More On The Trade Wars


[VDARE.COM
note:
Craig Roberts` rethinking of trade is being extensively
discussed on the Ludwig von Mises Institute`s new

blog
– click

here
for William
Anderson critique,

here
for Craig`s
response, and here for Dan Mahoney being

thoughtful
.]

For several years I have been
tracking US job losses and seeking to understand the
causes. I have written enough columns about this subject
to have caused angst among some inside-the-beltway
think-tankers.

Two critics,
Bruce Bartlett
and

Daniel T. Griswold
have yet to comprehend the
argument that they dispute. This is puzzling. Whereas
international trade theory is very complex, my statement
of the job loss problem, or more accurately, my posing
of the question is very simple.

Are the job losses that are
everywhere in the news and the decline in US
manufacturing the result of competition in the markets
for tradable goods and services and, thus, reflect the
benevolent workings of free trade, or are they
manifestations of David Ricardo`s case of
internationally mobile factors of production flowing to
countries with the greatest absolute advantage where
their productivity is highest?

It is easy to take

free trade
for granted and to forget the conditions
on which its case rests.

To briefly review: David Ricardo

discovered
the principle of comparative advantage,
the basis for free trade. Instead of striving for
self-sufficiency, countries should focus on what they
can do best and trade with one another for other wants.
Ricardo showed that shared gains from trade would result
from each country specializing in areas where it had
comparative advantage.

For comparative advantage to reign,
factors of production must be mobile within each country
so that they can move to the uses where they have
comparative advantage.

The principle

does not work
, however, if factors of production are
internationally mobile and can leave the country. If
factors are internationally mobile, they will flow to
countries that have the greatest absolute advantage
where their productivity is highest.

The countries with greatest
absolute advantage will capture the gains.

Historically, there have been
barriers to the international mobility of factors of
production. In Ricardo`s time, GDP was largely
determined by

climate and geography
, neither of which can migrate.

In our own time, world socialism
served to constrain capital and technology within the
first world of North America, Western Europe and Japan.
Multinational corporations would have felt unsafe
investing in China even if they had been permitted.

The collapse of world socialism has
made vast pools of

cheap and willing labor
in Asia and Mexico available
to US capital and technology. The Internet has made the
physical location of employees unimportant for many
knowledge and Information Technology jobs. The Internet,
out-sourcing, and offshore production for the home
market allow US firms to

substitute
cheap foreign labor for expensive US
labor in their production functions.

The question I ask is Ricardo`s:
Are internationally mobile factors of production flowing
to where their productivity is highest?

Does the ease with which foreign
labor can be substituted for US labor in the production
functions of US firms make foreign labor internationally
mobile to the U.S. where its productivity is highest?

Alternatively, does the
international mobility of US capital and technology
allow these factors of production to flow to countries
where their productivity is highest—countries with
abundant and cheap labor?

Until recently first world capital
and technology were confined to the first world, no area
of which had a massive labor cost advantage that would
convey an absolute advantage and suck in capital and
technology from other first world areas. The

Internet
, changes in Asian receptivity to foreign
investment, and the willingness of first world
corporations to make high-tech investments in third
world countries are new developments.

It is irresponsible to assume that
the US will not be affected by these new developments or
to assume without careful thought that the impact on the
US will be beneficial.

Some people feel so threatened by
the questions posed that they deny the obvious job loss
and decline in US manufacturing. Space is lacking to
expose their many mistakes with data and its
interpretation. Generally speaking, it helps to keep in
mind that historical data report the past, not new
developments.

Thus, Griswold and

Walter Williams
are wrong to conclude that the
larger US investment position in Canada and Europe
disproves the attraction of low labor costs in China and
India. Both overlook that over the decades when Asia was
not an alternative the US built up large stocks of
investment in first world locations. This stock of
investments requires new investments to maintain
profitability. These investments can be abandoned only
gradually as it is very expensive to close a factory.
Real world adjustments are not instantaneous.

Commentators would also benefit
from awareness that in recent years direct foreign
investment in the US consists primarily of merger and
acquisition activity, not new plant construction.

Griswold cites American exports of
manufactured goods as proof of our manufacturing
potency.

He overlooks, as Bartlett did
earlier, that the US is an even larger importer of
manufactured goods and produces each year fewer of the
manufactured goods that it consumes.

Which fact best illustrates our
position?

Without doubt some US job losses
are due to the

recession
. But the decline in manufacturing`s share
of US GDP from 19.2% in 1988 to 14.1% in 2001, a decline
of 27 percent, is inaccurately described by Griswold as
“the passing pain of a recession.”

Commentators should stop hiding
behind bogus data and address the questions.

COPYRIGHT CREATORS
SYNDICATE, INC.

Paul Craig Roberts is the author with Lawrence M.
Stratton of


The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice
. Click

here
for Peter Brimelow`s

Forbes Magazine interview with Roberts about the
recent epidemic of prosecutorial misconduct.