Throughout history peoples have been overcome by
trends and forces that they were unable to recognize.
Could the US be losing its economy to forces economists
mistake for benevolent free trade?
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-WW II era that U.S. wages
and living standards would be undermined by imports made
with cheap foreign labor proved to be wrong. 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. firm 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 firm 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
firm also avoids
torts, employment taxes, and
The mobility of capital and technology means that
American labor now faces direct competition in global
labor markets. This is a
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. U.S. firms 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
U.S. 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 U.S. 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. firms.
Economists mistake the free movement of factors of
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
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.
Ricardo 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. U.S. 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 U.S. 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
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 U.S. and Asia mean that
jobs will flow out of the U.S. into Asia. Tax cuts and
low interest rates cannot compensate for the huge wage
U.S. corporations have made a strategic decision to
move jobs abroad. What corporations will employ the
displaced U.S. employees?
Craig Roberts is the author with Lawrence M. Stratton
The Tyranny of Good Intentions : How Prosecutors
and Bureaucrats Are Trampling the Constitution in the
Name of Justice