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Global Trade: Meeting Its Challenge

Remarks delivered to the ADA Economic Committee May 16th, 2000, by Charles Craypo, Notre Dame Department of Economics

Introduction

When one approaches the issue of global economics from a labor perspective, the problems of globalization and trade, and their impact on workers, communities, and the nation become clear. They can be summed up as: Over time, free trade erodes existing labor standards; it destroys high paying jobs; it damages industrial communities; and it weakens national productive systems.

Labor history, from the beginning to the present day, is a study of employers' search for cheaper labor, either to gain a competitive advantage over other employers, or in response to the competitive advantages in wages which other employers already enjoy. There are two primary ways an employer, or sometimes an entire industry, can achieve this goal and these two methods are symmetrical. Employers either can bring low-wage workers to the job or they can bring the job to the low-wage workers. The process - as it involves globalism, and particularly international migration - is either a story of immigrant labor or a story of emigrant jobs.

Immigrant Labor

The story of immigrant labor is as old as American industrial history. One fascinating example is the pre-Civil War New England textile mills. The industrial workforce in those mills, the first industry that we would recognize as a mass production industry, was composed primarily of what were called "New England mill girls." Employers literally sent contractors out in carts. They would visit the farm. Farmers were agreeable to sending their daughters to southern New England into the mills providing that there were some sort of dormitory arrangement, or "in loco parentis," to ease their worries as parents. As a result, for quite some time, the industry had little trouble recruiting enough mill girls, in addition to the entire families they sometimes employed. These recruits become the first true American industrial workers.

Yet, after a number of wage cuts combined with increased work burdens, it became more and more difficult to find the New England mill girls who made up the core of the work force. As a result, the employers - first a few of them, then essentially the entire industry - resorted to importing French Canadian and Irish women to work in the mills. In this case, they were bringing the immigrant workers into the mills. Later, the textile industry either would migrate south or go overseas in search of cheaper labor.

All of us are familiar with employment patterns in the basic industries at the turn of the last century. Many Americans are here because our ancestors were brought over from various parts of Europe to work in the mills and the factories. The overall migration was massive. If, for example, one looks at the early history of steel and some of those other core industries, one readily sees that American workers, young males, would not work under the hard, dirty, dangerous conditions and at the pay immigrants were willing to accept. The latter, however, had little choice. Once they were here and hired, for example, by US Steel in the Gary Works, they had nowhere else to go. Initially, US Steel hired farm boys from Indiana, Illinois, and Michigan, but they wouldn't stay under the poor conditions and at the low wages US Steel was prepared to offer unskilled labor. US Steel, therefore, imported its labor force and built a segregated city laid out according to ethnic groups. Immigrants couldn't go home; they couldn't quit; they didn't have a farm to go back to. They had no alternative but to stay and become the work force of the largest steel complex in the world.

The trend continued. In post-war farm worker programs, Hispanic, mainly Mexican, field workers replaced U.S. workers, who both preferred and could obtain jobs in defense plants and other factories at much higher wages.

The meat packing industry is another recent example of this phenomenon. Over a 15 to 20 year period, a whole industry has replaced its native work force -- permanent residence in the communities -- almost entirely with immigrant workers, both documented and undocumented. The first immigrant group brought into these packing plants were Asian boat people who, in turn, were replaced with Hispanic workers, initially from Mexico, but later including those from other Central American countries. Now, according to the United Food and Commercial Workers, the Hispanic work force is being supplanted by Bosnians. Tomorrow it may be Kosovars. In short, wherever one finds a distressed population, it becomes a prime target to work in this and other low-wage industries.

The information technology industry achieves its goals both ways. They import workers under the H-1B visa program, as in the Silicon Valley and Puget Sound or, by using satellite digital information systems, they emigrate these jobs to highly trained, efficient IT workers in places such as India, for example. Technology, therefore, doesn't solve the problem of immigration of jobs as we are told, but, in many important respects, aggravates it.

Emigrant Jobs

Emigrant jobs also have become an all too familiar experience. For example, the Wall Street Journal cites the computer equipment manufacturing industry. We've been told that high-technology is to be our industrial savior through the regeneration of high-wage jobs for American workers. Yet, computer equipment manufacturers have discovered Guadalajara, Mexico, which reportedly has that country's highest level of formal education and vocational training. Thus, a skilled labor force is available in a country characterized by low wages and high unemployment. As American companies such as Dell and others move increasingly into sales and distribution, they contract out more and more of the actual manufacturing and assembly of their computer equipment. The contractors, in turn, are taking this work into Mexico, particularly to Guadalajara. Initially, they had to take middle level people from the U.S. to run those plants but now, with time, experience and training, they employ much lower wage Mexican labor.

