The International Trade in Jobs and Workers

It is an article of faith among most economists and businessmen that barriers to trade between nations create inefficiencies and lower standards of living.[1] What kinds of barriers to trade exist? Tariffs are taxes on imported goods that raise the sales price to a level that makes the import uncompetitive with a domestic product. Government subsidies (payments) to domestic producers of some goods allow them to hold down prices compared to imports. Government regulations and standards for goods which vary from one country to another can force adaptation costs onto foreign producers, thus raising the price of their goods to a point where it isn’t worth the trouble to sell in a foreign market. The effect of these barriers is to reduce competition, efficiency, and specialization, while raising the cost of living for consumers.

So, trade barriers are bad. In 1994 businessmen won passage of the international treaty called the North American Free Trade Agreement (NAFTA). This treaty abolished tariffs and other barriers to trade on 70 percent of the goods produced and consumed in Mexico, the United States, and Canada. What is the up-side of this agreement? Trade between Mexico and the US tripled during the decade and a half after passage of the treaty; Canadian exports also tripled. What is the down-side of the agreement? Wages haven’t gone up in either Mexico or the US.

In the United States the response to NAFTA is ambivalent. The normal line of development in an advanced economy is that low-wage foreign competitors in low-skill sectors take jobs from the advanced economy, while the advanced economy creates jobs in high-skill and high-wage sectors. That is one of the things that seem to be happening in the United States. By 2008, three million American manufacturing jobs had been lost since the passage of NAFTA. This doesn’t count the many more jobs lost during the “Great Recession.” On the other hand, more jobs were created in those years than in the fourteen years before passage of the treaty. Similarly, highly-mechanized North American farming is far more productive and cheaper than is much Mexican farming, so agricultural exports to Mexico have also greatly increased. However, neither American politicians nor American media have been very good about pointing out the realities of the situation. Job-loss and displacement normally gets a lot more media attention than does job creation. “If it bleeds, it leads.” Those three million manufacturing jobs that went up in smoke since 1994? Mostly they went to China and India, not to Mexico.

In Mexico the response has been profoundly hostile. Mexicans dislike NAFTA by about two-to-one. Why is that? About forty percent of Mexicans still live in poverty. Small and inefficient Mexican farms have been unable to compete with low-cost imports from North America, so many Mexican farmers have been driven to the wall. There was been a huge increase in illegal immigration to the United States, until the “Great Recession” hit. Eight million of the twelve million Mexican illegal immigrants in the United States have come since the passage of NAFTA. Is NAFTA solely or even principally to blame for the flood of illegal immigrants? Not necessarily. One Mexican observer argues that the upper classes have creamed off all the rewards of expanded trade. This has kept the benefits of increased trade from flowing downward in society through higher taxes on the well-off, better services for ordinary people, and higher wages for most workers.

This raises the possibility that the Mexican upper-class is intentionally exporting much of its population to the United States in order to defend an inequitable social order at home.

[1] “Coming to terms with NAFTA,” The Week, 30 May 2008, p. 13.

Exporting Jobs

Companies are owned by private investors seeking the maximum return on their investment. In the decades after the Second World War, the United States slowly became a high-cost place to do business. Labor costs (wages and benefits), and environmental and workplace safety regulations played an important role in this process. The weakening quality of the American workforce in terms of science and math also played a role.

Beginning in the late 1970s major American firms began seeking higher profits through the lower production costs that could be attained by moving operations outside the United States. General Electric, under Jack Welch, figures as one of the leaders in this movement and GE was not shy about encouraging its own suppliers to do the same. Many other manufacturers followed the example of GE. For example, in 1992 the Ford Motor Company overseas manufacturing sector employed 47 percent of its workforce, but still employed 53 percent of its workforce in the US and Canada. In 2009 the overseas operations employed 63 percent of its workforce, while 37 percent were employed in the US, Canada, and Mexico.

Then, in the 1990s, the growth of the Internet exposed service industries to globalization as well. Computer programmers have seen 13 percent of their jobs exported to foreign countries.

Furthermore, the United States has the second highest rate of taxation on corporations in the world. The nominal tax rate on corporate profits is 35 percent. Companies have spent decades lobbying Congress in successful efforts to create tax loopholes, so the average effective rate is 25 percent. In Canada the corporate tax rate is 16.5 percent; in Germany it is 15.8 percent; in Ireland it is 12.5 percent. Thus, the tax rate on corporate profits in the United States remains higher than the rates in many foreign countries.

Many American companies have created foreign branches to take advantage of lower labor and regulatory costs, and lower rates of taxation. Moreover, American corporations with operations abroad must pay the difference between the tax rate in the country where they earned the profit and the tax rate in the United States when they repatriate those profits. Rather than do so, the companies reinvest the foreign profits in their foreign profits in expanding production overseas, rather than reinvesting in the United States. America is almost alone in double-taxing profits earned abroad.

In 2010, the Simpson-Bowles commission President Obama recommended that the US tax rate be lowered to 23 percent and most loopholes closed. American business leaders generally accepted this proposal. However, the proposal also encountered opposition from the left to any reduction of taxes on business. According to one critic of corporate tax avoidance “It’s unpatriotic, it’s unfair, and we can’t afford it.”

Who profits from this strategy? American corporations profit: in 2009 47 percent of the revenues of the five hundred leading American corporations came from their overseas operations. Developing economies that host American corporations profit: between 1995 and 2008 China’s GDP grew an average of 9.6 percent and India’s GDP grew an average of 6.9 percent. It’s harder to say that America itself benefits. Between 1995 and 2008 the GDP of the United States grew an average of 2.9 percent. In 1950, the United States Government pulled in thirty percent of its revenue from taxes on corporations. In 2010, the United States Government pulled in nine percent of its revenues from taxes on corporations.

Corporate “inversions” are just the latest example of these problems.

“Where America’s Jobs Went,” The Week, 25 March 2011, p. 13; “Taxing corporations,” The Week, 2 September 2011, p. 13.