Author: Rajiv Srinivasan
Publication: Rediff on Net
Date: February 14, 2003
One of the articles of faith these
days is that free trade is a panacea for all sorts of evils. Proponents
of free trade and the concomitant globalization argue that comparative
advantage is key. That is, each country or region should produce what they
can do better than anyone else. Others will buy this product, and in turn,
sell things that they themselves have an advantage in making.
In theory, this is all well and
good. Thus, for instance, India, which is good at making polished diamonds,
should sell these to the US which in turn sells India aircraft engines,
which it is good at. Thus, capital will flow to India as investors wish
to own equity in diamond polishing companies; similarly capital will flow
to the US to make aircraft engines.
The fly in this ointment has always
been the insistence of the developed nations that such capital flows were
good and proper; but not similar labor flows. For instance, why shouldn't
said diamond polishers be allowed to immigrate to the US, since there is
a demand for their skills there? We have been told, however, that transferring
labor was not good. Why? The West said they'd prefer not to, much like
Bartleby the Scrivener. No further reason was given.
The reason is of course obvious:
they do not want even skilled Third World types crowding into their nice,
well-ordered countries. After all, they have enough trouble absorbing the
guest workers they brought in already to do the menial tasks they themselves
do not wish to do. Just look, they say, at Turks in Germany, Algerians
in France, and Mexicans in the US, all brought in as cheap, unskilled labor,
and now causing problems in host countries.
In addition, the West has been adept
at something called 'managed trade' or 'fair trade.' That is, even in items
where the non-West has a genuine competitive advantage, the West has fixed
things so that they win. This is called 'fair trade,' a magnificently Orwellian
term, as it really means 'unfair trade.' The West has managed this through
either tariff barriers or non tariff barriers.
The best examples are the uncompetitive
farmers of Europe and the US. There is a butter mountain and a wine lake
in Europe, unsellable overproduction, because inefficient producers are
subsidized by governments out of political considerations. On the other
hand, the US government pays some farmers to let their fields lie fallow.
These are clear barriers to entry: protectionism by subsidy.
There are some interesting statistics
in Businessworld ('Don't say Cheese,' December 30, 2002) about the subsidies
enjoyed by farmers in the rich world:
Daily subsidy per cow
USA - $2
EU - $2.50
Japan - $7.50
India - Nil
Added milk cost for consumers
USA - 71%
EU - 76%
Japan - 400%
India - Nil
There are other facts too, quoted
in the same article:
* Support to wheat farmers in the
EU amounts to 46 per cent of receipts and adds 86 percent to their income
* The subsidy for rice growers
in Japan equals more than seven times the world price of their output
* India's farm subsidies are negative.
It offers no direct subsidies but provides $1 billion worth of indirect
support on inputs to about 110 million farming families
* The number of farmers in rich
nations is falling. In Japan and the EU, it's down to 2 per cent of the
population, in the US it is 1 per cent. 900,000 US farmers get subsidies
that rose 700 times since 1996 This, in addition to highly creative non-tariff
barriers. The article above quotes the tale of the camel cheese makers
of Mauritania. Low in cholesterol, high in vitamins, the product had some
appeal. The EU ruled that 'in the interests of hygiene' the cheese could
only be imported if the camels were milked mechanically. Right, the poor
desert nomads of impoverished Mauritania were going to invest in milking
machines!
The best non-tariff barrier that
I can remember is the one that the French imposed on Japanese video players
in the 1980s. Alarmed at surging imports, the French came up with a winner:
each Japanese VCR had to be examined at the customs facility in tiny, Poitiers,
which is far from every port. The result? The obviously superior Japanese
product was in effect eliminated from the market, and local producers benefited.
Of course, local consumers did not benefit, but then nobody worries too
much about them.
So that lovely euphemism, 'fair
trade,' should be seen for what it is: the prettified face of protectionism.
The mercantilist governments of the West, especially the US, specialize
in this; naturally, they have loaded the WTO procedures in their favor,
as well.
Similarly, since the free movement
of labor would have been unpopular, they arrived at a simple formula: export
the dirty and dangerous jobs to locations where the poor locals could be
exploited and paid a pittance. Thus the maqiladoras on the US Mexico border,
the sweatshops in Southeast Asia, and the brutal gulag factories of China.
This way, the highly paid and appealing
service jobs remained in the West, and there was no need to worry about
what to do with immigrants once they and their children started demanding
the good life, too. This, I guess, was a good example of 'fair trade.'
But then along came the Internet.
Like all really good inventions, the inventors had no idea what the thing
would eventually be used for. This is like the case of the motorcycle,
which the original inventor thought would be a good vehicle for the village
postman! The Internet has made it possible, despite the best efforts of
Western politicians, to transfer those highly paid and appealing service
jobs to the rest of the world.
This is the crux of the matter:
if the labor couldn't migrate to the jobs, the jobs are now migrating to
the labor. With a good Internet connection, anybody anywhere in the world
can offer their skills to the job market. To begin with, it was indeed
the highly-paid service workers in the West who started to make use of
this: thus, management consultants would repair to Aspen, Colorado, and
offer their advice, say, après-ski.
But it soon become apparent that
it is just as possible for software developers in Bangalore to do the same
thing: thus the flow of IT jobs, and an arbitrage opportunity that has
been taken advantage of by a number of firms. Similarly, the new area of
IT enabled services, including Business Process Outsourcing can result
in a wholesale exodus of back-office work to less developed nations with
lower costs, but trained human resources: such as India, the Philippines,
much of Southeast Asia, Eastern Europe, etc., The New York Times said recently:
Forrester Research of Cambridge,
Mass, predicted in a recent report that the acceleration in outsourcing
would result in 3.3 million American jobs moving offshore by 2015, an exodus
reminiscent of the tide of American blue-collar jobs that moved to East
Asia in the 1980s. Forrester estimates that 70 percent of these jobs will
move to India, 20 percent to the Philippines and 10 percent to China.
