I – II – III – IV – V – VI – VII – VIII – IX – X – XI – XII – XIII – XIV – XV – XVI – XVII – XVIII – XIX – XX – XXI – XXII – XXIII – XXIV – XXV – XXVI – XXVII – XXVIII – XXIX
[Single-page view]

At any rate, this seems like a good place to take a momentary step back from this whole discussion of whether trade causes us to “lose out to foreigners” and consider whether this is even the right question to be asking in the first place. One of the things that has frankly always bothered me about how this whole discussion is framed is the way it so often treats the gains and losses of American workers as the only relevant consideration, with the well-being of non-Americans being treated as, at best, a kind of secondary afterthought (if not an active impediment to American prosperity). You’ll constantly hear politicians and commentators raving about how unacceptable it is that jobs are being filled by foreigners instead of Americans, as if the very idea that those people should have the same opportunities as Americans is repugnant. And I suppose this attitude shouldn’t actually be all that surprising; after all, if your only understanding of international trade is that it’s a purely zero-sum competition in which a given country can “win” only at other countries’ expense, it’s not hard to see why you might be unable to regard foreigners as anything other than rivals to either beat or be beaten by. But as I hope has been made clear by now, trade isn’t a zero-sum competition, and foreigners aren’t just rivals to beat. They’re human beings who deserve a chance to make an honest living and build a good life for themselves and their families, just as much as Americans do. And to care any less about their well-being, or to think that they’re any less entitled to a good job, just because they happen to have been born on a different patch of dirt, makes about as much sense as, say, someone from Texas or New York believing that everyone in their state is entitled to a good job but no one from any other state is. Certainly this kind of double standard can’t be justified on economic grounds; after all, as Wheelan points out, the economic considerations are exactly the same:

International economics shouldn’t be any different than economics within countries. National borders are political demarcations, not economic ones. Transactions across national borders must still make all parties better off, or else we wouldn’t do them. You buy a Toyota because you think it is a good car at a good price; Toyota sells it to you because they can make a profit. Capital flows across international borders for the same reason it flows anywhere else: Investors are seeking the highest possible return (for any given level of risk). Individuals, firms, and governments borrow funds from abroad because it is the cheapest way to “rent” capital that is necessary to make important investments or to pay the bills.

Everything I’ve just described could be Illinois and Indiana, rather than China and the United States.

Of course, anti-foreign prejudice isn’t the only reason why someone might be opposed to international trade; there are plenty of people who in fact care deeply about the well-being of non-Americans, and who oppose trade for that very reason. They see the horrible working conditions in Third World sweatshops, and the meager pay of the workers there, and naturally conclude that American companies and investors must be the source of all that misery, ruthlessly exploiting those poor Third World workers for their cheap labor while simultaneously using it to undercut the wages of workers here in the US. But although this stance comes from an understandable place, there are a few ways in which it misunderstands what’s actually going on in these situations.

For one thing, if American investors’ main goal in engaging in international trade were just to undercut domestic workers’ wages by exploiting cheap foreign labor, that wouldn’t really square with the fact that the overwhelming majority of international trade and investment actually occurs between rich countries and other rich countries, not between rich countries and poor countries. As Harford writes:

For most purposes, when people argue about globalization they are talking about […] two trends: […] more trade, and more direct investment by companies from rich countries, such as building factories in poor countries. A substantial proportion of foreign investment in poor countries is designed to produce goods for shipment back to rich countries; while this remains true, trade and foreign investment will be closely linked together. Foreign investment is widely recognized to be good for economic growth in poor countries: it is an excellent way for them to create jobs, learn cutting-edge techniques, and do so without having to invest their own scarce money. Unlike investments in shares, currency, or bonds, foreign direct investment cannot quickly be reversed in a panic. As economics journalist Martin Wolf puts it, “factories do not walk.”

Although trade with and investment in poor countries has risen rapidly in recent years, we should be clear that both trade and foreign investment overwhelmingly takes place between the richest countries, not between rich and poor. People look at their Nike shoes and assume, perhaps, that everything is made in Indonesia and China. However, far more money is spent importing wine from Australia, pork from Denmark, beer from Belgium, insurance from Switzerland, computer games from Britain, cars from Japan, and computers from Taiwan, all carried on ships from South Korea. These rich countries are mostly trading with each other. Mighty China, with about a quarter of the world’s population, produces less than 4 percent of the world’s exports. Mexico, a country of over a hundred million people, in a free trade agreement with the world’s largest economy, the United States, and in a situation of rapidly expanding trade as the US economy was red hot in 2000, exported less than gallant little Belgium. Meanwhile India is nowhere at all, with a billion people producing less than 1 percent of world exports. And these figures are for physical merchandise: if you look at trade in commercial services, fuss over “offshoring” notwithstanding, developing countries participate even less.

