Topics about free trade

Ever since the economist David Ricardo offered the basic theory in 1817, economic scripture has taught that open trade——free of tariffs, quotas, subsidies or other government subsidies—improves the well-being of both parties. U.S. policy has implemented this doctrine with a vengeance. Why is free trade said to be universally beneficial? The answer is a doctrine called “comparative advantage”. 

 Here’s a simple analogy. If a surgeon is highly skilled both at doing operations and performing routine blood tests, it’s more efficient for the surgeon to concentrate on the surgery and play a less efficient technician to do the tests, since that allowas the surgeon to make the most efficient uses of her own time.

By extension, even if the United States is efficient both at inventing advanced biotechnologies and at the routine manufacture of medicines, it makes sense for the United States to let the production work migrate to countries that can make the stuff more cheaply. Americans get the benefit of the cheaper products and get to spend their resources on even more valuable pursuits. That, anyway, has always been the premise. But here Samuelson dissents. What if the lower-wage country also captures the advanced industry?

If enough higer-paying jobs are lost by American workers to outsourcing, he calculates, then the gain from the cheaper prices may not compensate for the loss in U.S. purchasing power.

“Free trade is not always a win-win situation,” Samuelson concludes.It is a particularly a problem, he says, in a world where large countries with far lower wages, like India and China, are increasingly able to make almost any product or offer almost any service performed in the United States.

If America trades freely with them, then the powerful drag of their far lower wages will begin dragging down U.S. average wages. The U.S. economy may still grow, he calculates, but at a lower rate than it otherwise would have.