Economics 101 – Free Trade and Outsourcing Jobs

Free trade is an often misunderstood and polarizing subject. In my musings with everyday folks to academics it is shocking how confused the subject can become. Speaking in generalities, most Americans want a healthy, robust economy here in the United States. That is what I want and that is why I am an avid supporter of free trade. This is why the issue of shipping jobs overseas has particular importance to me. In my experience most people see shipping jobs overseas and the decline of American manufacturing as an unequivocally bad development. Avid supporters of free trade often take a negative stance towards businesses who shift operations overseas. This line of thinking is simply wrong. If this sounds crazy or offends you then that is exactly why you need to read on and gain some perspective. I want jobs in the United States and I want people and businesses to prosper and flourish but demonizing businesses for making shrewd decisions to stay competitive is pointing the finger at the wrong party. The problem isn’t the business that “ships jobs overseas,” it is the policies that make the business “ship jobs overseas.”

To illustrate the point I would like to talk about the sugar industry in the United States. Beginning in 1816 the United States implemented tariffs on sugar imports. These were designed to placate the newly acquired Louisiana territory and their sugar plantation owners. These tariffs were intended to protect the sugar industry in the United States and provide incentive to buy American sugar. In 1934 the government implemented import quotas to complement the tariffs and funnel subsidies to American sugar growers. For almost two hundred years these policies have protected sugar growers in the United States but this encroachment on free trade has not come without its costs.

For 59 of the last 60 years sugar prices have been equal to or higher than the world market price. At one point sugar in the US sold for 21 cents per pound when the world market price was 3 cents per pound. Every cent the price of sugar goes up costs the US economy between $250 million and $300 million to consumers. A commerce department study estimated this costs consumers more than $3 billion dollars a year in the United States. In 2002 Kraft moved its Lifesaver factory to Canada. In 2004 Brach’s moved its candy production to Mexico. Hershey Foods shut down operations in Pennsylvania, Colorado, and California and relocated them in Canada. Chicago, once the candy manufacturing capital of the U.S. has lost thousands of jobs. In 1984 both Coke and Pepsi stopped using sugar in their products and switched to high fructose corn syrup causing a drop in sugar consumption in the U.S. of 500,000 tons per year. Since then a slew of manufacturers have made the switch to high fructose corn syrup. In 2006, a Commerce Department study concluded that for each sugar industry job saved nearly three food manufacturing jobs were lost.

When businesses pull the trigger and move operations overseas we need to have a deeper understanding of why they are moving business overseas. In a previous article I spoke of our minimum wage that raises the cost of labor. The United States also has the second highest corporate sales tax in the world. These things tilt the scales and often make it more profitable to do business overseas. Many people like to spout the mantra “Buy American” but in a global economy this is often difficult to do and racked with confusion. Toyota has three of the top ten most American vehicles. Saying “Buy American” doesn’t hold much weight unless you talk with your wallet. People act in a fashion that gives the most bang for their buck. That is why we get cheap clothing and electronics from overseas.

Buying American is great as long as the price makes sense. When the price doesn’t make sense, it can hurt the economy and cost us jobs. I know this sounds scary and goes against what some of you might feel in your heart but it’s true. When you spend inefficiently and buy American products that cost more than equivalent foreign products, the difference in price is money that would have been spent in another part of the economy. If you spend $100 more on an American bed than you would have spent at IKEA, that is $100 taken from another part of the economy. The aggregate effect of this mentality could cost American salesmen jobs or American distributors. This is just like spending more on sugar to prop up American sugar growers while costing thousands of jobs in the food manufacturing industry in America.

It is misguided to blame companies for making tough decisions to stay competitive. If an American manufacturer decides to keep jobs in the U.S. when it is more efficient to outsource their jobs, they become less competitive. That means their prices will likely be higher. Their profits will be lower which means they have less money to expand or invest in research and development. If they cannot stay competitive then they will likely go under costing all of their jobs rather than just jobs they would have sent overseas. These are all things that need to be considered in free trade. Tariffs and subsidies cause distortions in the market where the negatives often outweigh the positives. Forcing “Buy American” policies when the price doesn’t makes sense may prop up one industry but at a cost to other industries and we often forget that.

Free trade works but we can’t pick and choose what kinds of free trade we like. When companies move overseas we need to stop blaming the companies and look at the policies that push them to do it. We can’t pretend that shipping jobs overseas has only one effect that is negative or that usurping free trade to keep certain jobs here doesn’t have negative effects. Companies don’t ship jobs overseas to satisfy some insatiable greed, they do it to survive in a competitive world market. It gives us low prices so our dollar goes further and our quality of life is higher. If we want manufacturing in America we need to address the reasons why businesses outsource manufacturing. We need to address things like our corporate tax rate, minimum wage, tariffs, and import quotas. Free trade is an amazing way to allocate funds efficiently for a maximum benefit to society. When we see things happening in the economy we don’t like you are likely to find that the source is a policy that hampers free trade rather than free trade itself. Get rid of the sugar program and we will see more jobs in America.

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