What about the very poor countries? Sadly for them, rich countries trade very little with them—and as trade expands elsewhere in the world, the poorest countries are being left behind. North American imports from the least developed countries were only 0.6 percent of total imports in 2000, down from 0.8 percent in 1980. But 0.5 percent of Western Europe’s imports in 2000 were from the least developed countries, down from 1 percent in 1980. For Japan, the figure is 0.3 percent, down from 1 percent. And for all the major world traders put together, the percentage of their imports from the least developed countries is 0.6 percent, down from 0.9 percent twenty years before. For the really poor countries, their problem certainly isn’t excessive participation in the world trading system. A similar story holds true for foreign investment.

The theory of comparative advantage, common sense, and experience all tell us that trade is good for economic growth; foreign direct investment is closely related to trade, and it, too, is good for growth. The poorest countries miss out on those benefits. This is a simplification but a fair one.

And Sowell adds:

Theoretically, investments might be expected to flow from where capital is abundant to where it is in short supply, much like water seeking its own level. In a perfect world, wealthy nations would invest much of their capital in poorer nations, where capital is more scarce and would therefore offer a higher rate of return. However, in the highly imperfect world that we live in, that is by no means what usually happens. For example, out of a worldwide total of about $21 trillion in international bank loans in 2012, only about $2.5 trillion went to poor countries—less than twelve percent. Out of nearly $6 trillion in international investment securities, less than $400 billion went to poor countries, less than 7 percent. In short, rich countries tend to invest in other rich countries.

There are reasons for this, just as there are reasons why some countries are rich and others poor in the first place. The biggest deterrent to investing in any country is the danger that you will never get your money back. Investors are wary of unstable governments, whose changes of personnel or policies create risks that the conditions under which the investment was made can change—the most drastic change being outright confiscation by the government, or “nationalization” as it is called politically. Widespread corruption is another deterrent to investment, as it is to economic activity in general. Countries high up on the international index of corruption, such as Nigeria or Russia, are unlikely to attract international investments on a scale that their natural resources or other economic potential might justify. Conversely, the top countries in terms of having low levels of corruption are all prosperous countries, mostly European or European-offshoot nations plus Japan and Singapore. […] The level of honesty in a country has serious economic implications.

Even aside from confiscation and corruption, many poorer countries “do not let capital come and go freely,” according to The Economist. Where capital cannot get out easily, it is less likely to go in, in the first place. It is not these countries’ poverty, as such, that deters investments. When Hong Kong was a British colony, it began very poor and yet grew to become an industrial powerhouse, at one time having more international trade than a vast country like India. Massive inflows of capital helped develop Hong Kong, which operated under the security of British laws, had low tax rates, and allowed some of the freest flows of capital and trade anywhere in the world.

Likewise, India today remains a very poor country but, since the loosening of government controls over the Indian economy, investment has poured in, especially for the Bangalore region, where a concentrated supply of computer software engineers has attracted investors from California’s Silicon Valley, creating in effect the beginnings of a new Silicon Valley in India.

[…]

Lurking in the background of much confused thinking about international trade and international transfers of wealth is an implicit assumption of a zero-sum contest, where some can gain only if others lose. Thus, for example, some have claimed that multinational corporations profit by “exploiting” workers in the Third World. If so, it is hard to explain why the vast majority of American investments in other countries go to richer countries, where high wage rates must be paid, not poorer countries whose wage rates are a fraction of those paid in more prosperous nations.

Over the period from 1994 to 2002, for example, more U.S. direct investment in foreign countries went to Canada and to European nations than to the entire rest of the world combined. Moreover, U.S. investments in truly poverty-stricken areas like sub-Saharan Africa and the poorer parts of Asia have been about one percent of worldwide foreign investment by Americans. Over the years, a majority of the jobs created abroad by American multinational companies have been created in high-wage countries.

Just as Americans’ foreign investments go predominantly to prosperous nations, so the United States is itself the world’s largest recipient of international investments, despite the high wages of American workers. India’s Tata conglomerate bought the Ritz-Carlton Hotel in Boston and Tetley Tea in Britain, among its many international holdings, even though these holdings in Western nations require Tata Industries to pay far higher wages than it would have to pay in its native India.

