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Laboring Productivity and Free Trade

Labor and capital have battled perpetually since the dawn of humanity. This struggle usually resolved itself through the barrel of a club, sword, or gun. Those who wanted more capital took it through the application of their labor in various militaristic means. Moving from serfdom to the industrial revolution the battle became less a direct application of force to a more nuanced form of subjugation through the trading of labor for wages. This exchange permitted a person to enrich themselves by working more or increasing productivity. With time a finite resource, the worker's incentive was to increase productivity to their own and capital's benefit. Labor won the battle over the past 200 years; however, the outcome reversed for US labor during the last few decades. Reversing this secular trend is difficult: the President's proposed trade policies may be labor's requiem.

Leaping Forward. As most of the Western World foraged headlong into the industrial revolution, major regions of the world wallowed in self-inflicted seclusion and exploitation that lessened the benefits of industrialization and global trade. After World War II, there is no starker contrast than the capitalism of the United States establishing a world money order to promote trade and China's isolationist Communism. One led the economic world for decades, while the other leaped down a path to famine.

As the US enjoyed world hegemony in the last few decades of the 20th century, other leading economies commenced their reentry into the economic world order. China began its long path to economic re-engagement with the world, Communism collapsed in the USSR, and India liberalized its economy. A new period of global trade commenced, and the developed world welcomed billions of new customers and new competition for developed world labor.

Producing Gains. Productivity increases came from the application of new manufacturing techniques, open global trade, and the efficient management of information. The world economy now encompasses a global supply chain that is managed in real time and seeks to deploy efficiently capital irrespective of the market. Productivity, however, is self-limiting. After a certain level of development the gains slow, and more modest growth expectations arrive.

The story is different when a mature economy is joined with an economy that possesses significantly more labor and inferior productivity. Adam Smith long ago provided the insight into trade that stands to this day: produce the good where it is more efficient, and thus an economy can “import” productivity growth from abroad. The secular change that is occurring in the world today is a combination of the constant application of technology to a supremely efficient global manufacturing process and an open global trading system.

Substituting Labor. The watershed moment for global trade was the entry of China into the World Trade Organization in 2001. With a dramatically lower cost of labor and an efficient global transportation system, the productivity gains are self-evident for global business. US companies availed themselves to the new source of cheap labor, but at a cost. While the gains to trade are numerous, the implication on domestic labor was long forgotten.

In a time before floating currencies and global trade, two insightful economists reasoned that trade could reduce local employment and wages as jobs left for the lower cost country. The US and China provided validation decades later: a free market will seek the lowest cost of production in tradable goods. Since 2001, the service sector has continued its ascent in the US, but the goods-producing sector succumbed to economic forces and reduced in number.