Kerry's Rhetoric on Trade, Jobs: An Unforced Error

What does John Kerry really think about trade and jobs? Is he a Neanderthal Democrat protectionist, or a post-Clintonian believer in global markets and expanded economic opportunity? To look at his record, you would say the latter. For years, his votes in the Senate were pro-trade. This is the real Kerry, his advisers assure market-friendly commentators. The campaign demands compromises, they explain confidentially: Voters are worried about jobs, and you have to speak to that concern. Nobody need fear that, as president, Kerry would be an old-fashioned protectionist. Just like Bill Clinton and other forward-looking Democrats, one is told, Kerry understands the advantages of trade and globalization for the American economy.

Does he? Kerry and his running mate have been hardening their position on trade and foreign investment as the campaign has progressed. They have elevated their proposed tax changes to penalize American companies that send jobs abroad—through "offshoring"—to a starring role, the team's big new idea on trade and employment.

In addition, the candidates underline the need to build stronger conditions on environmental protection and labor standards into future international trade agreements. Perhaps this will apply to existing trade commitments as well: Kerry promises to review each of these if he wins, presumably with the intention of junking the ones he does not like.

At a minimum, all of this would make it harder for President Kerry to do what, according to his advisers, he really wants to on trade. But the prospect may well be worse than this. The problem is that Kerry and Edwards explain their policy on offshoring with what looks like genuine conviction. And, after all, they are bolstered by many an avowed advocate of free trade "in principle"—politicians and pundits persuaded by the idea that the accelerating migration of service-sector jobs represents an entirely new threat to American prosperity. Just tune in to CNN each evening for another episode of "Exporting America." There is every sign that Kerry and Edwards actually believe this stuff.

Last week in Washington, at a conference organized by the Cato Institute (with the support of my other employer, The Economist), a former adviser to President Clinton debunked the whole offshoring scare. Martin Baily, now a senior fellow at the Institute for International Economics, was chairman of the Council of Economic Advisers under Clinton. He is a liberal and a Democrat. His speech, drawing on research carried out by the McKinsey Global Institute, shows what a center-left party could and should be saying about this subject.

Baily explained that offshoring is not merely a much smaller problem than the Democratic candidates are arguing (which is the most obvious line of criticism) but that the issue is not in truth a problem at all: Offshoring is good for the American economy, Baily argued, and good for American workers as well.

Whether it is, on balance, good or bad for most Americans, offshoring is certainly a small-scale event in the larger scheme of things. As Baily explained, estimates by Forrester Research and others put the likely extent of offshoring at some 3 million jobs over the next 10 years. That sounds like a lot, but you need to remember that roughly 2 million Americans (out of a total workforce of approximately 150 million) change jobs every month. Over the past 10 years, America's private sector has created about 35 million new jobs, more than 10 times as many as offshoring is likely to cost over the coming decade. The numbers of jobs lost at home to technological progress or to consolidation because of mergers and acquisitions are both much, much larger than the number of jobs lost because of outsourcing abroad.

Anyway, the idea that the jobs created overseas when companies offshore certain tasks or processes represent a net loss of employment in America is wrong—doubly wrong, in fact.

First, many of those jobs would not have been preserved in America even if the offshoring had never happened. Firms can just as easily economize on labor through automation or other changes. (Call-center workers in America can be replaced by automated voice systems as well as by workers in call centers abroad.) Second, and more important, offshoring creates new jobs at home. This is one of its main benefits. A company that becomes more efficient by adopting labor-saving technology, or by moving some jobs to countries where they can be done more cheaply, will be more successful in the marketplace than otherwise: It will be able to cut its prices and increase its share of the market, both at home and abroad. It will have more funds to invest in expanding its business.

Many American companies are global champions in the markets in which they operate. If they continue to thrive, they will create jobs as well as destroy them. According to circumstances, the most successful firms may very well add more overall than they subtract. Taxing them to discourage their efforts at becoming more efficient, as Kerry and Edwards propose, is therefore not necessarily a job-promoting strategy. On the other hand, it is undoubtedly a productivity-retarding strategy.

One of the oddest things about the offshoring scare in the United States is that the American economy is so uniquely well placed to turn investment overseas to the advantage of its workers and citizens. All of the evidence shows that America is far better than any of its international competitors at redeploying displaced workers into new and better jobs. Baily cites work by the Organization for Economic Cooperation and Development that shows that most Americans who lose their jobs find new ones within six months. Among the big economies, America has the most flexible and adaptable labor market, and the fastest medium- and long-term rate of job creation. It's this flexibility that makes America so attractive to investors from overseas, who hesitate to open new factories in places such as Germany or Japan. So far as overall employment is concerned, offshoring is a nonproblem.

And this is to say nothing of its benefits in the form of higher incomes and living standards. The McKinsey Global Institute finds that American offshoring is a win-win game. A recent McKinsey study asked what happens when an American company spends $1 on offshoring. The receiving economy—India, say—typically gains 33 cents. This comes in the form of wages paid to Indian workers, profits earned by local suppliers to the offshored entity, extra taxes collected by the Indian government, and so forth. It needs to be stressed that this gain to the world's Indias is valuable in itself to America, a point that Kerry and Edwards shamefully neglect. It is a good thing that the world's poorest countries receive investment from the world's richest, and thereby grow less poor. America has a huge stake in that process. But, that aside, it just so happens that America gains far more from the offshoring transaction than India does—more, in fact, than the $1 it initially spent.

The immediate gain is in the form of lower costs—58 cents' worth for each dollar offshored, according to McKinsey. This translates mainly into higher investment and/or lower prices for American consumers. But in addition, America then typically gains from higher exports, because the offshored activity creates a demand for American products (computers to equip a new call center, for instance), and some of the receiving countries' higher incomes are spent on other American imports. Profits repatriated to America are a third source of gain, and the United States also gains a variety of further indirect benefits. Altogether, according to this study, each American dollar spent on offshoring returns between $1.12 and $1.14 in extra value to the United States.

India gains, and American gains (far more). What kind of administration would make stamping this out an economic priority?

Whatever Kerry's advisers may believe, it is an unforced error. Kerry and Edwards could have developed a policy based on helping the victims of offshoring, emphasizing that their administration would be more intelligent and compassionate than Bush's. For example, policies calling for more generous support for lifelong education, enhanced wage insurance for those whose jobs are displaced by shifting patterns of trade and international investment would have been a more effective and distinctively Democratic response to the issue. And such an approach would have aligned the would-be Kerry-Edwards administration with Clinton's modern, outward-looking view of America in the world economy. Kerry and Edwards chose to go with the perils of growth, the threats from economic integration, the fear of progress. After his initial hesitation over the North American Free Trade Agreement, Clinton rejected all that—and the voters still liked him.