Why are profit-seeking companies investing far more where they will have to pay high wages to workers in affluent industrial nations, instead of low wages to “sweatshop” labor in the Third World? Why are they passing up supposedly golden opportunities to “exploit” the poorest workers? Exploitation may be an intellectually convenient, emotionally satisfying, and politically expedient explanation of income differences between nations or between groups within a given nation, but it does not have the additional feature of fitting the facts about where profit-seeking enterprises invest most of their money, either internationally or domestically. Moreover, even within poor countries, the very poorest people are typically those with the least contact with multinational corporations, often because they are located away from the ports and other business centers.

American multinational corporations alone have provided employment to more than 30 million people worldwide. But, given their international investment patterns, relatively few of those jobs are likely to be in the poorest countries where they are most needed. In some cases, a multinational corporation may in fact invest in a Third World country, where the local wages are sufficiently lower to compensate for the lower productivity of the workers and/or the higher costs of shipping in a less developed transportation system and/or the bribes that have to be paid to government officials to operate in many such countries.

Various reformers or protest movements of college students and others in the affluent countries may then wax indignant over the low wages and “sweatshop” working conditions in these Third World enterprises. However, if these protest movements succeed politically in forcing up the wages and working conditions in these countries, the net result can be that even fewer foreign companies will invest in the Third World and fewer Third World workers will have jobs. Since multinational corporations typically pay about double the local wages in poor countries, the loss of these jobs is likely to translate into more hardship for Third World workers, even as their would-be benefactors in the West congratulate themselves on having ended “exploitation.”

That last part raises another important point for our discussion here. As horrible as it is to have people in poor countries working in sweatshops, with such abysmal working conditions and low pay and everything else, the unfortunate reality is that for these workers, these jobs are actually better than any of the other options available to them – and taking that option away from them, even if done for “humanitarian” reasons, would do nothing but leave them worse off. As Harford writes:

Nice running shoes! But don’t they make you feel a little, well, guilty?

A number of multinational companies have been accused of subjecting workers in developing countries to poor working conditions. Nike is very frequently named and is the target of a number of campaigns. To consider just one particularly splendid example, an enterprising student at MIT named Jonah Peretti took advantage of Nike’s offer to create customized shoes. In his own words:

Confronted with Nike’s celebration of freedom and their statement that if you want it done right, build it yourself, I could not help but think of the people in crowded factories in Asia and South America who actually build Nike shoes. As a challenge to Nike, I ordered a pair of shoes customized with the word “sweatshop.”

Even economists think this is pretty funny. Nike did not; Jonah Peretti did not get his customized shoes.

Jonah Peretti and his sympathizers have rightly drawn attention to the fact that in developing countries, workers endure terrible working conditions. Hours are long. Wages are pitiful. But sweatshops are the symptom, not the cause, of shocking global poverty. Workers go there voluntarily, which means—hard as it is to believe—that whatever their alternatives are, they are worse. They stay there, too; turnover rates of multinational-owned factories are low, because conditions and pay, while bad, are better than those in factories run by local firms. And even a local company is likely to pay better than trying to earn money without a job: running an illegal street stall, working as a prostitute, or combing reeking landfills in cities like Manila to find recyclable goods. Manila’s most famous landfill, Smokey Mountain, was closed down in the 1990s because it had become such an embarrassing symbol of poverty. But other garbage dumps continue to support scavengers who can earn up to five dollars a day. Over 130 people were killed in a landslide at Payatas, another dump in Manila, in July of 2000. Even those ways of eking out an urban living are attractive compared with scraping an existence in rural areas. In Latin America, for instance, while extreme poverty is relatively rare in cities, it is commonplace in the countryside. Anybody with a scrap of concern for other human beings should be disgusted at the situation, but they should also recognize that Nike and other multinational companies are not its cause.

The solution to this poverty is not going to come by boycotting shoes and clothes made in developing countries. On the contrary, as countries like South Korea have opened up to multinational companies, slowly but surely they have become richer. As more multinational companies have set up factories, they have competed with each other for workers with the best skills. Wages have risen, not because the companies are generous but because they have no choice if they want to attract good workers. Local firms learn the latest production techniques and become big employers, too. It becomes more and more attractive for people to work in a factory and to acquire the necessary skills: education improves. People move away from the countryside, raising rural earnings for those who remain to a more tolerable level. Formal employment is easier to tax, so government revenues rise and infrastructure, health clinics, and schools improve. Poverty falls, and wages inexorably rise. After adjusting for inflation, the typical Korean worker earns four times more than his father did twenty-five years ago. Korea is now a world technology leader and rich enough to subsidize the hell out of its agriculture like the rest of the rich countries in the world. The sweatshops have moved elsewhere.

