Protectionists come in two main varieties. The ordinary kind sees an increase in imports as a threat to American workers and wants barriers raised. This is bad economics, but at least the logic is simple and consistent. There is also a more upmarket kind of trade-basher. These flatter themselves that they take a more sophisticated view. They are not "old-fashioned protectionists," an insulting suggestion. Ordinarily, they would man the barricades for free trade. But they have noticed, and they say this reluctantly, that something has changed.
These anti-trade innovators insist they are committed to the principle of liberal trade. But unlike those who apply outdated generalizations to entirely new problems, they shrewdly perceive that the laws of economics have shifted. Some kinds of trade really do now pose a threat to American prosperity. Something must be done, although they are unsure exactly what—such is the novelty of the problem, and such is their instinctive revulsion at outright protectionism.
This second lot is more dangerous and more objectionable than the first—more dangerous because they are more plausible (reluctant converts improve the credibility of any cause, and people like up-to-the-minute ideas), and more objectionable because the air of sophistication and deep thinking is such a fraud. The new reasons for opposing liberal trade are just the same old reasons, smartened up with this season's accessories and a look of intellectual hauteur.
Previous new reasons, which were really old reasons for opposing trade, included the sudden threat posed by outward investment; the idea that some industries have particular strategic or network importance for the domestic economy; and the claim that trade threatens the environment, or child welfare and workers' rights in poor countries. The latest new reason to question free trade, which is really just another old reason, is the "flight" of service-sector jobs.
Last week, The New York Times ran a column by Sen. Charles Schumer, D-N.Y., and Paul Craig Roberts, an assistant secretary of the Treasury during the Reagan administration. Titled "Second Thoughts on Free Trade," it was a classic of its kind. The American economy is entering a new era of intense foreign competition, they say. Jobs in services are now as much at risk as jobs in manufacturing. "Most economists want to view these changes through the classic prism of 'free trade,' and they label any challenge as protectionism. But these new developments call into question some of the key assumptions supporting the doctrine of free trade.... When American companies replace domestic employees with lower-cost foreign workers in order to sell more cheaply in home markets, it seems hard to argue that this is the way free trade is supposed to work. To call this a 'jobless recovery' is inaccurate: Lots of new jobs are being created, just not here in the United States."
What needs to happen, according to the authors? Hard to say. "The first step is to begin an honest debate." Isn't it always? Beyond that, however, they aren't sure. "Old-fashioned protectionist measures are not the answer"—no, of course not—"but the new era will demand new thinking and new solutions." They can say no more.
This new scare about services may prove more harmful than any of the old new scares. Undoubtedly, it reflects a widespread alarm in America over white-collar employment and the role of trade in the supposedly jobless recovery. Meanwhile, its pretense of intellectual respectability gives cover to politicians who want to change sides on the issue. Yet the truth is, if service-sector competition from abroad is a good reason for erecting trade barriers, then so was competition in manufactured goods. And if liberal trade was the right policy for manufacturing—which it was—then it is the right policy for services as well.
What is this "new development," and how does it call into question key assumptions of the orthodox case for free trade? According to Schumer and Roberts, it is the fact that capital now flows across borders. New? Can they be serious? It was old hat a century ago. And it is hard, isn't it, to defend free trade if this merely requires substituting low-wage workers abroad for high-wage workers at home? When did free trade mean anything else? The whole idea of free trade is, and always has been, to reduce costs. Why was this all right for manufacturing, but not for services?
Every drawback of liberal trade is also a drawback of labor-saving investment in technology. Would it be hard to defend the personal computer, if all it meant was the ability to get more work done with fewer workers? No, not very hard, so long as you understood that workers displaced by such technologies move on to new jobs, while prices fall and living standards rise across the rest of the economy. This is exactly how liberal trade works as well—whether you are trading goods or services.
An ancient fallacy is guiding Schumer and Roberts: the idea that trade permanently reduces the number of jobs. If this were true, then trade and investment in labor-saving technology would indeed be bad news. And the extension of international competition into services would be especially disturbing, because services now constitute the bulk of American employment. But trade and technology do not permanently reduce the number of jobs. They alter the pattern of jobs, in mostly advantageous ways. The American economy is the best example of this: It is the most open, the fastest-shifting, and hence the most successful in all the world.
Much of the concern about America's jobless recovery is overdone—and to anybody living outside the United States difficult even to comprehend. So far, the economy has weathered the slowdown that inevitably followed the boom of the late 1990s extraordinarily well. It is true that, by American standards, job creation is subdued. But to talk of jobs lost since the peak of the business cycle as a possible long-term trend is ridiculous. Much bigger losses might have been expected as the cycle wound down. The longer-term employment trend is fine. And America's unemployment rate remains among the lowest of any industrialized country.
For those needing further reassurance, and a stiff dose of statistics, a new paper by Catherine L. Mann of the Institute for International Economics comes highly recommended ("Globalization of IT Services and White Collar Jobs: The Next Wave of Productivity Growth"; it's downloadable from www.iie.com). The study explains that local white-collar jobs in information-technology-related areas—jobs said to be seriously at risk of moving abroad—are not disappearing. In the aggregate, they are stable in some sectors and rising in others. America remains a big net exporter of services, despite the dollar's prolonged overvaluation, which made services unduly expensive to foreign buyers. With the dollar's recent decline, America's balance of trade in services will move further into surplus, and demand for workers will increase.
Within services, some job categories, mainly at the low-skill end, will contract, as much because of domestic technology innovations as because of trade: ATMs and electronic transactions will replace more bank tellers; much brute data processing will move offshore; more call-center work could go the same way; and so on. Here and there, some higher-paid, higher-skill work will migrate as well, but as the globalization of services proceeds, the net demand for higher-end IT jobs in the United States will likely surge. And as the pattern of employment moves to America's advantage, the economy will harvest the benefits of falling costs and rising productivity.
The study rightly emphasizes that the globalization of software and services, the shifting pattern of employment, and the domestic transformation in productivity growth are all intertwined: "Breaking the links, by limiting globalization of software and services, or by restricting IT investment and transformation of activities, or by having insufficient skilled workers at home, puts robust and sustainable U.S. economic performance at risk."
Just as with trade in manufacturing in the 1980s, or investment in labor-saving technologies in the 1990s, today's pace of change, and the strains that sudden industry-wide shifts put on the workers who see their skills devalued in the market, are causes of legitimate concern. Such concern is where policy should focus: on bigger and better wage-insurance schemes of the kind that were included in the Trade Promotion Act, and on improving the quality and availability of education and retraining throughout a person's working life. Again, however, none of this is new. Such upheaval was true before the new era of globalization of services, and it remains true. The orthodox case for free trade is as compelling as ever.