Charles Schumer and Paul Craig Roberts, “Second Thoughts on Free Trade,” New York Times, 6 January 2004

Republished on on February 15, 2004

"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,"

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

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.

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.

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.

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. 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

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.


case for free trade
is based on the British

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. 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

Charles Schumer is the
senior senator from New York. Paul Craig Roberts was
assistant secretary of the Treasury for economic policy
in the Reagan administration.

Copyright 2004 The New York Times Company