How Not to Criticise Free Trade

Second Thoughts on Free Trade

I was brought up, like most Englishmen, to respect free trade not only as an economic doctrine which a rational and instructed person could not doubt but almost as a part of the moral law," wrote John Maynard Keynes in 1933. And indeed, to this day, nothing gets an economist's blood boiling more quickly than a challenge to the doctrine of free trade.

Yet in that essay of 70 years ago, Keynes himself was beginning to question some of the assumptions supporting free trade. The question today is whether the case for free trade made two centuries ago is undermined by the changes now evident in the modern global economy.

It's always bad news when an article on free trade economics starts off the discussion using Keyes as a supporter of free trade.

Two recent examples illustrate this concern. Over the next three years, a major New York securities firm plans to replace its team of 800 American software engineers, who each earns about $150,000 per year, with an equally competent team in India earning an average of only $20,000. Second, within five years the number of radiologists in this country is expected to decline significantly because M.R.I. data can be sent over the Internet to Asian radiologists capable of diagnosing the problem at a small fraction of the cost.

These anecdotes suggest a seismic shift in the world economy brought on by three major developments. First, new political stability is allowing capital and technology to flow far more freely around the world. Second, strong educational systems are producing tens of millions of intelligent, motivated workers in the developing world, particularly in India and China, who are as capable as the most highly educated workers in the developed world but available to work at a tiny fraction of the cost. Last, inexpensive, high-bandwidth communications make it feasible for large work forces to be located and effectively managed anywhere.

You get the sense the Chuck Schumer and Paul Craig Roberts, the opinion/editorial's authors, think these are bad developments. Each one of these makes it cheaper and easier to do business. That means more products, more R&D, more employee benefits, lower prices, quicker service, capital shifted to more productive enterprises, and any combination thereof. All to the constructive good for those involved.

We are concerned that the United States may be entering a new economic era in which American workers will face direct global competition at almost every job level - from the machinist to the software engineer to the Wall Street analyst.

We are indeed entering such an era. As other countries throw off the shackles of socialism and allow their citizens to trade freely, competition will rise and intensify among all.

Any worker whose job does not require daily face-to-face interaction is now in jeopardy of being replaced by a lower-paid, equally skilled worker thousands of miles away. American jobs are being lost not to competition from foreign companies, but to multinational corporations, often with American roots, that are cutting costs by shifting operations to low-wage countries.

Actually, it's gotten further than that. For example, notice the slow switch to self-checkout lanes in grocery stores and do-it-yourself menu ordering experiments at fast food joints.

Most economists want to view these changes through the classic prism of "free trade," and they label any challenge as protectionism. But these new developments call into question some of the key assumptions supporting the doctrine of free trade.

The case for free trade is based on the British economist David Ricardo's principle of "comparative advantage" - the idea that each nation should specialize in what it does best and trade with others for other needs. If each country focused on its comparative advantage, productivity would be highest and every nation would share part of a bigger global economic pie.

However, when Ricardo said that free trade would produce shared gains for all nations, he assumed that the resources used to produce goods - what he called the "factors of production" - would not be easily moved over international borders. Comparative advantage is undermined if the factors of production can relocate to wherever they are most productive: in today's case, to a relatively few countries with abundant cheap labor. In this situation, there are no longer shared gains - some countries win and others lose.

When Ricardo proposed his theory in the early 1800's, major factors of production - soil, climate, geography and even most workers - could not be moved to other countries. But today's vital factors of production - capital, technology and ideas - can be moved around the world at the push of a button. They are as easy to export as cars.

This is a very different world than Ricardo envisioned.

Here it comes.

When American companies replace domestic employees with lower-cost foreign workers in order to sell more cheaply in home markets, it seems hard to argue that this is the way free trade is supposed to work. To call this a "jobless recovery" is inaccurate: lots of new jobs are being created, just not here in the United States.

In the past, we have supported free trade policies. But if the case for free trade is undermined by changes in the global economy, our policies should reflect the new realities. While some economists and elected officials suggest that all we need is a robust retraining effort for laid-off workers, we do not believe retraining alone is an answer, because almost the entire range of "knowledge jobs" can be done overseas. Likewise, we do not believe that offering tax incentives to companies that keep American jobs at home can compensate for the enormous wage differentials driving jobs offshore.

