Anti-Free Trade Nonsense Refuted Again

Supply sider Paul Craig Roberts co-authored an amazingly ignorant editorial in the New York Times with New York Senator Charles Schumer calling for restrictions on free trade. According to Roberts and Schumer, free trade in shoes and wheat is okay, but not free trade in software and financial services. Columnist Michael Kinsley brilliantly and succinctly shows why their argument is nonsense. One would expect Schumer to make such a shoddy argument, but shame on Roberts!

Comments

[Julian Sanchez]

What really perplexed me about this op-ed was that I couldn't even quite put my finger on what the argument was supposed to be. They say something to the effect of: well, nowadays, factors of production are much more mobile than in Ricardo's day. Err.. ok, and? As non economists go, I feel like I've got a halfway decent grasp of basic economic principles, but I couldn't figure out any way to construct even a faulty argument that goes from that observation to the conclusion that CA doesn't apply. Any ideas there?

[Jason Ligon]

Julian:

Here is Tyler Cowen's take on their argument (from marginalrevolution):

Does the case for free trade require factor immobility?
Tyler Cowen

Paul Craig Roberts has been claiming that the traditional case for free trade requires immobile factors of production. Michael Kinsley offers his [critical] understanding of the argument as well. I take the bottom line to be as follows. If labor can migrate, trade will not always benefit both countries, in all conceivable circumstances. Those laborers will move to the country with the strongest absolute advantage. This may lead to a brain drain at home, and perhaps crowding and lower wages in the recipient country. In other words, there are potential externalities from the migration of labor.

Another scenario is that American capital flows, say, to China, instead of Chinese labor coming to America. America will not experience overcrowding, nor will China have a brain drain. Still the real wages of some American workers might fall. Chinese labor will be concentrated in some sectors more than others. Certainly some American workers will be worse off, though economists will continue to insist that wealth as a whole will go up.

None of these arguments are new and they do not represent a novel critique of free trade. The first version of the argument suggests, at best, that we cannot currently move to complete free immigration. It does not dent the case for free trade. The second argument simply points out that wealth-improving policies do not benefit everyone.

The ever-insightful Daniel Drezner offers some further commentary on the new anti-free trade arguments. He also notes that the "factor mobility" scenario does not involve fundamentally new considerations from the "factor immobility" scenario.

The bottom line: We should take care to minimize the negative externalities from foreign trade and investment, and this is best done by well-functioning labor markets and sound macroeconomic policy. Basically Roberts is peddling snake oil. His argument boils down to old-style protectionism, dressed up in new rhetorical garb, not new substance.

[Gene Berkman]

Michael Kinsley's column is an excellent rendition of the continuing case for free trade.

It is ironic that Sen Schumer and Paul Craig Roberts are so worried about American companies relying on tech support in India. Several business publications recently have pointed out the hidden costs of outsourcing tech support to India, including higher costs of oversight and inadequate service.

I know people in IT services who regularly complain about the inability of tech support staff in India to help them with their problems. It seems that market forces will encourage a move back to locally based services without a need for protectionism.

[joe]

Ron's surprised that a supply sider would hitch his wagon to bogus economics? Must not have been paying attention...

As for Schumer, NY pols are all about protectionism as pork. I sat in the Senate gallery and watched Al D'Amato give a fillibuster - a damn fillibuster - because some law that favored Smith-Corona over Brother (based in Tennessee) was about to be repealed, back in the early 90s.

[Kevin Carson]

keith,

The existing degree of mobility of factors of production shouldn't be accepted as a given. Factors are much more mobile now than they would otherwise be, because of heavy government subsidies to the export of capital. Most projects funded by the World Bank, as well as a great deal of U.S. foreign aid, are investments in foreign countries (especially infrastructure) necessary for making U.S. capital profitable there. U.S. foreign policy also leans heavily toward guaranteeing the security of American investments overseas, and maintaining TNC-friendly regimes in Third World countries. And massive subsidies to transportation reduce the cost of shipping foreign-made goods back to the U.S. These are all transaction costs of doing business, that should be internalized completely by the businesses operating overseas, in a real free market.

So what Roberts objects to is not "free trade," whether he knows it or not. There ain't no such thing, unfortunately.

[keith]

I'm gearing up to actually go to India in February to train new co-workers. In our case (I work for a systems-integration consulting co.) we'll keep full US staff for client interaction; the India office will provide for 24-hour integration, improving our competitive advantage. Two things: first, even if it turns out that I train my own replacement, I don't feel threatened or put out by this. My job's OK but if a fire were lit under me, I'd prefer to work for myself. Let someone who can do my job as well as me for less have it. That, and I'm getting the adventure for free. Second, salaries in the city we've located in and for the experience we're hiring are raising like gangbusters. India office's turnover is extreme. In not too long, for top individuals, the differences will be arbitraged away... and, thank goodness, productivity will start to go up and my 401(k) will start performing again and India can join the ranks of the Second World. Win-win-win.

[human racehorses]

Keith,

HR here. I need your Social Security number.

