International Trade Because of the Increasingly Globalized

International Trade

Because of the increasingly globalized nature of the economy, manufacturers, retailers and service providers have more options to locate sources of supply and labor where overall costs are lower than in their home markets. In industry today, parts and supplies frequently come from many different countries, such as the Boeing 787, with 65% of its components outsources to foreign companies (Hill 2011). Another example is flat-screen TVs, which have their components manufactured in Asia, assembled in Mexico then shipped to distributers in the United States. Vizio has a small office in California with less than 100 employees to handle sales and service, but with all of the design, manufacturing and assembly done overseas. Even though American companies originally developed this technology in the 1960s, they did not continue with it and forfeited this market to Asian countries (Hill 2011). This has happened time and again in American industry, which has been devastated by Asian imports since the 1970s. In the case of China, which has become the largest exporter among the developing nations, wage-costs and currency values have been held artificially low to stimulate exports, while the state subsidizes these export industries far more than in the United States. Economists who once believed in the comparative advantage theory of David Ricardo have changed their minds when it comes to the China trade and argue that its unfair advantages have cost the U.S. economy millions of manufacturing jobs, increased unemployment, lowered incomes and raised the costs of adjustment to the U.S. government.

American economists who once believed that trade with China would have only on minimal impact on manufacturing and blue-collar jobs in the U.S., have been changing their minds in recent years. For years they argued the benefits of the China trade would outweigh the costs, but now they realize that the "damage to the U.S. economy has been deeper" than they originally predicted. Those regions most exposed to Chinese exports have suffered the highest loss of manufacturing jobs and declines in overall employment, as well as higher costs to the government in the form of unemployment insurance and food stamps. Costs to the government alone wiped out one-third to two-thirds of the gains from trade with China, and these adjustment costs were far higher than economists and politicians asserted in 1999 (Lahart 2011).

Two centuries ago, the classical political economist David Ricardo put forward the comparative advantage theory that under free trade conditions each nation would gravitate towards those exports that it did best, yielding maximum benefits for all. Over 90% of U.S. firms that export are small businesses with fewer than 100 employees, although these account for only 20% of total exports. National markets have not yet broken down completely, particularly in consumer goods, and there are still major distinctions in legal regulations, trade barriers, culture and traditions and consumer tastes among nations, which "frequently require companies to customize marketing strategies, product features, and operating practices to best match conditions in a particular country" (Hill 2011). Most globalized markets today are for raw materials like oil, rubber, aluminum and iron ore, and manufactured goods like computers and aircraft. Rival firms in this globalized trade include General Electric and Rolls Royce in aircraft engines, Boeing and Airbus in aircraft, and Ford and Toyota in vehicles.

In recent years, though, economists like Paul Samuelson have challenged classical Ricardan theory on the grounds that the type of trade practiced with China has devastated blue-collar jobs in America. Alan Blinder, who once supported free trade policies, has changed his mind because "outsourcing to lower-wage countries puts millions of American jobs at risk." China's growth has been so unexpectedly rapid that its exports have swamped those from other developing nations, and American counties where manufacturing is facing the heaviest competition from Chinese imports, such as appliances, suffered higher job losses, reduced incomes and the largest declines in manufacturing (Lahart 2011).

All fifty states experienced net job losses from trade with China in 2001-10 for a total of about 2.8 million jobs, while the trade deficit grew from $84 billion to $278 billion. In fact, during the time that China has been a WTO member this deficit only decreased temporarily one time, due mostly to the recent recession and declining consumption in the United States. About 1.9 million of the 2.8 million jobs lost were in manufacturing, 32% of those in computer and electronic parts, and others losses in plastics, rubber, motor vehicle parts, textiles and apparel -- all the familiar, low-cost exports from China and other Asian countries. Government repression in China ensures that labor costs there are 40-80% lower than they would be in a free economy, while the Chinese government also ensures that the national currency is artificially undervalued by 40-50% (Scott 2011).

In October 2011 the Senate voted for trade sanctions against China because of currency manipulation on the grounds that it has deliberately kept the yuan undervalued. This increases the costs of U.S. exports and lowers those of imports from China. Although the Chinese government allows the yuan to fluctuate in a very narrow range of about 6.5 to 7.5 to the dollar, it held it steady throughout 2008-10, when Chinese exports declined because of the recession in the U.S. And other Western countries. At the WTO, the Obama administration has not yet accused China formally of currency manipulation out of a "well-founded fear of sparking a trade war," while China usually allows the value of the yuan to rise slightly in response to America "sabre-rattling" (Economist Online 2011).