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.
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.