From: ald@clipper.ingr.com (Al Date)
Newsgroups: sci.econ
Subject: Re: Free Trade a Bleak Future?  was Comparative Advantage
Date: 19 Aug 92 18:56:13 GMT
Distribution: na
Organization: Intergraph Advanced Processor Division - Palo Alto, CA

In article <1992Aug14.214534.6206@gasco.com> fpf@taurus.gasco.com (Frank Ferguson x3584) writes:

>
>Increased free trade has had the effect of fueling development in 
>less developed (or developing) areas of the world.  Countries (particularly
>on the Pacific Rim) have achieved substantial growth through a shift
>in manufacturing activities away from the developed industrial nations
>to those offering more attractive wage costs.  This movement benefits
>everyone so long as the purchasing nations do not lose the ability
>to continue fueling this development through their consumer demand.
>
>As a practical matter, the developed nations cannot expect to maintain
>their ability to consume these imported goods unless they produce an 
>equivalent stream of items which can be sold to the people in these 
>developing supplier nations (or other countries).

Your assumption here is somewhat weak, because the prices of the
imported goods will be very cheap, and because only about a third
of our economy is in manufacturing.  


>As employment and manufacturing facilities
>increasingly locate in low wage, offshore centers, people in the developed
>nations will be required to accept lower wages and standards of living in
>order to compete against foreign goods and for investment.
>

Some people, yes.  But this is estimated at only 20% of the population,
those who are semi- or unskilled in manufacturing.

>On used to assume, of course, that highly capital intensive industrial
>jobs would be retained in the developed world because of their inherent
>efficiency advantage over the less capital supplied workers in the 
>developing world.  The tendency now, it seems, it for manufacturers to
>construct factories with the latest capital equipment in those developing
>countries.  This results in these developing nations having advanced 
>capital and low wages as well.

And we get the goods CHEAP.

>
>Given the disparity between income and wage levels between the developed
>and developing world; and given the vast number of potential workers in
>the developing world's low wage pool, one would expect the process of
>lowering the industrial nation's workers wage level to go on for some
>time.  At the extreme, the wages of people in all nations would achieve
>the a common level, and given the current situation that would mean that
>wage earners in developed countries would see their wages fall to 
>equality with those of third world competitors.  
>

Actually, we can expect the wages of the foreign workers to rise.

>Obviously, such a drastic outcome would take time.  In the shorter run,
>one might expect to see chronic "depression" in the more advanced nations 
>as consumers reacted pessimistically to falling (or at best stagnant) living
>standards.  These "depressed" conditions would tend to reduce demand for
>the output of the developing, trading nations, thus slowing the gains
>these nations make and the pace of development within their economies.
>

Again, this would occur only if we were 100% manufacturing-oriented.

>The probable effect of free trade, in the medium to long term, is to
>depress wages and living conditions in the developed nations and to
>(perhaps slowly) improve conditions in the less developed world.  After perhaps
>several hundred years, the process of free trade and investment may well
>significantly improve global living standards and achieve the global
>efficiencies which original theorists said it would.  In the meantime however,
>in our and our childrens lifetimes (at least), the promise of free trade
>is very bleak.

It may be short term bleak for 20% of the workers, but it is short
and long term positive for the rest.

--Al Date