Missing Case for Free Trade

The Washington Times (Washington, DC), March 20, 2004 | Go to article overview

Missing Case for Free Trade


Byline: Paul Craig Roberts, THE WASHINGTON TIMES

Belatedly, pundits begin noticing economic growth without job growth is not politically viable. But they still haven't a clue about what has become of job growth.

Pundits no longer confidently assert the massive U.S. trade deficit is good for the economy because it puts money in foreign hands to buy U.S. exports and create jobs for Americans.

Some pundits are even beginning to realize "lower-priced foreign goods" are not all that cheap when the price is the loss of high-paying U.S. jobs.

But pundits still believe free trade is somehow going to bail out America and create new industries and high-value-added jobs to replace the ones lost to offshore production and outsourcing (and, I should add, to competition from Japanese industrial policy).

Sooner or later, pundits will have to face the fact the conditions upon which the case for free trade is based simply no longer exist.

Free trade is based on the principle of comparative advantage. For comparative advantage to operate, two conditions are required: a country's factors of production must seek comparative advantage within the country and not move to absolute advantage abroad, and countries must have different relative costs of producing different goods.

When free trade theory originated two centuries ago, climate and natural resources were important components of gross domestic product (GDP). Climate and natural resources could not migrate, and countries' different climates and resource endowments meant relative costs varied among countries.

In today's modern economies, production is based primarily on acquired knowledge. Modern production functions operate the same regardless of location. There is no necessary reason for the relative costs of producing manufactured goods to vary from one country to another. Only the absolute costs vary, with the advantage going to countries with large excess supplies of labor.

Economists and pundits mistake offshore production and outsourcing for trade, whereas in fact they are merely the substitution of cheap foreign labor for expensive First World labor.

It is nonsense for economists and pundits to claim the United States benefits from the loss of jobs, capital and technology when economic theory tells us all three are needed for economic development. …

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