One frequently encountered argument against free trade is that the generally lower regulatory burdens faced by companies in poor countries afford companies in these countries an "unfair" advantage over companies in rich countries (because rich-country governments generally have more stringent regulations on worker safety and emissions of environmental pollutants).
‘Tain’t nuthin’ unfair going on.
First, an economy’s ultimate purpose is not to produce for the sake of producing, but to produce for the sake of consuming. The ultimate standard for judging an economy’s performance is how well it satisfies consumers’ material desires, not how secure and fairly treated it makes producers feel. If producers in another country are better, for whatever reason, than are domestic producers at satisfying consumer desires, no economic or moral imperative is served by government protecting these domestic firms from competition — for do so, really, is to threaten to inflict violence upon consumers who insist on taking advantage of the good deals offered by the foreign suppliers.
Second, as with the focus on wages, focusing on the government-imposed regulatory burdens gives too narrow a view. Indeed it’s true: all other things equal, firms generally prefer to have to comply with fewer than with more regulations (just as, all other things equal, they prefer to pay less taxes and lower wages). But all other things are emphatically not equal. Rich countries are rich principally because they have good institutions — formal and informal — that make property rights reasonably secure, contractual commitments reasonably trustworthy, dispute-settlement processes reasonably unbiased, and on and on. Perhaps the greatest challenge to people who care about fostering wide-spread economic progress is to figure out how to create pro-growth institutions. Doing so is monstrously difficult. But it’s also terrifically important, for it’s the mix of these institutions that matter most for freedom and prosperity.
Suppose you’ve saved your pennies and have accumulated $10M to invest. You want to produce ball-bearings. Geographically, two places seem an ideal location for your factory: Nebraska and Nigeria. But geography is hardly all that counts. Will you commit your funds to Nigeria immediately upon learning that environmental and work-place regulations in Nigeria are more lax than they are in Nebraska? Hopefully not. (If your instinct is to say "Yes!", e-mail me; I have lots of things in my attic that I know you’ll just love to buy.)
Because your property — both immobile and mobile — will be much less secure in Nigeria, because in Nigeria you’re likely to have to pay bribes again and again and again, because your Nigerian workers will likely be less educated and less skilled, because the road, air, rail, water, and telephone infrastructures there are much poorer than in Nebraska, the fact that the Nigerian government imposes only lax environmental and worker-safety regulations on firms operating there means very little. The more-attractive place to set up shop is Nebraska.
Indeed, Nigerian factory owners might sing a related song: "We in Nigeria are forced to compete against factories in the U.S. and other developed countries that enjoy many more advantages than we enjoy — a rule of law, secure property rights, very little corruption." Would the Nigerian people be well-served if the Nigerian government heeded this (accurate) claim and, in response, protected Nigerian producers from foreign competitors enjoying the immense advantages that come from being located in the US?
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{ 13 comments }
This is slightly off topic. But, it occurs to me that one of the criticisms lobbed at America is that we are voracious consumers of scarce resources & environmental stressors. So, if one of the most taxing stresses on the environment is an American with a job, then there is an automatic benefit to moving that job to another country. A Nigerian making $5/day will almost certainly be using fewer fossil fuels than the American making $200/day. The Nigerian factory he works at will have to do an awful lot of polluting to make up the difference.
Kebko:
Are you being serious? Or just messing around?
My county spends $10s of millions every year dealing with air pollution. Some of that money goes to monitoring particulates and aerosols that drift over from China and contribute to our non-compliance. Untold millions more are spent on our high priced special formula gasoline. My children breathe that air. No new refinery in the lower 48 for 28 years. Old grandfathered refineries continue to belch because new refineries that would produce 1/4th as much are prohibited and those that are not prohibited cost too much. Hey, if that benzene spill were here rather than China? Liability? Come on professor. No one is paying me to compensate for my childrens' exposure, in fact I'm being taxed.
Look straight at my two daughters with asthma and tell them they need to suffer and yes, your parents need to pay for those pills because Chinese slave labor military controlled production is a good thing.
Kebko,
The issue you hit on is that of pollution efficiency. You hit it almost exactly backwards though.
What you basically have are two questions:
1) Will we produce a widget?
2) How much pollution will producing that widget create?
The 'Will we produce a widget' question is largely dependent on whether we can produe the widget at a price below it's market value. In this respect, moving the labor overseas, to the extent that it lowers unit widget cost, makes it more likely the widget will be produced.
The 'How much pollution will producing that widget create?' question varies depending on where it is produced. The developed world produces far less pollution per widget produced than the developing world.
So in actuallity, moving production overseas to lower cost markets increases rather than decreases global pollution.
Please note, this is why things like the Kyoto treaty, which basically works by raising production costs in the developed world while leaving them unchanged in the developing world were pretty much guaranteed to increase global carbon emmisions if implemented.
Nathan:
I might be falling into that contrarian trap, but I'm more or less being serious, though with some people it's hard to tell the difference, I suppose.
