-- MarcRoitman - 07 Dec 2008

The Effect of the Internet on the Labor Market and Free Trade

The basic principles of free trade that Adam Smith and David Ricardo wrote about two centuries ago remain valid today. Nations benefit by specializing in the tasks they do best and trading with other nations for the rest.1 Despite clear economic support for open markets, politicians continually engage in protectionist practices that heavily regulate trading and cause inefficiencies.

One of the most common arguments made by politicians in the United States against free trade is that American wages will decrease because of the willingness of foreign workers to work for less, and as a corollary to this, that many jobs will be shipped overseas to where the costs of labor and production are lower. Most economists, proponents of free trade, would argue that this logic is economically unsound. In terms of wages, if there were only one industry and occupation in the world, then free trade would indeed cause American wages to decrease towards the level seen in other parts of the world. However, modern economies clearly consist of a diversity of employment opportunities. If Americans continue to work in industries where America has a comparative advantage, then wages will remain higher. Wage level depends fundamentally on productivity, and according to leading free trade economist Alan S. Blinder “as long as American workers remain more skilled and better educated, work with more capital, and use superior technology, they will continue to earn higher wages.”2

Communications technology and the Internet, however, may be fundamentally changing the way economists look at free trade. Blinder himself admits that free trade economists may have to adjust their theories. He writes, “We used to think, roughly, that an item was tradable only if it could be put in a box and shipped. That's no longer true. Nowadays, a growing list of services can be zapped across international borders electronically. It's electrons that move, not boxes.”3

As the technology advances, more and more services will become deliverable electronically. The computer age has already changed the low end labor market in myriad ways. We are already familiar with voice-activated operators when we call any customer service help line. John Tanny adds, “Thanks to the proliferation of ATM machines, self-serve ticket kiosks at movie theaters, and the Internet, we now for the most part no longer deal with live human beings when we go to the bank, the movies or buy airline tickets.”4 And, as Blinder notes, it's not just low-skill labor markets that will see a decrease in labor demand. “It's also high-skill services such as radiology, architecture and engineering -- maybe even college teaching.”5

These fundamental changes to the labor market, however, do not justify an increase in protectionism. The argument that protectionist policies save American jobs in the long run is false. It is true that in the short-term economy, trade barriers will allow some Americans to keep their jobs. However, in the long run, it is unlikely that any jobs are saved. Protecting one American industry through barriers to trade will impose higher costs on other industries, resulting in a loss of jobs. Blinder cites two examples of this. In the 1980’s, quotas on semiconductor imports caused a huge increase in the price of memory chips, which in turn damaged the computer industry as a whole. The other example is the quota on steel importation, which requires car manufacturers in the United States to pay more for raw materials, which in turn makes them less competitive.6 And what is the cost of saving an American job in the short term? While the estimates differ widely across industries, the cost is always higher than the wages that would be paid to the protected worker. According to Blinder, "One study in the early 1990s estimated that U.S. consumers paid $1,285,000 annually for each job in the luggage industry that was preserved by barriers to imports, a sum that greatly exceeded the average earnings of a luggage worker. That same study estimated that restricting foreign imports cost $199,000 annually for each textile worker’s job that was saved, $1,044,000 for each softwood lumber job saved, and $1,376,000 for every job saved in the benzenoid chemical industry. Yes, $1,376,000 a year!"7 Blinder concludes that quite clearly, the costs exceed the benefits.

An analogy can be drawn here between the trade among nations and trade among states within the union. In terms of the economy, the United States can be considered in the same light as a free trade zone. In the United States, wages and production costs vary greatly from region to region. However, goods and services within the U.S. are able to freely cross state boundaries without tariffs or restriction. This free trade enables specialization and the laws of comparative advantage to apply within the United States, which helps to increase overall national prosperity. Blinder writes, “One reason why the United States did so much better economically than Europe for two centuries is that we had free movement of goods and services while the European countries ‘protected’ themselves from their neighbors.”8

It is tempting to turn to protectionism in times of economic turmoil. As Blinder writes, “American workers will face a troublesome transition as tens of millions of old jobs are replaced by new ones. There will also be great political strains on the open trading system as millions of white-collar workers who thought their jobs were immune to foreign competition suddenly find that the game has changed.”9 However, for the benefit of the world economy in the long-term, the principles of free trade must win out.

2. Blinder, Alan S., “Free Trade,” The Concise Encyclopedia of Economics. Accessed online, 7 December 2008, from <http://www.econlib.org/library/Enc/FreeTrade.html>, 3.

3. Blinder, Alan S., “Free Trade’s Great, but Offshoring Rattles Me.” Washington Post, 25 May 2007.

4. Tanny, John, “Free Trade and the Rattling of Alan Blinder.” Real Clear Markets, 28 November 2007. Newspaper online. Available from http://www.realclearmarkets.com/articles/2007/11/free_trade_and_the_rattling_of.html, accessed 7 December 2008.

5. Blinder, Alan S., “Free Trade’s Great, but Offshoring Rattles Me.” Washington Post, 25 May 2007.

6. Blinder, Alan S., “Free Trade,” The Concise Encyclopedia of Economics, 5

7. Ibid, 4

8. Ibid, 7

9. Blinder, Alan S., “Free Trade’s Great, but Offshoring Rattles Me.” Washington Post, 25 May 2007.

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