- The Washington Times - Tuesday, August 5, 2003

Throughout history, peoples have been overcome by trends and forces that they were unable to recognize. Could the United States be losing its economy to forces economists mistake for benevolent free trade?

Traditionally, free trade has required a country’s work force to compete indirectly against the work forces of other countries in the markets for traded goods and services. Fears in the post-World War II era that U.S. wages and living standards would be undermined by imports made with cheap foreign labor proved to be wrong, since U.S. labor was better educated and worked with more and better capital and technology, which made American labor much more productive. Higher productivity protected U.S. wages and employment from cheap foreign labor.

The collapse of world socialism and the rise of globalism have made U.S. capital, technology and business know-how highly mobile. Today it is as easy — and far less expensive — for a U.S. company to produce abroad for U.S. markets. Instead of locating its capital and technology in Ohio, California or South Carolina, the company locates its facility in China, for example.

By locating in China, the company substitutes a work force that is paid less than a dollar an hour for U.S. labor that costs $26 an hour. By locating in China, the company also avoids expensive regulations, torts, employment taxes and discrimination lawsuits.

The mobility of capital and technology means that American labor now faces direct competition in global labor markets. This is a new development.

A Chinese person working with U.S. capital and technology is just as productive as an American. The Chinese worker can be hired for much less, because living standards and the cost of living are far lower in China.

The huge labor surplus in countries such as China and India means that wages are not likely to rise very rapidly in those countries. The U.S. companies that substitute Chinese and Indian labor for U.S. employees are building in lower labor costs for years to come.

Eventually, as China and India become fully employed first world economies, wages will be bid up and labor will be paid according to its productivity. By then the United States might be a third world country.

Existing mortgages, cost of living and accustomed living standards prevent U.S. wages from falling to levels that would be competitive with China’s. Americans have to seek work in their next best alternative when they lose their well-paying manufacturing and high-tech knowledge and service jobs to foreigners. By definition, these are less productive jobs paying less.

When jobs move out, skills move with them. At the rate at which the United States is losing software and computer engineering jobs, for example, how much longer will U.S. engineering schools be offering this major?

When manufacturing jobs are lost, so are jobs in trucking, warehousing, banking and insurance. There is a chain effect that reduces the overall productivity of the U.S. as a location of economic activity.

The loss of high productivity jobs takes away the ladders of upward mobility and wipes out human capital. A displaced U.S. software engineer cannot move to China or India to seek employment in his profession.

Retraining is not an answer, because almost the entire range of knowledge jobs can be outsourced. The Internet permits U.S. employers to hire people in India, China and the Philippines as stock analysts, accountants, researchers, designers, engineers, radiologists — any occupation that doesn’t require hands-on, face-to-face, local presence.

Economists assume that the substitution of foreign labor for U.S. labor is the benevolent workings of free trade. But what is being traded when U.S. employers move jobs out of the country? Many of our imports are products made for American markets by U.S. companies.

Economists mistake the free movement of factors of production for free trade. Raised on the theory of comparative advantage, economists know that free trade is mutually beneficial. They dismiss without thought any concerns that seem to call free trade into question. The case for free trade has been unassailable for so long that economists have overlooked that today’s circumstances do not comply with the assumptions of the theory.

The gains from trade flow from each country focusing on what it can do best and trading for other goods. The idea that there are comparative advantages in production is based on countries having different endowments of immobile factors of production. When the theory was developed, agricultural output was an important component of gross domestic product, and a country’s advantages resided in its climate and geography.

David Ricardo discovered the principle of comparative advantage in the early 19th century. He recognized that the principle did not hold if all factors of production are internationally mobile. Mobile factors of production would migrate to countries that had the greatest absolute advantages. Those countries would gain and all others would lose.

Climate and geography cannot migrate, but capital and technology can. Today, absolute advantage resides in an abundant supply of cheap and willing labor. Now that Asia is safe for capitalism, capital and technology flow to countries where labor costs are lowest.

The global mobility of factors of production is a new development. Until recent years, it was not safe for capital and technology to migrate outside North America, Western Europe and Japan. No first world country had an absolute advantage in labor cost.

The collapse of world socialism changed circumstances overnight. American labor now faces direct competition in global labor markets. The excess supply of labor in these markets will drive down wages, salaries and employment in the United States. As the dollar is likely to lose value under pressure from our growing trade deficit, the decline in wages will not be compensated by a decline in prices, and U.S. living standards will fall.

It is irresponsible for economists to dismiss these concerns by citing empirical evidence from historical correlations. New developments are not reflected in historical data.

Economists dismiss as “anecdotal evidence” the news reports of millions of high-paying U.S. white-collar jobs being moved overseas and filled by foreigners. American high school and college students are far more realistic than economists as they search for careers that cannot be shipped out or given to foreigners on work visas.

U.S. labor no longer has the advantage of education, training, technology and capital over its foreign competition. Existing wage levels, however, assume that Americans still have these advantages. The extraordinary wage differences between the United States and Asia mean that jobs will flow out of the United States into Asia. Tax cuts and low interest rates cannot compensate for the huge wage differences.

American corporations have made a strategic decision to move jobs abroad. What corporations will employ the displaced U.S. employees?

Paul Craig Roberts is a columnist for The Washington Times and is nationally syndicated.



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