A business finds a cheaper labor source and pulls up stakes in everything but name and ships the work overseas, leaving thousands out of jobs. This isn't the way free trade is supposed to work, but it's the reality.
Charles Schumer may have it right when he questions whether the case made long ago for free trade is relevant in the modern global economy.
In an op-ed piece in the New York Times, Schumer and Paul Craig Roberts, assistant secretary of the Treasury for economic policy in the Reagan administration, offer examples of why the central argument of “comparative advantage” may be undermined by the global winds at play.
New York's senior senator, Schumer gives examples now occurring in the securities and radiology sectors. We can point to various industries associated with agriculture with as much veracity.
In securities, he cites a top firm that's shipping its $150,000 a year software jobs to India. The workers there only command a $20,000 salary. The same is happening in radiology, he says. Instead of a U.S. doctor reading the MRI, the X-rays are shipped to India via the Internet, where radiologists read them for a fraction of the cost.
The point Schumer makes is, “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.”
In essence, any worker is at risk of being replaced by a “lower-paid, equally skilled worker thousands of miles away.” Many of these jobs, Schumer notes, aren't being lost to foreign competition, but to multinational corporations with American roots, who are shifting production overseas.
As he points out in the essay, the argument is taking place based on assumptions that were made when British economist David Ricardo first argued the concept of free trade and “comparative advantage.”
The idea of “comparative advantage” says that each nation should specialize in what it does best and trade with other nations for other needs.
The idea assumes shared gains for all nations while noting that “factors of production would not or could not be easily moved across international border.
That in essence is what has changed: Factors of production can be moved easily across international borders, often with a push of a button, to countries where cheap labor is abundant.
Jobs are being created, just not in the United States. “But if the case for free trade is undermined by changes in the global economy, our policies should reflect the new realities,” Schumer says. Schumer proposes an “honest debate” about where the economy really is and where we are headed” as a starting point. Real and effective solutions will come only when economists and policy makers “end the confusion between the free flow of goods and the free flow of factors of production.”
He suggests that job retraining and tax incentives for companies aren't the answer. America's trade agreements need 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, he says. “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.”