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Op-Ed Contributor: Second Thoughts on Free Trade

January 6, 2004
 By CHARLES SCHUMER and PAUL CRAIG ROBERTS





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.

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.

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.

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.
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.

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.

http://www.nytimes.com/2004/01/06/opinion/06SCHU.html?ex=1074412822&ei=1&en=a532cf025823b773


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