By CHARLES SCHUMER and PAUL CRAIG ROBERTS|
We were 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
The question today is whether the case for free trade made two centuries ago is undermined by the changes now evident
modern global economy.
Two recent examples illustrate this concern. Over the next three years, a major New York securities firm plans to
team of 800 American software engineers, who each earns about $150,000 per year, with an equally competent team in
earning an average of only $20,000.
Second, within five years the number of radiologists in this country is expected to
significantly because M.R.I. data can be sent over the Internet to Asian radiologists capable of diagnosing the problem at
small fraction of the cost.
These anecdotes suggest a seismic shift in the world economy brought on by three major developments. First, new
stability is allowing capital and technology to flow far more freely around the world. Second, strong educational systems
producing tens of millions of intelligent, motivated workers in the developing world, particularly in India and China, who
capable as the most highly educated workers in the developed world but available to work at a tiny fraction of the cost.
inexpensive, high-bandwidth communications make it feasible for large work forces to be located and effectively
We are concerned that the United States may be entering a new economic era in which American workers will face
global competition at almost every job level — from the machinist to the software engineer to the Wall Street analyst.
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
to multinational corporations, often with American roots, that are cutting costs by shifting operations to low-wage
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
The case for free trade is based on the British economist David Ricardo's principle of "comparative advantage" — the
that each nation should specialize in what it does best and trade with others for other needs. If each country focused on
comparative advantage, productivity would be highest and every nation would share part of a bigger global economic
However, when Ricardo said that free trade would produce shared gains for all nations, he assumed that the resources
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
workers — could not be moved to other countries. But today's vital factors of production — capital, technology and
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
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
a robust retraining effort for laid-off workers, we do not believe retraining alone is an answer, because almost the entire
of "knowledge jobs" can be done overseas. Likewise, we do not believe that offering tax incentives to companies that
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
economy really is and where we are headed as a nation. Old-fashioned protectionist measures are not the answer, but
era will demand new thinking and new solutions. And one thing is certain: real and effective solutions will emerge only
economists and policymakers end the confusion between the free flow of goods and the free flow of factors of
- 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.