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Second Thoughts on Free Trade


Second Thoughts on Free Trade
By Charles Schumer and Paul Craig Roberts
Published: January 6, 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,'' 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.

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P_S. Cut income taxes to reduce costs by one quarter or more.

end Income taxes, they are a cost, a negative production factor.

End the Federal Reserve System, or at least force them to use 100% Reserves based on industrial commodities like steel, aluminum and copper (coal, oil and gas are no good since their the super abundance means prices will eventually fall when we can no longer afford wars to disrupt production and transportation.)

End our inflationay monetary policy that steals right out of everyone's wallet to finance political winners in the Washington over actual winners in the free marketplace. For example by financing tax incentives and grants to those US companies that move their operations offshore.

Instead government should act as referees and umpires calling technical fouls(contract infractions or inhibitions) and personal fouls(murder, injury, invasions of privacy, theft, fraud, libel etc). Their job is to keep the game open and fair.

Just keep the "free" lunch we pay for with interest. Give us sound money and a limited government and we can fend for ourselves.

Dr. Sylvia wakes up grabs her coffee and chunk of dark chololate. After a quick walk in the woods he brings up the first MRI of the day. Sixteen MRIs later including lunch she is $320 wealthier at $20 per piece. She works 200 days per year for $64,000.

But add taxes and the $20 becomes $27 for the self employed raising the tab to $85,000 if she can get it. Include taxes and she takes home only $43,000.

That's $20,000 she could have put in a health savings/retirement account (or gold coins). A savings account whose purchasing power is not robbed of some of 12% over twenty five years.

We have one advantage, we are native speakers of the language of international trade, science and medicine.

Free includes debt-free!

This guy is confused.

Ole Chucky Schumer shows his lack of brilliance in this piece. About midway he says, "Comparative advantage is undermined if the factors of production can relocate to wherever they are most productive." He just stated what free trade is all about. If someone else can be more productive, the least productive deserves to fail. That is comparative advantage. Comparative advantage has not failed at all if "production [] relocate[s] to wherever [it is] most productive."

What Chucky is failing to admit is that the United States, as a whole, has become rich and lazy. Now, they are becoming poor and lazy. Once unemployment benefits run out and the dollar crisis hits, citizens will stop being lazy and realize they need to make things if they want to survive. It's that simple.

It is not free trade that failed. It is government intrusion into the free market which has warped the market into something no longer free. If government would get out of the way, people would once again find it rewarding to be a producer and we'd be able to climb our way out of this mess.