It is difficult to be unmoved by conditions in sweatshops. The question is how to get rid of them. Most economists believe that sweatshops are good news in two ways: they are a step up from the immediate alternatives, and they are also a rung on the ladder to something better.

But plenty of people think otherwise. William Greider, a left-of-center political commentator, praised New York’s city council for passing a resolution in 2001 requiring that the city refuse to buy uniforms for police and firefighters unless they were produced under “decent wages and factory conditions.” Such a resolution can only harm sweatshop laborers: they’ll be out of a job and—literally, for those in Manila—back on the trash heap. Of course, it will be good news for textile workers in rich countries, who’ll get the business instead. I doubt it is a coincidence that the city council resolution was drafted by UNITE, the Union of Needletrades, Industrial, and Textile Employees, exactly the people who would benefit if imports of textile goods decreased.

Wheelan expounds further:

Every market transaction makes all parties better off. Firms are acting in their own best interests, and so are consumers. This is a simple idea that has enormous power. Consider an inflammatory example: The problem with Asian sweatshops is that there are not enough of them. Adult workers take jobs in these unpleasant, low-wage manufacturing facilities voluntarily. (I am not writing about forced labor or child labor, both of which are different cases.) So one of two things must be true. Either (1) workers take unpleasant jobs in sweatshops because it is the best employment option they have; or (2) Asian sweatshop workers are persons of weak intellect who have many more attractive job offers but choose to work in sweatshops instead.

Most arguments against globalization implicitly assume number two. The protesters smashing windows in Seattle were trying to make the case that workers in the developing world would be better off if we curtailed international trade, thereby closing down the sweatshops that churn out shoes and handbags for those of us in the developed world. But how exactly does that make workers in poor countries better off? It does not create any new opportunities. The only way it could possibly improve social welfare is if fired sweatshop workers take new, better jobs—opportunities they presumably ignored when they went to work in a sweatshop. When was the last time a plant closing in the United States was hailed as good news for its workers?

Sweatshops are nasty places by Western standards. And yes, one might argue that Nike should pay its foreign workers better wages out of sheer altruism. But they are a symptom of poverty, not a cause. Nike pays a typical worker in one of its Vietnamese factories roughly $600 a year. That is a pathetic amount of money. It also happens to be twice an average Vietnamese worker’s annual income. Indeed, sweatshops played an important role in the development of countries like South Korea and Taiwan.

He continues:

Trade is good for poor countries, [not just rich ones]. If we had patiently explained the benefits of trade to the protesters in Seattle or Washington or Davos or Genoa, then perhaps they would have laid down their Molotov cocktails. Okay, maybe not. The thrust of the antiglobalization protests has been that world trade is something imposed by rich countries on the developing world. If trade is mostly good for America, then it must be mostly bad for somewhere else. At this point […] we should recognize that zero-sum thinking is usually wrong when it comes to economics. So it is in this case. Representatives from developing nations were the ones who complained most bitterly about the disruption of the WTO talks in Seattle. Some believed that the Clinton administration secretly organized the protests to scuttle the talks and protect American interest groups, such as organized labor. Indeed, after the failure of the WTO talks in Seattle, UN chief Kofi Annan blamed the developed countries for erecting trade barriers that exclude developing nations from the benefits of global trade and called for a “Global New Deal.” The WTO’s current round of talks to reduce global trade barriers, the Doha Round, has stalled in large part because a bloc of developing nations is demanding that the United States and Europe reduce their agricultural subsidies and trade barriers; so far the rich countries have refused.

Trade gives poor countries access to markets in the developed world. That is where most of the world’s consumers are (or at least the ones with money to spend). Consider the impact of the African Growth and Opportunity Act, a law passed in 2000 that allowed Africa’s poorest countries to export textiles to the United States with little or no tariff. Within a year, Madagascar’s textile exports to the United States were up 120 percent, Malawi’s were up 1,000 percent, Nigeria’s were up 1,000 percent, and South Africa’s were up 47 percent. As one commentator noted, “Real jobs for real people.” Trade paves the way for poor countries to get richer. Export industries often pay higher wages than jobs elsewhere in the economy. But that is only the beginning. New export jobs create more competition for workers, which raises wages everywhere else. Even rural incomes can go up; as workers leave rural areas for better opportunities, there are fewer mouths to be fed from what can be grown on the land they leave behind. Other important things are going on, too. Foreign companies introduce capital, technology, and new skills. Not only does that make export workers more productive; it spills over into other areas of the economy. Workers “learn by doing” and then take their knowledge with them.

