Chapter x:

The Question: Free Trade & Globalization

(The excerpts you will read here use Canadian examples, but the issues and ideas revolving around working and middle class ownership of big business apply to all developed countries.)

Your comments, please! This is a draft version of Chapter 1, provided here for the purpose of getting reader feedback. This feedback will be incorporated into the final version.

The Strangest Automobile Plant

Americans can produce automobiles in two ways: They can manufacture them in Detroit, or they can grow them in Iowa. Really!

The latter idea comes from economist David Friedman (Hidden Order, New York: Harpercollins, 1996). Producing automobiles in Iowa, the heart of American farming country, works like this: Farmers in Iowa first grow the raw materials for these cars: Wheat. They ship the wheat across the country by rail, load it onto ships, and send it off across the Pacific Ocean. Later, the ships return full of Toyotas, and America gets cars grown from corn.

That stretches our imagination, it's true, but as we'll see, Friedman's illustration helps us understand how trade, and especially free trade, makes working- and middle-class Canadians more prosperous.

Imagine, if you will, attending a convention of New Democrats, the Council of Canadians or some other group that vigourously opposes free trade. And, imagine taking to the podium and asking how many attendees do their own car repairs, make their own clothes, or grow most of their own food. In each case, you'd likely see a smattering of hands at most.

In response to their quizzical looks, you'd then thank them for living the principles that make free trade work (but don't expect them to thank you for pointing out the irony).

Few of us now try to be self-sufficient to the point of foolishness. Why spend hours and hours making your own socks when you can buy them for the equivalent of a few minutes work at your regular job? If you earn $25 an hour, you can earn the equivalent of a pair of socks in five to ten minutes. The same holds for car repairs, and just about everything else you consume.

If you recall our discussion back in Chapter 2, which explained the legacy of the Industrial Revolution, you'll recognize we're getting back to the issue of productivity. In this case, productivity from specialization. I specialize in growing potatoes, you specialize in baking bread, and by doing so we become comparatively good at each of our roles. And, when I trade some of my potatoes for some of your bread, we both win. We both end up with more than we would if we both tried to grow potatoes and bake bread.

That same principle underlies trade among nations. We specialize in wheat and trees, Japan specializes in electronics and sushi. That means all Canadians and all Japanese enjoy more prosperity when our two countries trade. We specialize, therefore we are more productive; and when we're more productive our standard of living goes up.

And, the freer the trade, the greater the gains for each nation. For many Canadians, of course, free trade immediately brings to mind the pitched battles over the Free Trade Agreement (FTA) with the United States and the North American Free Trade Agreement (NAFTA) with the U.S. and Mexico.

Unfortunately, the debates (or to be frank, noisy arguments) got caught up in the wrong question or questions: How many jobs will be gained or lost? Few, if any, debated the right question, which is: What's in it for consumers?

You see, all of us are consumers. Even the babies among us consume, as do the oldest residents of nursing homes. When the prices of the goods and services we consume go down, our standard of living goes up. Even if everything else stays the same, lower prices make us all richer. That's especially important for poorer Canadians, because lower prices make them less impoverished.

On the other hand, jobs and the people who work at them represent a select group. As our American cousins might say, they're special interests. It's all very well to argue that free trade agreements will cause some Canadians to lose their jobs, and some others to find new and better jobs. But, those who lose their jobs and those who find new jobs do represent just a part, albeit an important part, of the population. So, imagine if you will, a divide that separates all Canadians, all 34- or 35-million of us, and a few hundred thousand Canadians who may suffer a life-changing loss.

Let's call this divide the Theory of the Few and the Many. For a few Canadians, the results will be literally life-changing; they will lose jobs and their companies may shut down. Others will get new jobs, perhaps even in companies that didn't exist before the free trade deals. A relatively few people will feel the effect, but will feel it profoundly.

For the many, that is, all Canadians who consume, literally all of us, the effects will hardly be noticeable. The price of this will go down by a few cents and the price of that will drop a few dollars. But collectively, the effect will be huge. A few dollars a day may not sound like much, but when you multiply it by 25- or 30-million Canadians, the totals add up very quickly. Consider this: $3 per day multiplied by 35-million Canadians represents a saving of $100-million per day. Every day. Until some point in the unforeseen future.

What's more, the sum saved will go into additional spending or saving. In the case of spending, that's extra consumption that generates new jobs. In the case of savings, the money forms the investments behind the jobs of tomorrow.

And when we trade, the benefits to the many consistently exceed the costs to the few. Just ask any economist. Although members of the profession disagree on just about everything under the sun, they almost all agree that trade between nations, and especially free trade, is a good thing.

Yet, to hear the public debates, you'd think just the opposite occurs. That's understandable, because people who face job losses will protest loudly. Their protests are driven by private emotion and public drama, making them prime candidates for lead status (radio/TV) or front-page status (newspapers/magazines).