This would be even more alarming
than the exodus of manufacturing jobs from the US. It would, in effect,
amount to a défi Asienne, with apologies to Jacques Servan-Schreiber
and his idea of the American challenge to Europe.
For, there are a lot of moderately
well-paid clerical jobs performed by moderately intelligent, middle class
people in the US and Europe that can as easily be performed by some bright
youngster in an outsourcing center in India. Assuming that the PPP (purchasing-power-parity)
multiplier for India is about 4, then the fully loaded cost of the Indian
youngster can be as low as 30 to 33 per cent of the loaded cost of the
American/European.
Clearly an arbitrage opportunity
exists for the Indian youngster and the American employer. The Indian youngster
will live roughly as well as his counterpart in the US, because he is being
paid the PPP equivalent of the latter's income, which incidentally also
reduces his incentive to emigrate. The company saves a significant amount
because of the differential costs in nominal dollars. Well, as for American
employee, he needs to upgrade his skills.
As heartless as it sounds, this
is simply the consequence of Adam Smith's Invisible Hand: in the absence
of market distortions, the more efficient producer wins.
Of course, this is not something
that said middle class people in the US will sit by and watch idly: they
vote, and can get their voices heard in the state legislatures. The first
broadside in this campaign was the recently-introduced Bill in the New
Jersey legislature that will prevent any call centers for state business
from being run offshore.
On the face of it, this is immaterial,
because there are not so many deals for call centers run by states. However,
the intent is to set a precedent that could be used to press against the
movement of service jobs offshore. Other states, sensing a good political
cause, will jump on this. And, of course, they will raise all sorts of
jingoistic America-first slogans.
It is highly likely, of course,
that this will end up in the WTO eventually. I believe the Americans will
lose, because this is a blatantly anti-competitive activity, and the raising
of a unilateral, non-trivial non-tariff barrier. However, as in the Helms-Burton
bill and the banana wars of a couple of years ago, we can expect the Americans
to create much bad blood and to threaten all sorts of one-sided acts, such
as invoking 301c.
There have already been rumblings:
The New York Times ran a story ('Experts See Vulnerability as Outsiders
Code Software,' January 6, 2003) which contains a fairly preposterous suggestion
that national security is at stake just because standard business software
is being coded offshore.
Similarly, the San Francisco Examiner
ran a story ('A Crime against Americans,' December 24, 2002) which is a
complaint by a Livermore, CA programmer wherein he squarely lays the blame
for his unemployment on Indians - as though the business cycle and the
dot.com bust had nothing to do with it.
An excellent example of Americans
talking out of both sides of their mouth comes from their dealings with
Vietnamese catfish farmers, from the Economist ('Case of the ghostly catfish,'
December 14, 2002):
In essence, the dispute is simple:
cheap imports of Vietnamese catfish threaten to put United States' producers
with higher costs out of business.A trade agreement between the two countries,.
eliminated tariffs on catfish a year go. But instead of submitting to the
free market principles aired while pushing [the pact], America's lobbyists
and lawmakers are seeking to crush the Vietnamese producers.
Predatory mercantilism in action,
of course. First, the Catfish Farmers of America insisted that Vietnamese
catfish could not even be called 'catfish' because it was raised in the
Third World. (Note to the Indian government: soon Americans will try to
take over the very names such as neem, basmati and ayurveda, some of which
has already happened in Germany.) Next they came up with something amusing
to determine if the Vietnamese were 'dumping' the product in America. The
Economist story continues:
So they asked the Department of
Commerce to work out how much it would cost to raise hypothetical catfish
in India, fillet and freeze them in imaginary factories, and ship them
in phantom boats to America.
But the fact of the matter is that
Vietnamese farmers will be competitive under practically any circumstance,
contends the article, because of their abundant cheap labor. This is the
core issue: because of abundant, comparatively inexpensive labor, Asian
countries such as India will come to dominate the offshore services market.
That is, unless the WTO and the West come up with some splendid new arrangement
to undermine their competitive advantage.
The Americans, bless them, are trying:
they have come up with a brand new proposal to reduce tariffs on everything
to zero by 2015. Robert Zoellick, US Trade Representative, made a formal
pitch to the WTO in 2002. However, despite rosy predictions of how this
will help everybody, many others, especially in the Third World, remain
unconvinced, fearing that the net result may be beneficial only to America.
There is some reason for skepticism,
it appears. A paper by Andrew Rose of the University of California, Berkeley,
titled Do We Really Know That The WTO Increases Trade?, answers its own
question with a simple 'No.' The author suggests that 50 years of trade
data covering 175 countries indicates that it was other factors, not the
WTO or GATT itself, that has caused world trade to boom in recent years.
While the jury is still out on this
one, and the catfish controversy will be argued over, the simple lesson
for India's call centers and other backoffice operations should be: carpe
diem! Seize the day. I agree with what Narayan Keshavan, director of the
Indian American Forum for Political Education, said on rediff.com ('US
legislators demand end to offshore outsourcing,' February 11, 2003):
Indian corporates, in my view, have
been sanguine and not pro-active in countering this growing phenomenon
of legislative protectionism to serve populist sentiments although they
make no economic sense.
They cannot afford to be.