In his excellent book The Elusive Quest for Growth, William Easterly tells the story of the advent of the Bangladeshi garment industry, an industry that was founded almost by accident. The Daewoo Corporation of South Korea was a major textile producer in the 1970s. America and Europe had slapped import quotas on South Korean textiles, so Daewoo, ever the profit-maximizing firm, skirted the trade restrictions by moving some operations to Bangladesh. In 1979, Daewoo signed a collaborative agreement to produce shirts with the Bangladeshi company Desh Garments. Most significant, Daewoo took 130 Desh workers to South Korea for training. In other words, Daewoo invested in the human capital of its Bangladeshi workers. The intriguing thing about human capital, as opposed to machines or financial capital, is that it can never be taken away. Once those Bangladeshi workers knew how to make shirts, they could never be forced to forget. And they didn’t.

Daewoo later severed the relationship with its Bangladeshi partner, but the seeds for a booming export industry were already planted. Of the 130 workers trained by Daewoo, 115 left during the 1980s to start their own garment-exporting firms. Mr. Easterly argues convincingly that the Daewoo investment was an essential building block for what became a $3 billion garment export industry. Lest anyone believe that trade barriers are built to help the poorest of the poor, or that Republicans are more averse to protecting special interests than Democrats, it should be noted that the Reagan administration slapped import quotas on Bangladeshi textiles in the 1980s. I would be hard pressed to explain the economic rationale for limiting the export opportunities of a country that has a per capita GDP of $1,500.

Most famously, cheap exports were the path to prosperity for the Asian “tigers”—Singapore, South Korea, Hong Kong, and Taiwan (and for Japan before that). India was strikingly insular during the four decades after achieving independence from Britain in 1947; it was one of the world’s great economic underachievers during that stretch. (Alas, Gandhi, like Lincoln, was a great leader and a bad economist; Gandhi proposed that the Indian flag have a spinning wheel on it to represent economic self-sufficiency.) India reversed course in the 1990s, deregulating its domestic economy and opening up to the world. The result is an ongoing economic success story. China, too, has used exports as a launching pad for growth. Indeed, if China’s thirty provinces were counted as individual countries, the twenty fastest-growing countries in the world between 1978 and 1995 would all have been Chinese. To put that development accomplishment in perspective, it took fifty-eight years for GDP per capita to double in Britain after the launch of the Industrial Revolution. In China, GDP per capita has been doubling every ten years. In the cases of India and China, we’re talking about hundreds of millions of people being lifted out of poverty and, increasingly, into the middle class. Nicholas Kristof and Sheryl WuDunn, Asian correspondents for the New York Times for over a decade, have written:

We and other journalists wrote about the problems of child labor and oppressive conditions in both China and South Korea. But, looking back, our worries were excessive. Those sweatshops tended to generate the wealth to solve the problems they created. If Americans had reacted to the horror stories in the 1980s by curbing imports of those sweatshop products, then neither southern China nor South Korea would have registered as much progress as they have today.

China and Southeast Asia are not unique. The consultancy AT Kearney conducted a study of how globalization has affected thirty-four developed and developing countries. They found that the fastest-globalizing countries had rates of growth that were 30 to 50 percent higher over the past twenty years than countries less integrated into the world economy. Those countries also enjoyed greater political freedom and received higher scores on the UN Human Development Index. The authors reckon that some 1.4 billion people escaped absolute poverty as a result of the economic growth associated with globalization. There was bad news, too. Higher rates of globalization were associated with higher rates of income inequality, corruption, and environmental degradation.

[…]

But there is an easier way to make the case for globalization. If not more trade and economic integration, then what instead? Those who oppose more global trade must answer one question, based on a point made by Harvard economist Jeffrey Sachs: Is there an example in modern history of a single country successfully developing without trading and integrating with the global economy? No, there is not.

Which is why Tom Friedman has suggested that the antiglobalization coalition ought to be known as “The Coalition to Keep the World’s Poor People Poor.”

—

Trade is based on voluntary exchange. Individuals do things that make themselves better off. That obvious point is often lost in the globalization debate. McDonald’s does not build a restaurant in Bangkok and then force people at gunpoint to eat there. People eat there because they want to. And if they don’t want to, they don’t have to. And if no one eats there, the restaurant will lose money and close.

[Similarly,] Nike does not use forced labor in its Vietnamese factories. Why are workers willing to accept a dollar or two a day? Because it is better than any other option they have. According to the Institute for International Economics, the average wage paid by foreign companies in low-income countries is twice the average domestic manufacturing wage.

Nicholas Kristof and Sheryl WuDunn described a visit with Mongkol Latlakorn, a Thai laborer whose fifteen-year-old daughter was working in a Bangkok factory making clothes for export to America.