On the other hand, not many beneficiaries of trade and free trade even know about the gains they'll receive. And, if they do know, will they go to the barricades to demand their few dollars a day? Highly unlikely.

The Theory of the Few and the Many then, works out like this: Trade agreements between countries produce net benefits on both sides because the gains to the many consumers outweigh the losses experienced by the few who lose their jobs. But debate about trade agreements will focus on job losses because victims are strongly motivated to protest, and their pleas will be heard and amplified by the media.

The Game

It's Saturday night; you and your partner head off for an evening of cards with some friends down the street.

All four of you sit down at the table and take out your little bags of change. Mostly pennies, but also a some nickels and dimes, as well as the odd quarter that got into the mix in some long-forgotten game.

You each grab a drink, help yourselves to crackers and dip, exchange a few jokes and sit down at the table to play. Stakes normally start with a penny or two, and may go as high as five or ten cents when one of you feels lucky or feels like bluffing.

Throughout the evening, you all win some and lose some, with the pennies and occasional nickels going back and forth across the table. At the end of evening, no one's more than a dollar or two richer and no one's more than a dollar or two poorer.

Now here's the important thing: At the end of the evening, there is exactly as much cash as there was at the beginning of the evening (well, except for a couple of pennies that rolled off the table when someone thumped the table too enthusiastically). Because the total stayed the same throughout the evening, we call this a zero-sum game.

The idea of a zero-sum game is often used in business and economic analysis to illustrate important points. For us, the zero-sum concept is useful because it helps us understand most objections to free trade from people with left-wing political views.

Check out their arguments against free trade, and you'll usually find the idea that if one nation gains, the other must lose. For left-wing Canadians, free trade with the United States and Mexico would mean we lose jobs to the Americans and Mexicans, that we would lose sovereignty to the U.S., and so on. Of course, none of those things happened. In fact, just the opposite happened when it came to jobs.

Particularly colourful were the words of American presidential candidate Ross Perot, who referred to that "giant sucking sound" as jobs moved massively from the U.S. to Mexico. Yet, in the half dozen years following the enactment of NAFTA in 1994, and stimulated by the dot-com boom, the U.S. jobless rate was rarely lower. And even since then, there's been no overall loss of jobs because of free trade.

The zero-sum game also helps illustrate another important element of free trade: That imports must, ultimately, equal exports. So if we export more because of trade, we must also import more. And, that's what happens with trade agreements, whether it's a bilateral (two nation) agreement like the FTA between Canada and the U.S.A or among hundreds of countries participating in World Trade Organization agreements.

Let's go back to our example of potatoes and bread. If I specialize in growing potatoes and you specialize in baking bread, we both get richer through trade. The reason is simple: By specializing, we can accomplish more with each hour we work. Again, we're back to productivity, where every improvement in productivity directly produces an improvement in living standards. In the end, trade and free trade give us positive-sum games (technically, perhaps that should be non-zero-sum games), in which both sides gain and neither side loses.

Free Trade & the Poor in Other Countries: The Big Question

Another Saturday morning, and you're off shopping again. Today, just one stop, and that's to pick up a new cell phone. You get to the store, and while waiting at the checkout, you discover it was manufactured in a developing country, one of those places where people make less than a dollar an hour. Should you buy the phone? Should you feel guilty if you do buy it?

Some people would suggest that in buying this phone you've exploited some people far poorer than you. That you should feel guilty, because if you refused to buy it, you'd send a message to the retailers and manufacturers who take advantage of the poor.

However, I'd suggest you apply a simple litmus test before making a judgement one way or the other. That litmus test takes the form of a simple question: "Did the people who made this product have a choice about where they worked?"

If they had a choice, then you should buy the product and not feel a bit guilty. In fact, you should feel good about yourself, because you've helped some people in a poor country become more prosperous. You've helped them along on the same journey that saw our great-great-whatever-great grandparents escape from poverty.

If the workers in that factory did not have a choice, then you should not buy the phone, and if you did buy it, then you should feel guilty. We'll discuss why in a moment, but for now, remember that whether you're exploiting someone in a poor country all depends on the answer to that question: "Did the people who made this product have a choice about where they worked?"

The reason we ask the question comes down to this: People in poor countries who have a choice will do what's best for them. They may work in a factory where they earn only 50-cents an hour, but their other choices probably pay less. Unlike those of us who live in prosperous countries, they don't have a chance of getting a job that will bring in tens of thousands of dollars a year. "In a poor country like ours, the alternative to low-paid jobs isn't well-paid ones, it's no jobs at all" was how Jesus F. Reyes Heroles a former Mexican ambassador succinctly captured the essence of the question (cited in In Defense of Global Capitalism, by Johan Norberg, p.194).

