The logic of trade

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Whenever an expert touts a totally new theory, invention or miracle medicine, a healthy dose of skepticism is called for. The recent writings of Paul Craig Roberts fit the mold. He claims that two centuries of economic thought in support of free trade, dating back to Adam Smith and David Ricardo, have been overturned by new developments and his own unique insights. But reality is more straightforward, and far less ominous, than he depicts.

In his Aug. 6 column, "Seeking Jobs in the U.S.A.," he claims that American workers face an unprecedented threat from low-wage countries such as China and India, where an endless supply of workers can now substitute for millions of middle-class American workers at a fraction of the wage. What has changed, Mr. Roberts asserts, is the mobility of labor through the Internet. It is no longer only manufacturing jobs that are in danger, but "almost the entire range of knowledge jobs," including "stock analysts, accountants, researchers, designers, engineers, radiologists."

Telecommunications technology does indeed allow a new range of services to be traded today, but that trade is still subject to the same economic constraints as trade in goods. The United States can continue to reap tremendous gains from specializing in what we do best and importing what other countries do best. The economic logic of trade has not been overturned but merely extended to previously non-tradable sectors.

According to Mr. Roberts' novel theories, massive amounts of U.S. capital should be flowing to low-wage countries, especially China and India. His theory utterly fails to explain why most capital leaving the United States, including manufacturing investment, flows to other high-wage countries, such as Canada and Europe. According to a study by Deloitte and Touche Consulting, 94 percent of outward U.S. foreign direct manufacturing investment in 2001 flowed to other rich countries. If low wages drive investment, how does Mr. Roberts explain the fact that, during the past decade, the United States has been a net recipient of an annual average of $20 billion in foreign manufacturing investment?

As many American companies can attest, investing profitably in China and India remains a challenge--because of their underdeveloped infrastructure and legal systems, undereducated workforces, remaining trade barriers, and limited consumer markets. American companies invest less than $2 billion a year in China, and far less in India. That compares to the nearly $200 billion invested each year in our own domestic manufacturing capacity, and $100 billion a year invested by American companies in the rest of the world (and most of that in other rich countries). At the end of 2001, American companies owned more than 10 times as much direct investment in the tiny, high-wage Netherlands ($132 billion) than they did in China ($10.5 billion) and India ($1.7 billion) combined. Obviously, wages are not the only, or even the main, driver of foreign investment.

Mr. Roberts' theory also fails to explain America's continued export success in world markets. Americans remain the world's leading exporters of manufactured goods. The United States today accounts for a steady 12 percent of global exports, the same share as two decades ago, and three times China's share. Chinese exports to the United States have indeed grown rapidly in recent years, but at $125 billion last year, they represent just above 1 percent of America's gross domestic product of almost $10.4 trillion. There is nothing alarming about the fact that Americans spend 1 percent of our income on products made by the one-fifth of mankind that lives in Mainland China.

Like many before him, Mr. Roberts confuses the passing pain of a recession with a shift in fundamentals. Yes, the recession of 2001 and the slow recovery have been especially hard on the manufacturing and high-tech sectors, but neither is in danger of disappearing. Manufacturing output in the United States remains 40 percent higher than it was a decade ago, and double what it was in the 1970s. We can produce more with fewer workers because of soaring productivity. In information technology services, the United States remains the world's top provider. Under what contorted economic theory does rising worker productivity--up an amazing 4.8 percent in the Untied States last year and still rising--turn a rich country into a poor country?

Obviously, competition from China hurts some U.S. sectors and companies and will even drive some of them out of business. That is an expected result of competition. Trade with China allows our economy to shift production to those products and services where we enjoy an even greater advantage, raising our overall productivity. Erecting new barriers to trade and investment with China would restrict the liberty of Americans and would weaken our economy by reducing competition and raising prices. It would benefit the few at the expense of the many.

American workers retain huge advantages when competing in the global economy. When we shake off the current slowdown, as we have every other postwar recession, American workers will be more productive than ever. As the unemployment rate falls and worker compensation continues to rise, I predict that the supposedly revolutionary theories of Mr. Roberts will quickly be forgotten.

Daniel T. Griswold is associate director of the Center for Trade Policy Studies at the Cato Institute.