America's trade agreements need to to reflect the new reality. The first step is to begin an honest debate about where our economy really is and where we are headed as a nation. Old-fashioned protectionist measures are not the answer, but the new era will demand new thinking and new solutions. And one thing is certain: real and effective solutions will emerge only when economists and policymakers end the confusion between the free flow of goods and the free flow of factors of production.

Copyright 2004 The New York Times Company

I disagree, unsurprisingly.

The case for free trade does rest on Ricardo's past work, but only partially. It is a pragmatic defense of free trade and can therefore be undermined by changes that happen over time. It's a principle, but one that due to it's nature, has been diluted for the reasons the article's authors mention. It's original meaning is doubtless losing staying force.

The case for free trade rests on deeper roots. Morally, it is more right to allow people to freely exchange goods and services, to freely associate and communicate, than not. Systemically, central planning of any economic sort by parties not truly involved in the economic processes they are attempting to influence fails in the long run and creates unintended negative consequences that end up causing at least as much trouble as the initial "problem."

The article's authors seem to ignore the most obvious response to their assertion that Comparative Advantage no longer applies: Ricardo's principle actually applies to individuals and that's where economics matters. Countries don't move en masse towards one unified collective goal; they are made up of unique and independent people who have differing wants, needs, and abilities. This complexity is flatly beyond anyone or any group to manage and control. But that's a pragmatic response.

The real reason why free trade is desirable is because freedom is more moral than slavery. And in order to enact the euphemistic "new thinking and new solutions" Chuck Schumer and Paul Roberts vaguely hint at, you must first exert control over people to force them, in one way or another, to do what the people in charge want. Economic slavery is no different from civil slavery and telling me I'm free to do x, y, and z doesn't make me any fundamentally less a slave if I'm not allowed to do a. Mr Schumer and Mr. Roberts are lying when they imply their ideas don't amount to protectionism because that is exactly what they are: measures enforced in order to protect American jobs from competition.

This article is a large strawman using a deceptive reading of a single principle of free trade in order to attack the entire doctrine.

UPDATE(1/8/2004 1:02pm)
Andrew Sullivan points to a reply to the NYT article written by Noam Scheiber that tackles Schumer and Roberts from another angle.

UPDATE(1/9/2003 10:07am)
Another hit against the piece from Slate's Michael Kinsley:

One of the tiresome conceits of political debate is that when opponents agree on something, it is more likely to be true. Another is that an assertion is more credible if it comes from someone who used to assert the opposite.

The joint byline on the New York Times op-ed page Jan. 6 - "By Charles Schumer and Paul Craig Roberts" - certainly was a shocker. Schumer is a liberal Democratic senator from New York; Roberts is one of the wildest of the bug-eyed supply-side conservative economists. Schumer's connections to the financial establishment and Roberts' free-market ranting make their message surprising as well: They have turned against free trade. But two people can be just as wrong as one.

[...]

The core of free-trade theory is the concept of "comparative advantage." Schumer and Roberts make the classic college-student mistake of confusing comparative advantage with absolute advantage. Nations trade because for each one there are goods or services it is more efficient to buy from abroad than to produce at home. If there is nothing America can offer the world that is either uniquely desirable or cheaper than elsewhere, the world will not buy anything from America. And after a while the world won't sell anything to America either, because we won't have the foreign currency to pay for it. So, even in this extreme case there is no need to restrict trade because trade will restrict itself. But in fact, as Ricardo demonstrated, there will always be something worth trading. Even if Nation A can produce both apples and oranges more efficiently than Nation B, it will still make sense to concentrate on producing one fruit and import the other. And Nation B will make itself poorer, not richer, by keeping out fruit from Nation A. If Nation A retaliates by keeping out fruit from Nation B - and why shouldn't it? - Nation B will be doubly punished.

That's the theory. It's pretty rock-solid. You can reject it in its entirety?as, for example, Dick Gephardt, the most protectionist of the leading Democratic presidential candidates, pretty much does. But most critics don't have the guts to defy reality and/or conventional wisdom (take your pick) to that extent. Schumer and Roberts cling to the free-trade label and endorse the general principle while claiming it no longer applies because "the factors of production can relocate to wherever they are most productive." In fact, that makes the theory even more compelling.

©2004 Microsoft Corporation. All rights reserved.

No, Mr. Kinsley isn't what he terms a "hard core" free trader (as he explains later in the piece), but he's on firmer ground than either of the NYT op-ed's authors.

UPDATE(1/15/2004 10:05pm)
Another article, this time by George Reisman on the Mises Institute website worth reading.

Posted by Drizzten at January 06, 2004 11:27 AM