Tuesday, April 17, 2007

Does China Up = America Down?

China and India are now grabbing headlines through their rapid economic transformation (more dramatic and longstanding in the Chinese case). Some highly respected people are saying some very surprising things. Recently the Princeton economist Alan Blinder, a pillar of the profession and a long-time free-trader, noted that the rise of India in particular, with a giant population well-endowed with technological skills and English fluency, will make tens of millions of American jobs “outsourceable.” In the article linked above, he indicates that this should be dealt with by training to prepare people for face-to-face work such as law, which is less subject to outsourcing. While Prof. Blinder is still a free-trader, The Wall Street Journal recently interpreted his stance to be skeptical toward globalization overall. The left-wing magazine The Nation documents the trend while interpreting in the usual anti-corporate way, arguing that opposition to globalization is rising among surprising people because corporations have been unmasked as disloyal.

The argument that the rise of China and India , and poor countries generally, is bad for the U.S. because they are cranking out so many skilled people and posing greater competitive threats is a bad one. Not just because it overstates the technical prowess of all those Chinese coming out of school with the label “engineers” despite the low level of their training, nor because it underestimates the power of skilled immigrants to the U.S. and our advantages in transparency, market flexibility and the other more important ingredients of rising standards (although it does both these things). Rather, the argument fails on basic fundamentals, the most important of which I lay out here:

More trading partners is a good thing. Would you rather have one car-repair shop or ten to choose from? One brand of bread or 100? One gastroenterologist or 12? Clearly, the more the better from your point of view. The same is true for the seller as well – the more potential customers, the better off he will be. That is all the rise of China and India is – more trading partners brought into the global trading networks that Americans always take for granted. The more they are woven into the global trading system, the better.

Knowledge is free. As I have argued before, more traders in the global economy also means more creation of new ideas. Much knowledge is nonrivalrous, meaning that you can use it without diminishing the amount available for others. A technological or scientific breakthrough in India is just as true and useful in Kansas City as in Bangalore. It is true that the Indian firm may (justifiably) be able to patent the breakthrough, but the underlying principles and ideas are still freely available to all. Each breakthrough provides the raw material for more. The more competitive experimenters, the better.

Job destruction is a precondition of job creation. The hard truth is that jobs are created and destroyed all the time, often for reasons having nothing to do with globalization. It is when they are being created and destroyed at the most rapid rate that human progress is most dramatic. The Industrial Revolution completely remade the employment profile of every country that went through it, moving people from the farms to industry, but only as a side-effect of completely remaking human possibilities. To a lesser extent the information revolution has done the same, and the merging of billions of people into the global economy will do the same perhaps even more spectacularly.

There is a fallacy that everyone who talks about jobs being “destroyed” is invoking, that the status quo is somehow to be privileged. This is the path of France, of Germany, of decline. In fact, jobs come and jobs go, and wastefully idle workers are the entrepreneur's workshop The only way this is not true is if labor markets are rigged to protect current job-holders, as is the case in countries like the aforementioned. In that case technological change leads to substitution of capital for labor, lower growth despite that, and high levels of unemployment. This pretty much describes the Continent in a nutshell.

Countries do not compete; individuals do. Countries do not in an economic sense meaningfully compete. Rather, the individuals within them cooperate for mutual gain, and sometimes compete to make trades with others, whether as employers seeking workers, employees seeking jobs, or businesses seeking customers. There is no way in which “America” and “China” compete in that sense. The individuals who compose the two countries have so many different interests, possess so many different resources, etc. that the differences within countries are far more important than the differences across countries treated as unitary actors.

The rise of China, India, Brazil, or any other country does not intrinsically make any nation poorer. Rather, it serves to lift the residents of other nations up. This is the way it was with the rise of the U.S., of Japan, and every other successful country. The addition of billions of new hard-charging, industrious, clever, creative people into the global trading mix is going to be one of the greatest developments in the last several centuries of human history. Of course, this is purely an economic argument; the rise of India and especially China can certainly have geopolitical consequences. More on that later.



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