Economics focus
Trade disputes
Sep 16th 2004
From The Economist print edition
Nagging doubts about the benefits of globalisation,and a look at the evidence
WHEN David Ricardo,a 19th-century economist,criticised England's protectionist
corn laws,he based his argument on the notion of,comparative costs”,these
days called comparative advantage,The idea,in brief,is that all countries can
raise their living standards through specialisation and trade,Even if one country
can make everything more cheaply than every other it still gains from focusing on
the goods in which its relative advantage is greatest—ie,in which it has a
comparative advantage—and importing the rest,But trade in Mr Ricardo's day
involved grain sent by ship from Germany,not computer code sent by e-mail from India,As the
production of goods and,increasingly,services is,outsourced” or,offshored” to developing
countries,many people in rich countries worry that this new development in international
commerce will do them and their national economies more harm than good,
Does such trade defy Mr Ricardo's insights,or does it lead,just like the old-fashioned kind,to
greater overall prosperity? Two papers in forthcoming issues of the Journal of Economic
Perspectives,both by greatly respected economists,confront this question,The first paper* is by
Paul Samuelson,a Nobel laureate whose textbook has introduced students to economics for
decades,He paraphrases the defence of free trade by,economists John and Jane Doe spread
widely throughout academia”,
Yes,good jobs may be lost here in the short run,But still total net national product,.,
Correct economic law recognises that some American groups can be hurt by dynamic
free trade,But correct economic law vindicates the word,creative” destruction by its
proof [sic] that the gains of American winners are big enough to more than
compensate the losers,
Of course,says Mr Samuelson,Ricardo was right,Take the example of a poorer,less productive
economy,and a richer,more productive one,say,China and America,In the classical model,
trade does indeed benefit both economies,Though there are both winners and losers,the winners'
gains exceed the losers' losses,Productivity gains in China's export sector raise total wealth in
each country,
But,he adds,not so fast,Suppose the poor country,spurred by technical progress,improves
productivity in the rich country's export goods,think of China's advances in semiconductors or
India's in financial services,Then,says the theory,trade can turn entirely to the poor country's
advantage,The improvement in productivity in the poor country can reduce the price of the rich
country's exports by enough to make it worse off,despite the increased availability of cheaper
goods,It may be that not just some Americans lose,but that the country as a whole is worse off,
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Few mainstream economists doubt that this is possible,at least in theory,Mr Samuelson himself
described the idea in the 1970s,Europeans worried about American growth in the 1950s for this
reason,and Americans later worried about Japan,But evidence that it has been borne out in
practice is thin,Mr Samuelson suggests that the move of textile manufacturing to the American
South may have caused net losses in the North,Or that Malaysia's leap in rubber production may
have had the same effect on Brazil,But both conclusions are uncertain,and there are not many
other examples available,
Might the new wave of outsourcing to poor countries be different,and make rich countries poorer?
On the empirical side,a paper? by Jagdish Bhagwati,author of a recent book on globalisation (and
listed by Mr Samuelson alongside John Doe),Arvind Panagariya,his colleague at Columbia
University,and T.N,Srinivasan of Yale provides more help,They show,also using classical trade
models,that outsourcing is no different in economic terms from the trade that has been going on
since Ricardo's time,The standard results still hold,including the possibility that a country's
export prices could fall so much that it becomes worse off,Then the authors cast an eye over the
empirical evidence,
No pain,no gain?
How likely is offshoring to hurt America,they ask? Not very,The threat posed by Chinese and
Indian innovation is overblown,The number of graduates likely to take white-collar jobs from
westerners is nowhere near the 300m often said to be ready,As skills in China and India improve,
trade with them will become more like that with other rich countries,from which America has
historically benefited,
In any event,outsourcing abroad is too small to matter much,One of the most popularly cited
estimates,by Forrester Research,is that 3.4m jobs will be outsourced by 2015,That may sound
enormous,but it implies an annual outflow of only 0.5% of the jobs in the industries affected,In
an average year,the American economy destroys some 30m jobs and creates slightly more,
dwarfing the effect of offshoring,
The authors take a sanguine view about the quality of jobs that will replace those lost to
outsourcing,American radiologists need not be condemned to flipping burgers when their work is
shipped to Chennai,They can turn their skills to the obesity epidemic,or to the burgeoning field of
plastic surgery,There is,surely,more than enough work to be done,
Does all this amount to a,proof” that trade can only help America's economy? No,But the
marshalling of the evidence on outsourcing,such as it stands,should calm even the worst bout of
trade jitters,Mr Samuelson's worries,for all his brilliance,can remain safely on the blackboard,
*,Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization”,Journal of Economic
Perspectives,Summer 2004,
,The Muddles over Outsourcing”,Journal of Economic Perspectives,Fall 2004,
Copyright? 2004 The Economist Newspaper and The Economist Group,All rights reserved,
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