invested by American companies in the rest of the world (and most of that in other rich countries). At the end of 2001, American companies owned more than 10 times as much direct investment in the tiny, high-wage Netherlands ($132 billion) than they did in China ($10.5 billion) and India ($1.7 billion) combined. Obviously, wages are not the only, or even the main, driver of foreign investment.

If there was some mass exodus of jobs based on lower labor standards and wages, you wouldn’t see 94% of US FDI going to countries with anything but low wages and worker standards.

The reasoning for this is relatively straightforward. As I noted in a previous entry outsourcing isn’t an effective business strategy. Outsourcing assumes that cutting labor costs is the best way of cutting overall costs, and that simply isn’t true. If there were such great costs savings through foreign labor the levels in FDI going towards countries like India and China would be a flow rather than the trickle that is currently being seen.

Instead, we’re seeing a relatively small flow of capital towards these countries. This clearly doesn’t support the idea of jobs flowing overseas and shows that the current arguments about the supposed destructive effects of free trade don’t match the data any more now than they did with NAFTA. It is clear that the best interests of the overall economy lies in promoting and encouraging more trade rather than less.

3 thoughts on “More Trade Myths Exploded

  1. Damn. I had no idea that the mighty Dutch had such a stranglehold over our economy. Either the windmill industry must really be taking off or else we’re paying for the needles that their government is giving out free in Amsterdam.

    I guess it’s just slipped under our noses all these years. We’ve been hearing reports of hundreds of thousands of American jobs relocating in China and India, when the real threat has been those conniving dastardly Dutch, stealing our jobs and deferring blame onto the Third World. When I look around the items in my house, I’m finally seeing the light. About 95% of the goods from my television to my toaster say made in the Netherlands on it. It’s no wonder that Americans are invested in the Dutch economy more than 10 times more than those of China and India. The simple solution, one would guess, is that we all need to move to the Netherlands where we can enjoy the high standard of living and take some of the jobs leaving America and moving to the Hague instead of Calcutta.

    But I thought the European economy was in utter shambles, and that their very existence is an act of genocide against Africa. One would have to infer that if American corporate investment in the Netherlands is that high, perhaps we’re just as responsible as they for “starving Africans”. If Chirac is the second coming of Hitler, what does that make ADM, Monsanto and Cargill who are payrolling it through generous contributions to the economy of the Netherlands (and presumably every other genocidal European country as well).

    Either way, thank goodness the rhetoric of the Cato Institute has cleared things up for us all. We were beginning to notice a pattern of job losses to the tune of 17% of all manufacturing jobs in three short years, but lo and behold, the same right-wing institution that wants to privatize all highways and schools has told us that the Netherlands is the real enemy and China and India are red herrings who aren’t really importing our jobs by the boatload. Millions of unemployed Americans must be relieved.

    Dinosaurian, rightist “think”-tank outperformed by neocons. Core credo: Social Security privatisation, pension privatisation, health care privatisation. In other words: human life privatisation.

    And so does Bush as he implemented primitive steel protectionism to secure West Virginian blue-collar votes.

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