She is paid $2 a day for a nine-hour shift, six days a week. On several occasions, needles have gone through her hands, and managers have bandaged her up so that she could go back to work.

“How terrible,” we murmured sympathetically.

Mongkol looked up, puzzled. “It’s good pay,” he said. “I hope she can keep that job. There’s all this talk about factories closing now, and she said there are rumors that her factory might close. I hope that doesn’t happen. I don’t know what she would do then.”

The implicit message of the antiglobalization protests is that we in the developed world somehow know what is best for people in poor countries—where they ought to work and even what kind of restaurants they ought to eat in. As The Economist has noted, “The skeptics distrust governments, politicians, international bureaucrats and markets alike. So they end up appointing themselves as judges, overruling not just governments and markets but also the voluntary preferences of the workers most directly concerned. That seems a great deal to take on.”

—

The comparative advantage of workers in poor countries is cheap labor. That is all they have to offer. They are not more productive than American workers; they are not better educated; they do not have access to better technology. They are paid very little by Western standards because they accomplish very little by Western standards. If foreign companies are forced to raise wages significantly, then there is no longer any advantage to having plants in the developing world. Firms will replace workers with machines, or they will move someplace where higher productivity justifies higher wages. If sweatshops paid decent wages by Western standards, they would not exist. There is nothing pretty about people willing to work long hours in bad conditions for a few dollars a day, but let’s not confuse cause and effect. Sweatshops do not cause low wages in poor countries; rather, they pay low wages because those countries offer workers so few other alternatives. Protesters might as well hurl rocks and bottles at hospitals because so many sick people are suffering there.

Nor does it make sense that we can make sweatshop workers better off by refusing to buy the products that they make. Industrialization, however primitive, sets in motion a process that can make poor countries richer. Mr. Kristof and Ms. WuDunn arrived in Asia in the 1980s. “Like most Westerners, we arrived in the region outraged at sweatshops,” they recalled fourteen years later. “In time, though, we came to accept the view supported by most Asians: that the campaign against sweatshops risks harming the very people it is intended to help. For beneath their grime, sweatshops are a clear sign of the industrial revolution that is beginning to reshape Asia.” After describing the horrific conditions—workers denied bathroom breaks, exposed to dangerous chemicals, forced to work seven days a week—they conclude, “Asian workers would be aghast at the idea of American consumers boycotting certain toys or clothing in protest. The simplest way to help the poorest Asians would be to buy more from sweatshops, not less.”

You’re not convinced? Paul Krugman offers a sad example of good intentions gone awry:

In 1993, child workers in Bangladesh were found to be producing clothing for Wal-Mart and Senator Tom Harkin proposed legislation banning imports from countries employing underage workers. The direct result was that Bangladeshi textile factories stopped employing children. But did the children go back to school? Did they return to happy homes? Not according to Oxfam, which found that the displaced child workers ended up in even worse jobs, or on the streets—and that a significant number were forced into prostitution.

Oops.

Heath sums things up this way:

For all the bluster and protest about globalization, the basic problem comes down to something that is quite simple. International trade is controversial because it allows individuals to engage in transactions that would be illegal (and immoral) if conducted domestically. People in China may find it normal to work for 10 hours a day six days a week, but in the United States it is illegal to hire workers for that long. Thus a company that closes down a plant in the United States and moves it to China is effectively doing an end-run around American labor regulations. It will also be doing an end-run around minimum-wage laws, workplace safety regulations, and probably a whole host of environmental regulations. So from a certain moral point of view, it seems obvious that these transactions should be prohibited.

Yet it is also easy to see that the consequences of such a prohibition would be extremely damaging to people in China—precisely those whose welfare ostensibly provides the motivation for the prohibition. The problem is that these trades, despite their apparent unfairness, are nevertheless mutually advantageous. Chinese workers take these jobs because they are better than the alternative, in a very poor country. Workers in Europe took jobs at comparable wages under similar conditions back in the nineteenth century. The only reason they don’t have to anymore is that everyone is richer. People will someday look back at us and marvel that we were willing to work under the conditions that we do at the abysmal level of pay that we currently accept; that doesn’t make it immoral for us to work the way that we now do.

Furthermore, it is essential to remember that when China exports goods to the United States, it uses the currency that is earned to import American goods to China. This is an important part of China’s development strategy, because it relieves China of the need to do everything that an advanced industrial economy must do, all at the same time. It allows the Chinese to import most of the equipment that is in their factories from Japan or Europe, rather than build it themselves. Or, to take a more interesting example, it allows them to import legal services from the rest of the world (China being a country that, until recently, had almost no lawyers). For a very long time, India followed a policy of economic autarky (self-sufficiency), convinced that trade with the West was a source of exploitation and dependency. The result, however, was economic stagnation, because Indians had to waste countless amounts of time and energy building things that they were not particularly good at building, things they could easily have bought elsewhere.

