Atanu Dey On India's Development

Blinder on Offshoring

Alan Blinder claims that “Free Trade’s Great, but Offshoring Rattles Me” in a Washintonpost.com article. He has dug up an old 2004 US election issue. He begins with

I’m a free trader down to my toes. Always have been. Yet lately, I’m being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation.

It’s a strange article considering that he does know his economics. Surely he knows that trade is good. International trade is also good, subject to some very well-understood conditions. He understands Adam Smith and David Ricardo well enough to write econ textbooks and is a professor at Princeton.

I think it is easy to see that with the rapid fall in the cost of transporting bits, many non-tradeables have become tradeables. All services that are potentially digitizable have become tradeable. When trade is opened up among two economies, both economies do gain from increased specialization but every sector in both the economies don’t gain. The sector which is import-competing loses and the sector which is exporting wins. Nothing unheard of and unexplained about that. Sure, to protect the interests of those who hurt, you could use trade protection. But that is more costly than to compensate the workers of the import-competing sector.

Blinder agrees that trade protection is not the answer.

Trade protection won’t work. You can’t block electrons from crossing national borders. Because U.S. labor cannot compete on price, we must reemphasize the things that have kept us on top of the economic food chain for so long: technology, innovation, entrepreneurship, adaptability and the like. That means more science and engineering, more spending on R&D, keeping our capital markets big and vibrant, and not letting ourselves get locked into “sunset” industries.

Blinder is wrong about blocking electrons: it is quite possible to block them from crossing national boundaries. It is technically possible and is often done for political reasons. But I agree that the US needs to do more than just try to outlaw offshoring. All in all, a fairy disappointing article. Blinder was just having a bad economics day perhaps.

  • DODO

    Hey, Blinder has been criticized by his own favorite student for such a stance.
    (http://gregmankiw.blogspot.com/2007/05/blinder-on-offshoring.html#links)

    This is becoming interesting. Although hard to fathom why he suddenly has taken this view(since last presidential election??).

  • http://www.offshoringmanagement.com/BlinderOffshoring.htm Mohan

    Hi Atanu,
    It will be interesting to see how the debate is picked up by the media and other thought leaders, especially as the runup to the US Presedential elections approach.

    - M

  • http://flawedskull.spaces.live.com Tushar Saxena

    Atanu Bryan Caplan and Don Boudreaux have discussed this last week at EconLog and CafeHayek respectively. You might be interested in their perspectives.