The Dread Pirate Roberts

For over a week, I’d been planning to administer a thorough fisking to a recent Washington Times article by Paul Craig Roberts. (It’s no longer available online without a payment, unfortunately. If you really want to read it, search for “Outsourced Economy” in the February 27th archive.) But I finally realized that I just don’t have the time to give it the drubbing it deserves, so the following will have to do.

Paul Craig Roberts poses what he think is a “new” question for economists. “Is outsourcing trade?” he asks, apparently expecting the slack-jawed economics profession to scratch its collective head, wondering how they had failed to think of that question themselves. Well, maybe it’s because the answer is jarringly, crashingly obvious. *Of course* outsourcing is trade; what else would it be?

Roberts uses the word outsourcing to refer to “when a U.S. firm or industry relocates its capital and technology in China [or some other less developed nation], where it employs Chinese [or Indonesian, or Pakistani…] labor to produce goods for the U.S. market.” Hmm…sounds an awful lot like trade to me. Trade simply means the exchange of goods and services for money or (in a barter system) other goods and services. Any time Americans buy goods or services from abroad, that’s trade. It doesn’t matter whether American consumers buy final products or American firms buy labor services -- either way, we’re paying foreigners to do things for us.

Roberts is eager to distinguish outsourcing from trade because he wants to sound like a conservative “free trader” while making arguments to the contrary. But the case for this particular form of international trade is pretty much the same as for all international trade. And the contrary arguments are as bogus as they’ve always been.

Roberts’s bugbear is the prospect of American jobs being exported merely to take advantage of lower labor costs. He seems to think this is distinct from the issue of comparative advantage, the usual justification for free trade among nations. What he misses is that lower labor costs are one of the means by which comparative advantage is revealed. God doesn’t come down and declare, “Make athletic shoes in Indonesia! Write code in North America!” Instead, wages and prices act as signals to convey the relevant information. Employers pay wages just high enough to attract workers away from their next-best options. In underdeveloped nations, workers tend to have fewer desirable outside options, so their wages tend to be lower. In developed nations like the U.S., they typically have better outside opportunities, so their wages are higher. The wage differential induces employers to hire the workers with the lower opportunity cost, thus freeing up the workers with better options to do something else.

In the past, this process has typically manifested itself in the movement of manufacturing and other low-skill jobs to the third world (Nike’s factories in Indonesia and Pakistan are probably the most visible example), while skilled jobs expand at home. But Roberts thinks he’s found a new argument, because a recent Business Week article told him that it’s no longer just low-skill jobs that are being exported. Now, American firms are hiring foreigners to do work in finance, accountancy, programming, engineering, etc. You can almost hear Roberts’s brain clicking: “Manufacturing jobs left last year, high-tech jobs are leaving this year… Good God, *all* the jobs are leaving!” But a more careful reading of the BW article (from the 3 Feb 2003 issue, not available online) reveals some of what’s actually happening:

In the 1990s, Corporate America had to import hundreds of thousands of immigrants to ease engineering shortages. Now, by sending routine services and engineering tasks to nations with a surplus of educated workers, the U.S. labor force and capital can be redeployed to higher-value industries and cutting-edge R&D. “Silicon Valley doesn’t need to have all the tech development in the world,” says Doug Henton, president of Collaborative Economics in Mountview, Calif. “We need very-good-paying jobs. Any R&D that is routine can probably go.” Silicon Valley types already talk about the next wave of U.S. innovation coming from the fusion of software, nanotech, and life sciences.”

To put the argument somewhat differently, we shouldn’t expect to see a clean division wherein only manufacturing jobs, or only low-tech jobs, move to other countries. Comparative advantage is primarily a matter of differences in personal skills and talents, not geography. Just as there are unskilled people in all parts of the world, there are skilled and educated people all over the world, too. It’s unreasonable to think that *all* programming will take place in the West and *all* garment-making will take place in India and China. Instead, free trade drives a global division of labor that may have little relation to national boundaries.

And that’s a good thing. Ultimately, it means more goods and services getting produced at lower cost, with lower prices for consumers. Yes, some people will lose their jobs in the transition, and they will have to find new ones; that’s how the market process moves labor and capital to their highest-valued uses. But on the whole, we become wealthier because our dollars go further.

And here’s the added bonus: as foreign markets become more developed, their residents become more affluent. As capital flows in, productivity increases, and wages begin to rise. The poor foreign workers begin to make money – not much at first, but more than they would have made otherwise – which they can use to improve their standard of living, save for the future, educate their children, and even buy American goods and services.

The free trade position is caught between a left-wing rock and a right-wing hard place. Leftists excoriate free trade because it allegedly harms the residents of foreign nations, by exploiting their cheap labor and selling them goods at inflated prices. Rightists like Roberts, on the other hand, say free trade helps the residents of foreign nations at the expense of Americans. In short, free trade is bad if harms foreigners, and it’s bad if it helps them!

Fortunately, the anti-traders of both left and right are wrong. Free trade does create jobs for foreigners and improve their standard of living. But the gains for foreigners need not mean losses for Americans, because trade is not, as Roberts seems to think, a zero-sum game.