Competition from Cheap Foreign Labor

Of all the arguments for protection. the most persistent is that free trade exposes U.S. workers to competition from low-wage foreign labor. The only way to preserve high U.S. wages. so the argument -goes, is to protect domestic workers by keeping out or putting high tariffs on goods produced ir, low-wage countries. An extreme version of this contention is that under free trade U.S. wages would converge to the low foreign wages. This point was trumpeted by presidential candidate Ross Perot during the debates over the North -American Free Trade Agreement (NAFTA) when he ,argued Philosophically, [NAITA] is wonderful. but realistically it will be bad for our country.

That thing is going to create a giant sucking sound in the United States at a time when we need jobs coming in. not – jobs going out, Mexican wages will come up to Si ‘/2 an hour and our wages will come down to Si ‘/2 an hour.

This argument sounds plausible but it is all wrong because it ignores the principle of comparative advantage. The reason American workers have higher wages is that they are on average more productive. If America’s wage is 5 times that in Mexico, it is because the marginal product of American workers is on average 5 times that of Mexican workers. Trade flows according to comparative advantage, not wage rates or absolute advantage.

Having shown that the nation gains from importing the goods produced by “cheap foreign labor” in which it has a comparative disadvantage, we should not ignore the costs that this strategy may , temporarily impose on the affected workers and firms. IT plants in a particular locality are unexpectedly shut down because production moves overseas.

the local labor market may be inundated with job seekers. Older workers with outdated job skills may have trouble finding jobs and win suffer a decline in their comes. The difficulties of displaced workers will be greater when the overall economy is depressed or when the local labor markets . have high unemployment. Over the long run. labor markets will reallocate workers from declining to advancing industries. but. the transition may be costly for many people in summary.

The cheap-foreign-labor argument is flawed because it ignores the theory of comparative advantage A country will benefit from trade .even though its wages are far above. those of its trading partners. High wages come from high efficiency. pot from tariff protection.

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