The important point is that trade between rich countries and poor countries, like all trade, is not a win-lose, but rather a win-win transaction. The consumer in the rich country is not literally gaining at the expense of the worker in the poor country, and the accumulated wealth of the rich country is not achieved through a transfer from the poor. In other words, there is no actual exploitation here—no one is made worse off. International trade is simply a system of mutually beneficial cooperation between people who live under highly unequal conditions. This is not to say that globalization is great, or that it has no problems. It just means that globalization is a very tricky issue, from the moral point of view. On the one hand, there is enormous unfairness in the terms of trade; but on the other hand, the trade is beneficial to both parties, and it is unclear how the terms could be modified without eliminating a lot of the benefits. Thus we need to weigh the pros and cons very carefully before deciding to outlaw certain transactions. Banning child labor should be fairly uncontroversial, but the question of what sort of adult labor or environmental standards to impose strikes me as being very difficult to resolve. Requiring anything like first-world standards is just an indirect way of creating trade barriers, which harm the poor. But at the same time, you don’t want to say that anything goes—that as long as everyone is benefiting, everything is okay. That would make child labor okay, too. Somewhere the line must be drawn: We just can’t really use our intuitions about what would be appropriate or fair in a domestic context to do so.

Without a doubt, the conditions for most workers in poor countries are absolutely abysmal. And without a doubt, if we here in the First World consider ourselves to have even the slightest sense of decency and morality, we ought to be doing everything we possibly can to help. But simply declaring “We won’t have any part of worker exploitation” and then cutting off trade to poor countries is not what “help” means. Nor does it help to encourage these countries to cut themselves off from the rest of the world. As we’ve seen with literally every country that has ever grown rich in modern history, no one does it alone; the route to prosperity always involves being open to foreign trade and investment. And trying to force an alternative ideology of “self-sufficiency” is nothing but a recipe for continued poverty, as Wheelan illustrates:

We’ve had a whole [discussion] on the theoretical benefits of trade. Suffice it to say that those lessons have been lost on governments in many poor countries in recent decades. The fallacious logic of protectionism is alluring—the idea that keeping out foreign goods will make the country richer. Strategies such as “self-sufficiency” and “state leadership” were hallmarks of the postcolonial regimes, such as India and much of Africa. Trade barriers would “incubate” domestic industries so that they could grow strong enough to face international competition. Economics tells us that companies shielded from competition do not grow stronger; they grow fat and lazy. Politics tells us that once an industry is incubated, it will always be incubated. The result, in the words of one economist, has been a “largely self-imposed economic exile.”

At great cost, it turns out. The preponderance of evidence suggests that open economies grow faster than closed economies. In one of the most influential studies, Jeffrey Sachs, now director of The Earth Institute at Columbia University, and Andrew Warner, a researcher at the Harvard Center for International Development, compared the economic performance of closed economies, as defined by high tariffs and other restrictions on trade, to the performance of open economies. Among poor countries, the closed economies grew at 0.7 percent per capita annually during the 1970s and 1980s while the open economies grew at 4.5 percent annually. Most interesting, when a previously closed economy opened up, growth increased by more than a percentage point a year. To be fair, some prominent economists have taken issue with the study on the grounds (among other quibbles) that economies closed to trade often have a lot of other problems, too. Is it the lack of trade that makes these countries grow slowly, or is it general macroeconomic dysfunction? For that matter, does trade cause growth or is it something that just happens while economies are growing for other reasons? After all, the number of televisions sold rises sharply during extended spells of economic growth, but watching television does not make countries richer.

Conveniently for us, a recent paper in the American Economic Review, one of the most respected journals in the field, is entitled “Does Trade Cause Growth?” Yes, the authors answer. All else equal, countries that trade more have higher per capita incomes. Jeffrey Frankel and David Romer, economists at Harvard and UC Berkeley, respectively, conclude, “Our results bolster the case for the importance of trade and trade-promoting policies.”

Researchers have plenty left to quibble about. That is what researchers do. In the meantime, we have strong theoretical reasons to believe that trade makes countries better off and solid empirical evidence that trade is one thing that has separated winners from losers in recent decades. The rich countries must do their part by keeping their economies open to exports from poor countries. Mr. Sachs has called for a “New Compact for Africa.” He writes, “The current pattern of rich countries—to provide financial aid to tropical Africa while blocking Africa’s chances to export textiles, footwear, leather goods, and other labor-intensive products—may be worse than cynical. It may in fact fundamentally undermine Africa’s chances for economic development.”