[keith]

This is the money paragraph. The authors are just wrong. I'm willing to entertain arguments along the lines of "Free trade causes dislocations and it sucks to be an ". Yup, it sucks to be an employee. But if India's competitive advantage is cheap labor, it seems that US's competitive advantage is managing companies that flog their processess and intellectual property and execute successfully by using the most effective (the intersection of skill and cost) workforce to complete it. Arrgh, I'm just preaching to the choir here.

"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. "

[ed]

Nicely done, Mr. Kinsley.

Politicians and left-leaning economists will always find a reason to look a gift horse in the mouth. Consumers are more practical, if not hypocritical. A wheat farmer will happily snap up the newest and cheapest Chinese DVD player, then bitch to holy hell if his farm subsidies are threatened. You can't have it both ways, but as a nation we keep trying.

I have yet to hear a protectionist honestly explain why trade surpluses are good for us but bad for the rest of the world. But then, the press never asks.

[Jean Bart]

keith,

Also, whatever advantage a country has as far as low-wages are concerned will quickly be eroded away as that nation becomes more prosperous. Spain, once the low-labor cost leader in Europe, is feeling the bite of the particular problem now, since the increase in the average wage there has eroded what advantage it had when it joined the EU (that doesn't stop it from sucking off the tits of net contributor countries like Germany, France, Denmark, etc. when it comes to getting EU welfare though). Those low-wage jobs are shifting to Eastern Europe; as European companies like Renault, etc. switch their assembly lines to that region of the EU (and gear some of them up to produce low-cost products for those regions - like Opal and Renault's new $5,000 euro cars).

[Citizen]

I suspect a protectionist might say something along the lines of: "But I believe I made it clear that I am in favor of it, because I am in favor of a free economy. A free economy cannot exist without competition. Therefore, men must be forced to compete. Therefore, we must control men in order to force them to be free."

[John Thacker]

I swear, from reading that piece it seems that the two of them don't know the difference between absolute advantage and comparative advantage. Not that the average person really understands comparative advantage, one of the most important, but counterintuitive, parts of economics.

On a related note to free trade, I'd like to see Reason's take on Bush's immigration proposals. They seem like a mix between legalization and the old bracero program.

[ed]

Or:

"I have no freedom of choice because I have to eat."

[Don]

Gees, now I'm thinking about German, French, and Danish tits . . .

[Andrew]

I am waiting for Clark to get on this "out-sourcing" bandwagon (now that it has been in NYT). Dean, I assume, is already there.

[Jean Bart]

Keith,

The "second world" is generally known as communist states (it was more commonly used twenty and thirty years ago - given that communist nations are now an endangered species its not used as much). Anyway, don't wish that on India please. 🙂

[C M Cole]

I am a huge fan of irony and have found the latest topics in Hit & Run to be particularly satisfying. In 'Two Cheers for Amnesty,' I was treated to the possible (probable?) woes to those who would advocate an influx of cheap labor over a government-controlled marketplace. Many of the same arguments are held dear by those deriding the EXPORT of cheaper labor out of the country. Does anyone presuppose that, given a choice, these evil corporations would prefer to hire an equally qualified individual here at home? I believe any argument against comparative advantage has to honestly acknowledge the effect that unions, lawyers, OSHA, ESA, EPA, ACLU, and the DNC have had on the status quo. In closing, it's hard to stomach the hypocrisy of Schumer cheering for BOTH Affirmative Action and the possibility of a member of another nationality (albeit foreign and underqualified, by his standards!) being awarded a job ahead of the rest of us. Please...

[Will Spencer]

Schumer and Roberts are pressing for another attempt at government control of business decisions. These two must have missed that "spectacular failure of Communism" which was on the TV news for about a decade.

The experts agree that this is idiocy:

"To be controlled in our economic pursuits means to be controlled in everything." -- Friedrich August Hayek

"When a government takes over a people's economic life it becomes absolute, and when it has become absolute it destroys the arts, the minds, the liberties and the meaning of the people it governs." -- Maxwell Anderson

"If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand." -- Milton Friedman

The good news is that even with idiots like this, the country probably isn't going to fall to pieces:

"The natural effort of every individual to better his own condition is so powerful that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations." -- Adam Smith

[joe]

The dislocations and temporary local economic problems caused by growing international trade wouldn't serve as such effective arguments against the globalization of the economy if this country did a better helping out people who found themselves in difficult economic straits for whatever reason.

There are genuine losers in Free Trade (and even in actual free trade, Kevin). In this case, though, the answer is to treat the symptoms.

"Rough and tumble" is a lot more acceptable to people if its happening on tumbling mats instead of concrete floors.

[tonio_k]

Looks like that dickhead Clothier is wrong again,even without him arguing in his painfully inferiority complex manner. His "cousin" is over at econlib.org spouting the same, tired old shit in that patronizing, switch sides, ad hominem way ("Steve").

[Goodman Erika]

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DATE: 05/20/2004 06:18:17
It's never right to say always, and always wrong to say never.