Dealing with a Chinese Tsunami

Alan Blinder, in an interview with Marketplace, suggests the following to deal with increased competition from China and with globalization more generally:

First, I would say don’t succumb to the allure of protectionism. It doesn’t work, and it certainly won’t work for electronic trade. I mean, how can we stop electrons? Secondly, as I was saying before, we just have to do a better job with the social safety net, so that job displacement doesn’t hold the ravages that it now holds to the typical American. Thirdly, I think we have to think, in terms of those kids you were talking about, about what we need to do with our educational system so that we’re training kids for the jobs that will actually be available in the United States when they leave the school system. Not the jobs that will have migrated overseas. And then finally, I think we have to get used to the idea that if we want to stay the richest country in the world — which I presume we do — we can’t try to hang on to sunset industries. We have to specialize in sunrise industries.

Succumbing to protectionism [dead link] is a very real possibility today. The US Congress, reflecting popular impressions, is becoming increasingly wary of freer trade. Legislators hear the anxiety of workers facing international competition and feel they must do something. Of course, since the benefits of international competition are so widely dispersed among the entire population, these benefits are less obvious and do not result in equal political pressure to resist protectionist actions. When the economy is humming along and growing briskly, the pressures to protect, which are always there, are easier to deflect. But if the US and other countries were to enter into even a mild recession sometime soon, given the current political atmosphere, I suspect we are destined to follow much the same protectionist path as in the 1930s. Since the system remains much the same now as then, legislators would likely respond similarly, despite the knowledge we now have of protectionism’s ineffectiveness.

One change that has occurred since the 1930s can act to reduce protectionist pressures on legislators. That change is the presence of a safety net. Although Blinder suggests the current US system “ravages” the typical American worker, it is worth pointing out several things. First, the social safety net available in the US today, with 26 weeks of unemployment compensation, tremendous educational opportunities at numerous levels, the widespread availability of credit and the presence of welfare programs as a last resort, are all programs that simply did not exist in the 1930s. Then, people had to rely on family or the kindness of strangers even to feed themselves at times. Now, it’s not nearly as bad. True, the protections for US workers are not as generous as in Europe, but they are available nonetheless. The second point to make is that the US safety net system for displaced and unemployed workers is much more generous than in most developing countries. Ask yourself if you’d rather be unemployed in the US, or in China or India, … or Zimbabwe? I think the answer is obvious. And yet, global competition is going to create as much turmoil in developing countries as it will in the US, if not more. Although China is growing rapidly, in time they too will need to give up some industries that contributed to their early success. They will suffer job losses as well as gains. They also must deal with hundreds of millions of underemployed workers stuck in the countryside with very little to do. Transitioning to the global marketplace without fanning the flames of social rebellion is a tremendously delicate balancing act that the Chinese government has so far been very successful maintaining. Similar problems exist in many other developing and globalizing countries.

Blinder adds that we need to train UIS kids for the jobs that will be available in the future, not the ones that people have now. This begs the question, which jobs will those be? As I wrote in a previous post, predicting the future jobs is virtually impossible. There is an alternative to prediction though. It involves developing the ability and mindset of flexibility.

Embracing flexibility and learning how to adapt rapidly is a very important attribute to develop. It means recognizing that learning is a lifelong endeavor, that some career paths will be deadends and there is very little way to know which ones beforehand, and that experimentation at the level of the individual firm and the individual is the source of sustained growth. It means accepting that bad outcomes are often not “someone’s fault” and that the best response to a lost job, or a closed business, is to focus on retooling and new opportunities, rather than trying to preserve the old.

Indeed this is Blinder’s final point. We need to move our energies into sunrise industries and be willing to let go of sunset industries … admittedly, easier said than done! Especially because, although politicians will pay lip service to the dynamism of a competitive economy and all of its virtues, nothing buys votes more effectively than protection. This is why the US has begun to point the accusatory finger at China lately. These actions are meant primarily for US domestic consumption, to show voters that the US government will help protect them.

A little pressure on China, India or others will do little harm, but if the pressure rises, the US risks weakening itself economically even though its intention is to strengthen. If the US wishes to remain the most important force for positive economic change in the future, it would do so more effectively by accepting the “unfair” trade practices in the world and striving to overcome them with higher quality, lower cost products nonetheless. Sure, the Chinese and Indians have certain competitive advantages – lower wages, more lenient standards – but at the same time they have enormous disadvantages as well – archaic legal systems and stultifying bureaucracies. When people in the developing world look at the US, all they see are overwhelming advantages for workers and firms. Isn’t this why so many people seek to emigrate to the US?

I see the problem like a basketball game between US and Chinese players. The US has a competitive professional National Basketball Association league and the Chinese have one notable strength – Yao Ming. We could complain, of course, arguing that the Chinese height advantage is “unfair” – we could try to force them to put height restrictions into place to “level the playing field.” Of course, the Chinese would react to this request incredulously. They would look at the discipline of the US players, the college feeder system that helps young players develop, the extensive competitive experience embodied in the coaching and would wonder why the US insists on taking away their only advantage.

It is much the same way in the economy. If the US wishes to remain influential in the world economy, it is best to look at the competitive advantages of other countries merely as challenges that need to be overcome. Head-on competition is the way to face those challenges in a way that empowers and strengthens. Protection, or finger pointing, is a way to face the challenges in a way that slowly zaps the strength and vitality of the economic system. The choice is there to make.