The truth is, despite how repugnant things like sweatshops might seem from our perspective, they really do represent a rung on the ladder to something better for the poorest people in the world. Alexander points to Bangladesh as just the most recent example of this:

For a long time, Bangladesh – whose garment industry has become almost synonymous with sweatshops – has been used as a critique of capitalism. And for an equally long time, capitalists have said this is a process countries have to go through and in a few years Bangladesh will reap a reward of economic growth and development. So it’s relevant to hear that Bangladesh is booming, with per capita income tripling in a decade, poverty rates cut in half, near food self-sufficiency, and the UN graduating them out of “least developed country” status.

And they aren’t the only ones, either. As Sowell writes:

The growth of international free trade has been said to increase inequality among nations because the 23-to-one ratio between the incomes of the twenty richest and twenty poorest nations in 1960 rose to a 36-to-one ratio in 2000. But the nations constituting the 20 richest and 20 poorest were different in 1960 and 2000. Comparing the same twenty richest and twenty poorest nations of 1960 over those decades shows that the ratio between the richest and poorest declined to less than ten-to-one. This leads to the directly opposite conclusion, suggesting that freer international trade may have helped reduce inequalities among nations, allowing some of the initially poorest to rise out of the category of the bottom twenty.

Nor have the benefits of participating in international trade only been financial, as Pinker points out:

Countries that depend more on international trade, [Barbara] Harff found, are less likely to commit genocides, just as they are less likely to fight wars with other countries and to be riven by civil wars. The inoculating effects of trade against genocide cannot depend, as they do in the case of interstate war, on the positive-sum benefits of trade itself, since the trade we are talking about (imports and exports) does not consist in exchanges with the vulnerable ethnic or political groups. Why, then, should trade matter? One possibility is that Country A might take a communal or moral interest in a group living within the borders of Country B. If B wants to trade with A, it must resist the temptation to exterminate that group. Another is that a desire to engage in trade requires certain peaceable attitudes, including a willingness to abide by international norms and the rule of law, and a mission to enhance the material welfare of its citizens rather than implementing a vision of purity, glory, or perfect justice.

For a whole host of reasons, then, we shouldn’t deny the most desperately needy people in the world the opportunity to participate in trade with the rest of humanity, and to potentially create more peaceful and prosperous lives for themselves as a result. As Harford writes, creating that kind of opportunity is ultimately what free exchange is all about:

In the end, economics is about people—something that economists have done a very bad job at explaining. And economic growth is about a better life for individuals—more choice, less fear, less toil and hardship. Like other economists, I believe that sweatshops are better than the alternatives and without a doubt better than starvation under the Great Leap Forward or in “modern” North Korea. But if I did not also believe that they were a step to something better, I would not be such an enthusiastic supporter of China’s [pro-market] reforms.

That is why I was cheered when I discovered that wealth—while very unevenly spread—has been slowly seeping inland from the “Gold Coast” of Shanghai and Shenzhen. Between 1978 and 1995, two-thirds of China’s provinces grew faster than any country elsewhere in the world. Most importantly, the people of China are feeling the difference. After years of paying low wages—because the supply of migrant labor from China seemed unlimited—factories on the Gold Coast are starting to run out of willing workers. (Foreign-owned factories pay a bit more and enjoy easier recruitment and lower turnover.) Between 2002 and 2006, average wages rose by 9 percent per year (and by 11 percent in the cities)—these numbers measured in dollars rather than local currency. Strikes are now commonplace, and after a change in the law in January 2008, workers now have more rights built into their contracts. All this is feeding into higher pay and better conditions.

But these steps forward don’t just come through strikes and changes in the law. They are also forced on employers by the fact that as China develops, workers have more and better alternatives to working in abusive settings.

In 2003, Yang Li did what many Chinese workers have done: she left home to work in a sweatshop in the Pearl River delta. A month later, after working thirteen-hour shifts, she decided to go home and start her own business—a hair salon. “Every day at the factory was just work, work,” she says. “My life here is comfortable.” Yang Li’s parents had to survive the Cultural Revolution; her grandparents, the Great Leap Forward. Yang Li has real choices, and she lives in a country where those choices mean something for her quality of life. She tried factory work and decided it wasn’t for her. Now she says that “I can close the salon whenever I want.” Economics is about Yang Li’s choice.

Continued on next page →