Nor, can workers in poor countries apply for unemployment insurance, welfare, or other types of social support. In their countries, you may have the support of your family, who will be just as poor as you, but that's it.

The Cruelty of the Left

For years, we've been told over and over that we should boycott products made in factories in poor countries. But, of course, that's a myopic message.

And, it's driven not by altruism, except ignorant altruism; it's driven by special interests intent on preserving jobs in Canada and other rich nations. It's a strategy that serves the interests of a narrow slice of Canada's middle-class, and disserves everyone else in the country.

Now, it's fair game to try to preserve your job and the jobs of others – in a transparent way. But it's not fair to make that case with by dishonestly suggesting you've committed a moral offence with your purchases.

Beyond that, though, we need to total up the damage done by the Left's dishonesty on this issue. First, they're helping keep poor people in poor countries in poverty. There's only one way these people can get ahead, and that's through more trade and investment by rich corporations. Boycotting their products only prolongs their suffering.

Second, they hurt the poorest people in Canada and other rich countries. Without access to products made in the 'sweatshops' of the world, they must pay more for everyday essentials. Because of their low incomes, they have fewer consumer choices than most of us, and to make them pay more hurts them even more.

The Road Ahead

So, what happens when a company arrives from a rich country and sets up a factory in a poor country? First, the company will hire working people, to build the plant, to operate the the machines in it, distribute the products, and so on. Because it's new, and needs to hire quite a few people, the company will likely offer wages slightly higher than those paid by other companies in the same sector.

As a result, other employers in the poor country could or will lose some of their employees, and likely their better employees. To help stem the loss of key employees, the other employers will increase the wages, and perhaps the benefits, they pay to all employees.

So, simply by arriving and hiring even a relatively small number of employees, the company from the rich nation has helped put upward pressure on the wages of all employees in the poor city or country.

In addition, the newly-arrived company will likely use newer machines and better technology. That will make it more productive, and in turn, put pressure on other companies in the area to increase their productivity as well, by providing more training and education that also help the employees.

And, as we saw earlier, when productivity increases, the real wages of employees increase. Fewer employees may be needed, but those who stay will get better pay.

Globalization

In December 2009, the Canada Pension Plan Investment Board had its eye on a potential acquisition, one worth nearly $8-billion.

Working in partnership with a fund from Abu Dhabi, and advised by an American investment banker, it planned to make an offer for a French company which operates an electrical distribution network in the United Kingdom.

Now we glossed rather quickly over the details, so let's look at them again:

• A Canadian organization (CPPIB) is looking for investments outside Canada
• It spots a company based in France
• The French company operates in the U.K.
• To help with its due diligence, it hires a company in the U.S.A.
• It partners with a money source in Abu Dhabi.
  

We see five different countries involved in this deal, just one of the many foreign investment deals undertaken by the CPPIB. Welcome to globalization, 21st Century-style. And, as an 'owner' of the Canada Pension Plan, you're part of it.

Globalization is, in effect, an expansion of free trade, beyond the exchange of goods and services between countries. Wikipedia offers the following list of areas in which we sometimes think globally as well as locally or nationally:

• Industrial
• Financial
• Economic
• Health
• Political
• Informational
• Language
• Competition
• Ecological
• Cultural
• Social
• Technical
• Legal
• Religious

The most obvious example of globalization, one that connects many issues on this list, is the Internet. In just a few years, it made us all part of one or more global communities. Even the greatest technophobes among us, who refuse to connect at all, are affected by it on a daily basis because their neigbours, their employers, their unions, and their governments have adopted it. And one more thing: their (and our) pension plans! 

Ah! Those pension plans again. Which means we – all of us who contribute to mutual funds and pension plans – are among the prime drivers of and the main recipients globalization.

For a moment, let's cast our minds back to one of the many anti-globalization demonstrations that now accompany every meeting of world leaders. You can choose Seattle in 1999 or Toronto in 2010, or anything in between. Think of the protestors with their angry slogans and sound bites at the ready.

Yep, they're drivers and beneficiaries of globalization, too! In fact, since the labour movement is often closely tied to such demonstrations, there's a delicious irony of which few of the protestors would be aware: The union movement played a big part in extracting pension plans from both companies and governments, and at increasing the benefits to their members, which in turn helped get companies and governments looking beyond their borders for more and better investments. So, as you watch the next big protest, remember that many of the demonstrators have only themselves (or their parents) to thank for globalization and its imagined ills.

For the rest of us, we'll just go on appreciating the better lives we live, and the better lives people in poor countries live, because of free trade and globalization.

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Bob Abbott

People, Profits, & Pensions: The Ownership Revolution, Copyright Robert F. Abbott 2010