Economics - General

‘Rethinking Free Trade’ by Lindsay Oldenski

Today, guest blogger Lindsay Oldenski will give her opinion about Alan Blinder’s recent comments regarding free trade and American job losses. Ms. Oldenski is an economics PhD student at the University of California-San Diego (UCSD) and specializes in topics related to international trade.

Rethinking Free Trade?
By Lindsay Oldenski

According to a recent Wall Street Journal article, it’s suddenly become trendy for high-profile economists to contradict their previous views– and centuries of economic research– by coming out against free trade. The article by David Wessel and Bob Davis is entitled Pain from Free Trade Spurs Second Thoughts and focuses on recent comments by economist Alan Blinder and others about the potential drawbacks of offshoring service jobs.

However, this article misrepresents what Blinder is actually saying. He is not having “second thoughtsâ€? about the importance of free trade or proposing that we build a wall between the US and India. In the 2006 Foreign Affairs article that the WSJ piece is based on, Blinder says that “we should not view the coming wave of offshoring as an impending catastrophe. Nor should we try to stop it. â€? (emphasis added). Instead, he’s making the point that I’ve been finding over and over in my own research , which is that there is something fundamentally different about trade in services than trade in goods and we should try to understand as much as we can about this important economic phenomenon. Blinder’s bottom line is that the US and the world as a whole can gain from the productivity increases that accompany service trade expansion, but in order to do so we need to acknowledge that there will be adjustment costs and develop education systems, social welfare programs and other policies to minimize these costs and maximize the gains.

Unfortunately Blinder chooses to make that point by attempting to forecast the gross number of jobs that could be lost to offshoring over the next 20 years without estimating offsetting gains. His main point, emphasized in the article’s title “Offshoring: The Next Industrial Revolution?â€? is that the first two major industrial shifts (from agriculture to industry, then from industry to services) made the US better off and the current information revolution will do the same. The numerical estimate of service jobs that could be offshored is meant to quantify the extent of the shift, and should NOT be construed as a net loss. But claiming that the US could lose 40 million jobs without estimating the offsetting job gains is not going to accomplish that goal. It’s just a scare tactic that invites misuse by those who hold up job loss figures as an argument for restricting trade—exactly what Blinder says we should not do.

So what net effects should we expect from an expansion of services offshoring? The data overwhelmingly point to net gains. First, consider the US trade deficit in goods, which was a staggering $600 billion in 2005. Over the past two decades, the US had a growing trade surplus in services which reached $40 billion in 2005. This suggests that, in spite of high profile anecdotal evidence on call centers in India, the US actually has a comparative advantage in services and increasing the volume of services trade should lead to net gains. Martin N. Baily and Diana Farrell point out that while 70,000 computer programmers in the US lost their jobs from 1999 to 2004, 115,000 higher paid software engineering jobs were created during the same period. Mary Amiti and Shang-Jin Wei found that while offshoring services may have a small negative effect on certain industries, no such effect exists at the aggregate level. Looking forward, Catherine Mann of the Institute for International Economics argues that offshoring some IT service jobs will make technology inputs cheaper, leading to greater production of high-tech goods and services in the US and job growth of about 40% in IT-related occupations by 2010.

None of this evidence is meant to downplay the impact of offshoring on those individuals who lose there jobs. Indeed, Blinder’s message is targeted at helping exactly those individuals. But we should do so by easing the transition forward through the information revolution, not by trying to move backward.