Does Trade with Low Wage Countries Create Unemployment

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Does Trade with Low Wage Countries Create
Unemployment

• Richard Stansfield

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Two Questions

• It is agreed that some of the downward pressure
  on unskilled wages and employment is due to
  competition, but to what extent is not agreed.
• Even if there is a significant relationship
  between the conditions of the rich and imports
  from the poor, is protection of our crisis
  industries the answer?

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Background

• Imports from low wage countries such as Thailand,
  Taiwan and China constitute the fastest growing
  elements of trade
• Theoretically there are a host of reasons why
  would expect increased trade with low wage
  countries to have an effect on employment, or at
  least on wages.

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Minority View

• Adrian Wood unemployment in the North was caused
  by the expansion of trade with the south, forcing
  ruthless competition on domestic labour-intensive
  industries, who in turn were forced to shed
  workers, driving productivity increases (1994).
• Statistically imported materials from low-wage
  countries have a significant negative impact on
  total employment and measures related to labour
  demand in industries with low skill intensity.

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Majority View

• There is not enough trade with low-wage countries
• Krugman External trade of the US is only about
  10 of GNP, and imports from low-wage countries
  are just 2.8 of American GDP.
• Trade occurring between countries in the North
  has a greater effect on employment than
  North-South trade.

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• Greater impact of technical change, automation
  and a need for new IT skills on employment
• In the face of competition from abroad,
  manufacturing firms have laid off workers, but
  other firms have added workers to produce for the
  expanding export markets

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Protection

• Even low levels of protection can lead to large
  deadweight losses, and high protection through
  tariffs can lead to as much as 10 losses in GNP.
  
• In terms of jobs actually saved, the numbers seem
  to be very few and so this combined with such
  high costs of protection indicates that there
  must be much more efficient policies available.

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Conclusion

• The relative employment and wage position of
  unskilled, workers in unexposed service sectors
  has worsened.
• However Americas and the EUs problems cannot be
  explained by imports from the third world.
• Taken together, the evidence is clear that
  technological change is far better at explaining
  the changes in wage and employment positions of
  the less skilled workers than trade.
• It is also clear that protection is a
  counterproductive measure for alleviating fears
  of free trade.

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• With the increasing prevalence of outsourcing and
  the possibility that this could be driving
  technological change (Morrison Paul and Siegel
  2001), our wages and labour market
  characteristics may not be determined by events
  in the Far-East today, but this does not mean
  that we should remain a little concerned for the
  future.
• The effect of outsourcing is less clear than
  trade, most notably because we are increasingly
  seeing accounting, legal and computer service
  jobs outsourced and these require higher levels
  of education.