An article in the current issue of Mother Jones humanizes the problem. The author traced the production history of a particular machine. This machine initially was used by a family-owned plant in Patterson, New Jersey. The plant, which made the ballasts that go into florescent bulbs, was acquired by a conglomerate which, in turn, was acquired by another. Two or three acquisitions later, in the 1980s, the machines were moved to Mexico. The writer followed the path of one machine, along with the biographical histories of the two persons who worked on that machine, one in the U.S., the other in Mexico. The story is revealing. One worker is an African-American woman, who in the 1950s migrated from a southern state to Patterson to join the industrial workforce. All together, she devoted thirty years of her life to working in this plant. She started out making one dollar per hour in 1950. By the time the plant was closed and its operations moved to Mexico, she was making enough money to support her family and, therefore, although divorced, was self-sufficient. Her Mexican counterpart working the same machine, also migrated from a farming community in central Mexico, because she couldn't make a living there. She traveled to a Maquiladora plant on the U.S. border and is working at 97 cents per hour - discounting for inflation, the same wage that was paid for working at the same kind of job in the United States in 1950.

National Economic Systems

The historical development of English-speaking trade economics is instructive. From the perspective of Adam Smith, for example, the study of national economic systems rests on the tenet that the best economy is the one that gives consumers the lowest possible prices. The reason for this is that low prices reflect efficiency, as a result of each individual expending maximum effort to achieve maximum individual gain. To Smith, that was the point of it: to convert self-interest or personal greed into the common good by rewarding people for hard work. They would produce more and the effect would be to increase the "wealth of the nation." Ricardo, another classical economist, later built on Smith's analysis to develop his comparative trade advantage concept. This says, simply, that different countries are more efficient at producing different kinds of things depending on their location, climate, social practices, education and so on. The example Ricardo used in this regard is enlightening. It is the case of British linen trading for Portuguese wine. The British could never duplicate Portuguese wine, because they were in the wrong climate and they didn't know how to make good wine to begin with. For the same reasons, the Portuguese couldn't duplicate British linen. Thus, those were natural products to trade. But there are always assumptions in these economic models. Among other things, in comparative trade theory transactions must be at arms-length. Robert Heilbroner examined the Ricardo example and discovered that the major Portuguese wine distilleries, at the time that Ricardo was writing, were owned by the British. Actual trade relationships were and are complicated. Thus, although one of Ricardo's necessary assumptions was shown to be invalid, and NAFTA has been shown to destroy more jobs than it produces, that doesn't keep comparative trade theory out of the textbooks. It is still being taught as if it were not somewhat make-believe.

What is missing from most textbooks is the story of Friedrich List and protective tariffs. List was an early political economist who traveled about the principalities that eventually became Germany preaching the advantages of unification. As a result, he was chased out of Germany and gravitated to the United States, settling in Missionburg, Pennsylvania - Pennsylvania Dutch country. There he became a newspaper publisher and a small businessman. On his frequent trips to Washington, he would sit in the Congressional balcony and listen to American politicians debate national trade policy. What he heard was the opposite of free trade. American policy makers didn't subscribe to Ricardo's philosophy at all. In fact, they viewed it as being entirely a self-interested argument, because free trade under Ricardo's terms could only benefit the British who were then far ahead of every other country when it came to manufacturing. Then, and now, a national productive system could not be a global power without having a strong manufacturing component.

Thus, early American industrialists and policy makers believed if they didn't protect their manufacturing industries they would forever be shipping commodities and raw materials to the British, who would make them into finished products which the Americans, in turn, would buy from the British largely on their terms. In other words, they always would be at a trade disadvantage. They would never learn to make steel and machines and the other products a country needs in order to be taken seriously. In saying this, the Americans of the day simply were justifying their own tariffs, which were at that time and would remain for decades among the highest in the world.

The lesson here is that no industrial power has ever become an industrial power practicing free trade. Even the British didn't because, going back before Queen Elizabeth, they had deliberately protected their agriculture, fisheries, their merchant fleet, and their manufacturing. It was only after the British had these unassailable comparative advantages that they began to preach, and later to practice, free trade. The nearest examples of genuinely free trade countries in the world today are the U.S. and the British, and each year we compete with one another to see who can set the higher trade deficit. Right now the United States is winning. Our current account trade deficit between 1997 and 1998 increased by more than half. Last year it exceeded $300 billion. In each of the first few months of this year it has been at record levels. To practice free trade, when the rest of the world practices something approaching managed trade, is quite harmful to the living standards of average American workers and their industrial communities, such as Patterson, New Jersey, Youngstown, Ohio and elsewhere. It undermines the nation's entire production system. It becomes a dynamic, interactive process. If you give up certain industries to overseas producers, after a generation you don't know how to make those things. For example, if we ever got truly serious about rapid transit in our cities, we would be forced to buy - as we have been buying - the rail cars either from Bombardier, the Canadian company, or from a European or Japanese company. Another example is the machine tools that we no longer manufacture. A nation can't be an industrial power if it doesn't make machine tools. Today, however, the Germans make the high-end tools; the Japanese the middle range; and developing countries the low-end lathes and industrial machines that everyone knows how to make but not how to do so and compete in a low-wage market.

