Tuesday, June 21, 2011

Free Trade Isn't Really Free; It's Been Very Costly to American Workers

Free trade was sold to the American people as a tool that would open global markets to American goods and increase opportunities for American businesses and workers.

It hasn't quite turned out that way.

Because workers in developing nations make a fraction of what American workers earn, U.S. jobs have been outsourced by American companies seeking to reduce labor costs and increase profits.

The average wage in developed economies is about 10 times the average level in emerging economies. That's the inherent flaw in "free trade".

These developing nations are often absent the unions, environmental regulations and worker protections found in the US.

In short, the playing field is anything but level and American workers are on the wrong end of the field.

What Americans have come to realize — as they were warned of in advance by people such as Ross Perot — is that free trade is not free at all. In fact, it's been very costly to American workers.

Jobs in manufacturing, the kind that built the American middle-class, have been hit particularly hard. Largely due to outsourcing, the number of workers in manufacturing dropped by one-third over the past decade.

Manufacturing has declined from 14.2% of GDP in 2000 to just 11% of total output today. According to the Bureau of Economic Analysis, in 2009 U.S. GDP was $14.2 trillion. Manufacturing contributed just $1.5 trillion to the total.

One of the consequences of the contracting manufacturing base is that exports now represent just 12% of the economy. On the other hand, the U.S. has led the world in imports for decades. As a result, the U.S. has a massive trade deficit and is the world's biggest debtor nation.

The nation is faced with a real unemployment rate of 22.3 %. The official unemployment number does not include the millions who have stopped looking for work or are working part time. If you add these numbers together, the actual number of Americans without a real full-time job is close to 24 million.

The U.S. will never overcome its unemployment problem as long as American jobs are continually outsourced to developing nations. Sadly, the U.S. is hampered by the fact that it treats its workers much better those nations treat theirs. This amounts to a huge disadvantage for the U.S.

Domestic competition is waged on a more level playing field. In the U.S. we have worker's rights; a minimum wage; over-time; coffee, lunch and bathroom breaks; holidays and holiday pay; vacation time; medical leave; maternity leave; worker's compensation; unemployment insurance and whatever else I'm leaving out.

We even have a few private labor unions left.

Foreign workers, in the developing countries where American jobs continue to be outsourced, have none of the above. In short, it costs a lot less to employ foreign workers, and that makes profit margins much higher for the American corporations that employ them.

In many developing nations, worker safety, proper care and fair treatment are after thoughts — as are environmental regulations. These things cost U.S. employers a lot of money and make them even less competitive internationally.

With jobs so scare, American workers are often forced to take whatever they can get and are competing for lower paying jobs. Consequently, over the past six months, the purchasing power of the average American's paycheck has fallen at a 3.2% annual rate.

This will have unintended consequences for American companies. Americans need jobs and money to make the U.S. economy tick. However, these things are not nearly abundant enough; consumer spending declined in May.

This is a big problem for an economy that is 70% reliant on consumer spending.

So while outsourcing American jobs may have short-term benefits, it will likely have long-term negative consequences for the very businesses responsible for it.

The current system is short-sighted. But, beyond that, it is simply unsustainable.

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