Quadrupole:
You make good points, but I'm not sure you address fully my original point. Even if the producer is polluting more, the fact is that the labor in the American version is likely driving an SUV 40 miles to work, and eating corn fed, subsidized beef, while the Chinese labor is likely riding his bike to work & eating rice & veggies for dinner.
Aren't these secondary or tertiary pollutions that are products of those factories? As long as there is a large discrepency in incomes, it seems to me that there are positive environmental consequences from moving production to the 3rd world which mitigate, to a certain extent, the extra pollution that the factory may be causing directly.
The American drives his SUV 40 miles to work because he chose his car, and his residence, in times when petrol was a lot cheaper. Only 7 years ago I was paying less than $1/gal.
But he likely made those choices because to live closer to work, he had to put up with a less-desirable residential environment. That choice was rational at the time; it was easier to move out than to bring about community betterment.
Today there is more incentive to live closer to your job, isn't there? Drive a more economical car, too.
An it may be that the American worker produces more widgets per shift too, thus his environmental impact is spread over a larger production base.
Kebko,
My pardon, I was insufficiently clear about my counter point because I was using a micro example. Here's the thing.
http://earthtrends.wri.org/searchable_db/index.php?theme=3&variable_ID=468&action=select_countries
If you look at, for example, metric tons of CO2 per million $ of GDP of the US (626.1 metric tons per million dollars) vs China (3135.4 metric tons per million dollars) you see that producing a million dollars of good in China produces about 5 times as much carbon emmisions as producing a million dollars worth of goods in the US. Since these are numbers averaged over whole GDP and the whole carbon emmissions of the respective countries, they include the driving of SUVs to work and the eating of grass fed beef in the US.
Or to put it differently, my argument proves out in the macro as well as the micro, and it's quite simple: for a $ of output, production in the developing world produces more pollution than it does in the US.
I can't remember where I read it (it was a couple years ago) but it has been speculated that the reason asthma and allergies are rarer in eastern europe is BECAUSE the kids grew up in such a polluted environment.
I had asthma and allergies as a kid, but I don't know how relevant my living in a suburb of the twin cities was to that.
Quadrupole: Good points.
True Liberal: Not judging, just pointing out. No need to justify it, to me at least.
Nathan: "Old grandfathered refineries continue to belch because new refineries that would produce 1/4th as much are prohibited and those that are not prohibited cost too much."
If you consider only construction cost, yes. But, factor in the cost of pollution (of the old refinery) as regards health hazards and redo the maths. The conclusion is quite different.
One can take the same arithmetic approach to casual smoking. Consider the cost of health care of those who are inflicted with a smoke-related sickness, but never smoked a cigarette in their lives. Add to it the medical cost (that we all support via medical insurance) of those who do smoke and contract a serious illness there from.
Then tack that total cost onto a packet of cigarettes. Wow.
Why don’t we do the same for gas prices? The cost is certainly not only that paid at the pump.
When we talk of "cost", we must be holistic. But we aren't.
Robert Cote: "No one is paying me to compensate for my childrens' exposure"
That's a good point, Robert. It's a problem we haven't yet solved. But let's be clear about air pollution. The quality of air we breathe across the U.S. has steadily improved for the past 36 years – the years when our flower power generation gained control, by the way. As the EPA reports, total U.S. tonnage of the six defined air pollutants is half what it was in 1970. That's total tonnage, not per capita tonnage.
Robert Cote: "Old grandfathered refineries continue to belch because new refineries that would produce 1/4th as much are prohibited and those that are not prohibited cost too much."
I'm not as informed about the refinery situation in California as you are. I don't think the old but large refineries her in Texas and Louisiana are constructed of worn out equipment and inefficient processes. Refiners are constantly replacing all parts, machines, and vessels in the plant. They've been steadliy reducing the pollutants emitted since 1970.
As I understand it, new refineries are not being built because the approval process is just too costly. It's not the post-startup processing costs – the increased burden due to more stringent pollution controls. Rather, it's the decade or more of environmentalists' lawsuits and the many millions of dollars in environmental studies that inhibit refiners from building new plants.
So far as efficiency is concerned, I side with all of the free traders above. However, I think it's still fair to say that there may be a moral problem here which you have sort of dodged. If a foreign producer benefits from being able to offload externalities due to lack of regulation, is it always OK to ignore this? I am not thinking here simply of CO2 emissions. North Korean slave labor or violent seizure of natural resources would be two extreme examples, but dumping toxins in an area thanks to an absence of regulation would surely also qualify. Now as it happens, nations where you can get away with this kind of thing are normally also areas where business has terrible disadvantages, so as already pointed out these are not typically efficient competitors. But there still seems to be a hypothetical case for not trading under certain circumstances.
Perhaps off topic, but I can't ignore the above criticism of U.S. refiners.
Old refineries need not be polluters. Dupont has helped three old refineries cut sharply their sulfur dioxide emissions:
http://tinyurl.com/j7xjm
The three refineries in the article were built in 1909 (Linden, NJ), 1928 (El Paso, TX), and 1957 (Delaware City, DE).