What obviously is happening is that industry is rapidly becoming more integrated globally. One can't read an issue of the Wall Street Journal or the Financial Times, without seeing a half dozen or more corporate combinations of one kind or another. It is very much like the formation of industrial oligopolies in the U.S. In the first and second great merger waves of the turn of the last century and the 1920s, the American industrial oligopolies were formed. Thus, three auto companies emerged in the U.S. They became unionized in the 1930s and became leaders in setting labor standards all over the United States. Oligopolistic market power was made to work in the interest of workers and to stabilize communities. Are we now seeing a repetition of this globally? If you take into account all of the recent mergers, the interlocking ownerships, there are now about seven auto companies, and they seem to be working themselves down to a number smaller than that. Six auto companies control three-quarters of global production and sales. Tomorrow, maybe the top three or four will control 90 per cent. The historic lesson here is that things won't get better until national labor movements are able to organize and coordinate internationally, which is difficult enough, and then to move those companies toward uniformly high labor standards. In reality, this requires some combination of labor contracts and labor standards legislation. Without identifying the details of such responses, we don't really know what's coming. We do know that this is another great transformation that we are experiencing and, so far, much of it has been bad news. In short, we need to promote worker rights in the global economy. The difficulty is in enacting and enforcing restrictions on capital and technological mobility.

The Swedes, for example, years ago tried to contain the emigration of jobs out of Sweden by, among other things, imposing restrictions on the importation of goods previously manufactured in Sweden but since relocated in low-wage countries. Eventually, they had to more or less abandon the effort - either for political reasons or because such restrictions proved impossible to enforce.

Nevertheless, the Swedes were correct in focusing on the jobs. We might be wise to concentrate our efforts on the direct protection of labor standards by focusing on the jobs rather than on the workers. The problem with economic policy analysis here is that when labor economists study the problem of bad jobs, they instead focus primarily on the workers. But, if we have a policy problem with the numbers of workers that are not making enough money, we examine the workers instead. Not surprisingly, when we do, we find that pay correlates directly and strongly with education and education then becomes the solution to everything. When students at Notre Dame were asked in class, "If by some miracle tomorrow morning, every working age adult American had a college degree, who would pick up the garbage," they replied, "Oh, of course, the people with degrees from Indiana University - certainly not us." The point is: society always finds some socially determined way of allocating the more desirable and less desirable jobs. Education is one such determinant, and if it were equalized society would still allocate the good and bad jobs accordingly. The solution is to turn bad jobs into good jobs in terms of pay and conditions.

Protective labor standards have to be a very important part of the solution. Wage and hour laws, safety laws, and others need to be far stronger and better enforced than they are now. But, that cannot happen in a market economy without unions that are both strong and independent. The AFL-CIO has made an important step in this direction with their recent statement on immigrant labor, by advocating amnesty for the estimated 6 million undocumented workers in the United States, and instead targeting the employer (that is, the jobs) rather than concentrating on the workers themselves. This reflects a basic understanding of the problem and a shift in policy.

Specific recommendations for international reform need to include:

  1. International organizations, such as the World Bank, the International Monetary Fund and the World Trade Organization, should adopt a series of rules protecting and promoting workers' rights and human rights. These rules should be monitored carefully and enforced.
  2. Enforceable rules incorporating such rights should be built into international trade agreements and provisions covering government regulations on investments.
  3. All government agencies should promote implementation of the 1998 ILO "declaration of fundamental principles and rights of work" which was adopted unanimously and commits ILO members to observe the following "core worker rights."
    1. freedom of association, including the right to form unions
    2. recognition of the right to bargain collectively
    3. elimination of all forms of forced or compulsory labor
    4. abolition of child labor
    5. elimination of discrimination in employment and occupation
  4. The U.S. Senate should ratify the ILO 1948 convention on freedom of association and the right to organize as well as the ILO convention on the right to collective bargaining.
  5. Legislation should be adopted which holds multinational corporations accountable for conduct which violates decent workplace policies for their employees and the employees of their subcontractors.

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