Arnold Kling  

The Free Trade Case

House Prices... The Health Care Market...

Brink Lindsey offers "one-stop shopping" for a list of common complaints about trade and outsourcing and their refutations. One excerpt:

Again and again, serious and influential voices have raised the cry that the sky is falling. It never does. The root of their error is always the same: confusing a temporary, cyclical downturn with a permanent reduction in the economy’s job-creating capacity.

UPDATE: Daniel Drezner has another article summarizing the case for free trade and against anti-outsourcing hysteria.

For Discussion. The composition of jobs can change due to trade patterns, technological change, and other factors. Does the pace of change slacken during a boom and pick up during a recession?

Comments and Sharing

CATEGORIES: International Trade

COMMENTS (4 to date)
Lawrance George Lux writes:

The pace of Job turnover is fairly consistent, whether in discussion of Boom or Bust. The two consistent vitals in the discussion remain Job Creation levels, and increasing or decreasing Wage during the transition. Job loss in excess of Job creation increases Household debt, constricts Consumption, and retards the use of financial capital. Income loss constricts Standard of Living, brings Personnel skill levels loss, and curtails Household service of debt.

Current Government policies, both Democrat and Republican, combine to limit American ability to create Jobs. Trade combinations are currently sought which actually hinder the free flow of Trade. Japan and China are both making extensive efforts to peg their Currencies, and will not respond to American efforts to get them to stop. Their purchase of Treasuries expands the Trade deficit, while ruining American Business ability to compete, through evasion of escalating American production costs from Government expenditures. lgl


I would like to state firstly, that because of the rule of "flight to safety", there never has been in the past century, a fair parity of the American dollar. Nor, with the USA having the strongest military on the planet, is there likely to be for some time, a parity. Of course I agree with the first commenter, Lawrance Lux, that the USA has many other costs including social, environment, and governmental that the world, I think without exception avoids. Then to incur the outright manipulation of parity by various foreign countries, I think finally we ask too much of Americans. The competition is absolutedly rigged!

When the USA, bears nearly alone the costs of all the world policing, and still enables and allows its workers who are acknowedly to be among the very hardest workers of any world, to be victimized by a $500 Billion a year foreign trade deficit (which more nearly represents a $1 Trillion sacifice in GNP), then it simply follows that there are the following problems created or exasperated in America:
1. Lower income per capital.
2. Lower tax collections particularily for Social Security.
3. Because of the lessening of opportunity for "good" jobs, then less incentives for the unemployed to change themselves into productive members of society. (Just less opportunity and less examples in their community of sucessful individuals).
4. Small businesses, who are not inclined to import, are under pressure due to the weakened economy and thus are not as likely to hire or be willing to train frequently poorly educated and poorly, enculturated employes.

One more usually unsaid comment please: America has about 30% plus of its population with a tested culture-free IQ mean of 85, many of whom are not parented well.. Therefore we will have for sometime, the added burden of enhanced educational resources being devoted to facilitate their enculturation. Of course these, our people, given their current status of not being well-educated and enculturated are not able to compete with the Chinese who are governed by a corrupt Communist dictationship which passes a small percentage of the wages the government receives onto their workers.

Gerard James writes:

Riccardo's Theory of Comparative Advantage implicitly assumes that, over the longer term, trade will increase productivity and, moreover, that this increased productivity will lead to higher wages, savings, and investment. Theoretically, the enhanced investment will lead to even greater productivity gains in a "snowball effect" that raises the living standards of the trading partners. But the theory is among nations, not multinational corporations that have no national allegiance..

Riccardo's theory breaks down when multinational corporations surbrogate national incomes to profits that are returned, ultimately, to the multinational's stockholders. Writing in 1817, there is no way that Riccardo could have foreseen this development or that his theory would break down in such an environment where profits are remitted outside the nation that produces the goods most efficiently.

Increased national productivity does not necessarily lead to increases in national income or wealth when the producer is a foreign-based multinational that retains as additional profit the increases in productivity brought about by shifting production to lower-wage nations.

The only means by which national wealth in the lower-wage producing nation can be increased, then, is if the lower-wage producing nation imposes some legal "barrier" to remitting the profits thus earned back to the headquarters of the foreign multinational (and, ultimately, its shareholders). But mere profit blocking will not achieve that goal because there are a variety of means to avoid such blocking (e.g., obtaining a loan from the bank where such blocked profits are deposited; then, remitting the loan proceeds back to the multinational's headquarters.)

Instead, it would be better for the lower-wage nation to permit its workers to organize and collectively bargain with the multinational so that the benefits of their increased productivity can be retained in the lower-wage nation and shared among the workers whose efforts created the additional income in the first instance.

The WTO does not do this; there is no "socical clause" requiring the lower-wage nation to have laws allowing collective bargaining. (While many would argue that this diminishes the sovereign powers of the lower-wage nation, its notable that the WTO does require protections of the multinational's intellectual property and that no similar sovereignty qualms are raised in that regard.)

Until this break-down of Riccardo's theory is addressed, the productivity gains earned by lower wage nations will continue to be remitted to the headquarters country without substational increases in the national wealth of the lower-wage nation. Capital will continue to accumulate among the higher-wage nations, leaving workers there to fight among each other for scarce jobs and, ultimately, to accept as their own the diminished working standards of the lower-wage nation. Ultimately, it will become a "fight to the bottom" with workers in both nations adopting similar low standard work rules and ever-reducing wages. Riccardo's theory will continue to be mis-applied in a global marketplace dominated by multinationals, enhancing the wealth of the multinationals' shareholders and creating misery and privation wages for workers.

Luke writes:


I'm no expert on Riccardo's theory by any stretch of imagination, but I'm familiar with it, and it seems like your reasoning doesn't, well, reason out.

You say that this theory only applies to nations, not multi-national corps, because the profits are not transferred to the countries that produce most efficiently. But is the theory SUPPOSED to apply to nations, or does comparative advantage in it's purest form merely provide "even greater productivity gains in a 'snowball effect' that raises the living standards of the trading partners" The term 'trading partners' is interesting to me, because it doesn't say anything about nations or countries or groups or collectives, or societies or anything.

It seems to me that MNC's are an economist's dream-come-true? Perhaps they don't enable an entire nation to prosper in the way you would like Riccardo's theory to operate....but they allow people to prosper, regardless of their nationality or ethnicity, based solely on their productive capabilities at the individual level.

For laborers, they have plenty of inexpensive manufacturing labor and capacities, but do not have as many business institutions set up to direct and coordinate that production. Plenty of business institutions are very good at directing and coordinating manufacturing production. So they trade, and the laborers have more jobs than they would have, and the business directors and coordinators have more jobs than they would have.

It's an over-simplified application of Riccardo's theory that takes out the nationality concept completely. If you need a more prominent and practical example of the benefits of free trade among different people at the behest of corporations larger than the different groups of people, look at the U.S. We have lots of MSC(multi-state corporations) that operate primarily out of one state, yet still provide great increased productivity for the entire nation.

One thing that I would think important is that foreign laborers should be allowed a chance to become shareholders of the corporations they work for. But if real free trade existed between nations, they could. Usually this fault lies with another countries' policies restricting their citizens' ownership of American corporate stock, as I seriously doubt American corps want to restrict the number of customers that can buy their stock.

Like I said, I'm no expert, but the basic theory of comparative advantage doesn't seem to apply in a nationalistic way, but in an individualistic way.

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