On May 24, 1993, National Review magazine wrote, “NAFTA will create twice as many U.S. jobs as it will destroy, according to most studies.”
At the same time The Group of Lisbon wrote in their book, “Limits to Competition,” that “the main result ... will be a new wave of massive unemployment in the United States. Recent studies anticipate that approximately 20 to 25 million jobs will be cut in the United States in the next 20 years.”
Who proved to be right about the effect of international trade?
If one quadratic fits U.S. employment data from 1940-1993 and then extrapolates to 2013, one finds that we should have about 164 million jobs. The current Bureau of Labor Statistics count is 136 million jobs. This is a cut of over 25 million jobs. Why was the Group of Lisbon right and the NAFTA advocates so wrong?
International trade is justified by economists by appealing to comparative value theory (CVT). CVT is successfully applied to interest rate swaps. In this case, each transaction is characterized by four numbers (fixed and floating rate at which counterparties can borrow). If the numbers satisfy a simple arithmetic relationship, the swap is done and both parties benefit. This analysis does not extend to international trade.
Suppose we close an iPhone factory in California, ship the work to China and import the phones. China now has an iPhone factory, and Apple has cut their costs by getting rid of unwanted Americans. Both parties are said to benefit from this transaction. There are two fundamental problems with this assertion.
Problem 1 is the assumption that work can be created to provide employment for those who lose jobs to foreign trade. Writing in “The War for Wealth,” Gabor Steingart points out that there is a roughly fixed amount of demand to be served in the industrial countries, but the accessible labor force has grown by as much as 1 billion people. Alan Blinder said in 2007 that another 40 million American white collar jobs are going offshore in our lifetime. The empirical reality is that exported jobs dominantly result in increased social service consumption, i.e. the gain is privatized, and the loss is socialized.
Problem 2 is the more powerful force of arbitrage. Suppose an American car costs $31,600, including $1,600 for health insurance. An identical Chinese car costs $30,000, since there is no employee health insurance in China. The American car loses in the marketplace, and the health insurance is dropped. Arbitrage, not law or public consent, mandates that employer health insurance is too expensive, and this American value is killed. The car worker loses his job as arbitrage incessantly eliminates the wage differences between Americans and Chinese.
“The race to the bottom” is not union sloganeering; it is mathematical fact.
The cumulative effect of all comparative value transactions has been to make the U.S., Eurozone and Japan poorer and more indebted since China joined the WTO in 2001.
There is significant quantitative empirical evidence that international trade is the fundamental mechanism of privatizing gain and socializing loss. If one regresses debt/GDP against manufacturing job loss, one finds that job export closely predicts a country’s debt/GDP.
Because of international trade, the governments in the U.S., Eurozone and Japan are in the terminal stages of failed states: first the surplus was squandered, then the easy credit and now printing money to create an illusion of prosperity.
It is time to ask, “Why are we doing this?”
Unregulated international trade is an economic dead end of mass unemployment, deflation, international contention, societal division and the corruption that inevitably follows the concentration of economic power. Only when we reject failed ideology will the American Dream for average Americans be restored.