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The Gospel of Free Trade

By Ramaa Vasudevan

BOSTON, MAY 2004

“Open markets allow American firms to sell world-class products in the large global economy, and they give American households and businesses the freedom to buy the greatest variety of goods and services at the best prices. Because of international trade, American children have more toys in their toy boxes and more clothes in their dressers, while American parents have the opportunity to sell the fruits of their efforts into the large global marketplace.”

—Mankiw, Remarks at 2004
National Business Economists Association

When Gregory Mankiw, the Chairman of the Council of Economic Advisors to the President, suggested—in passing—that the outsourcing of jobs might be a "plus" for the American economy, he was only repeating what mainstream textbooks on trade have been arguing for ages. This is the claim that free trade leads to universal benefits. For Mankiw, "the off-shoring of jobs is only the latest manifestation of gains from trade that economists have talked about for centuries."

In some ways the controversy unleashed in the aftermath of Mankiw’s hapless remark echoes the debates that raged in early nineteenth century Britain around the protectionist Corn Laws. This was the context in which David Ricardo developed his theory of comparative advantage—now enshrined as an "economic law" by Free Traders—while making a case against the mercantilist's preoccupation with the accumulation of trade surpluses.

The "Law of Comparative Advantage" lies at the heart of the Free Trade gospel. The law implicitly argues that trade between nations does not penalize the least efficient countries, that is, those that drive producers out of the market because of high costs. Instead, each country specializes in whichever products it can produce with relatively lower costs. Such specialization, the argument goes, allows both trading partners to "gain from trade" even if production in one of the countries costs more in absolute terms.

What Mankiw was arguing is that outsourcing is just a new and wider kind of international trade:

One facet of increased services trade is the increased use of offshore outsourcing in which a company relocates labor-intensive service industry functions to another country... Whereas imported goods might arrive by ship, outsourced services are often delivered using telephone lines or the Internet. The basic economic forces behind the transactions are the same, however. When a good or service is produced more cheaply abroad, it makes more sense to import it than to make or provide it domestically.

This logic is self evident to those who espouse the Free Trade gospel. Drezner in Foreign Affairs uses a similar argument to chastise those who fear the "bogeymen of outsourcing." The Economist defended Mankiw’s claim that the flight of jobs was not a disaster, since it was merely a reflection of comparative advantage at work.

In the ideal world governed by"the law of comparative advantage," jobs lost in the lower-end services are matched by growth of higher-end, better paying jobs in the services sector. "Win-win" is their mantra: there are no losers in the "Free Trade game."

Related Articles and Resources

Anwar Shaikh, “The Economic Mythology of Neoliberalism” This chapter from the forthcoming book, Neoliberalism: A Critical Reader edited by Alfredo Saad-Filho, examines free trade theory as the economic rationale for neoliberalism.

Ha-Joon Chang, “Kicking Away the Ladder: The Real History of Free Trade." This paper, drawn from Chang's book Kicking Away the Ladder, debunks the myth of free trade from a historical perspective, and demonstrates the urgent need for to re-think conventional wisdom on trade policy and globalisation.

Full Metal Fantasy
Gloves Off co-editor and columnist Joe Smith takes free trade cheerleader Thomas Friedman to task, Part I.

Selling Neoliberal Globalization
Joe Smith takes free trade cheerleader Thomas Friedman to task, Part II.

So the purveyors of the free trade gospel invoke the doctrine of comparative advantage to dismiss widespread concerns about the "export of jobs." But Ricardo never argued that nations as a whole would gain from trade: quite the contrary. The debates around the Corn Laws in the early nineteenth century—in which he played an active role—were driven by tensions between the rural landlords and the emerging industrial capitalists.

Repealing the Corn Laws—Ricardo's political cause—symbolized the fight of the nascent, progressive, capitalist class against the remnants of the feudal landlord class in the early days of the Industrial Revolution. Ricardo was arguing that the repeal of the Corn Laws would enable the inflow of cheaply imported agricultural goods and stimulate growth and profits in newly industrial Britain.

It is obvious that free trade stimulates profits by reducing costs. According to the comparative advantage parable, however, once market forces have been allowed to work their magic, competitiveness somehow doesn’t matter. Even less developed countries—ones that cannot hope to compete in terms of productivity and costs of production with the developed countries—once they open up to trade, the story goes, they can always specialize in the sectors where they have a comparative advantage.

This "conventional economic wisdom" consigns many developing countries to "specialize" in agricultural goods. Once that happens, they get locked into the export of goods that face deteriorating terms of trade (with respect to the manufactured goods they are then forced to import.) At the same time, agricultural subsidies in developing countries undermine their ability to compete. This is an unfortunate inversion of the gospel that Free Trade adherents fail to explain or even acknowledge.

Another unacknowledged inversion: the late industrializers, like Japan, and the Newly Industrializing Economies in East and South East Asia. Flouting "economic wisdom" was their key to the protection and transformation of their economies after World War II. They selectively nurtured technological capabilities in specific manufacturing sectors and took advantage of their own domestic lower wage costs to gradually—and this is the key—become effective competitors of the US and Europe in manufacturing.

India’s competitive edge in the outsourcing of software development and business processes—like accounting and customer service—was honed on aggressive investment in skills, technology and infrastructure and a stark disparity in wages and salaries. A job in the US that pays $65K, pays only $25K in India. What is the impetus to free trade? One need only look at examples like this huge saving in wages to see what drives the free trade ideology.

This was the logic behind previous waves of offshore-production by US corporations. While the present wave of outsourcing white collar jobs has hit the headlines, the larger phenomenon comes from the same drive for profits that lead to the creation of global assembly lines. The assembly lines linked sweatshop labor in developing countries in Latin America and Asia through the global commodity chains underlying the new corporate strategies.

About one third of world trade in the nineties was trade "within" a corporation, in other words between branches of the firm in different countries. Promoting Free Trade as a political cause enabled this process. In the present context, US hopes are pinned on promoting higher-end service exports by prying open the markets for these services. In India, pressure is mounting to further pry open the markets for telecom, insurance and financial services to US corporations.

The smooth transition to a new "services economy" that the parable of Comparative Advantage offers, is unlikely to materialize. With the specter of jobless recovery haunting the US economy, common-sense fears of "job flight" take on a greater significance. The point, however, is not simply to draw lines between protectionism and free trade.

It is, in the end, the corporate giants of globalization that are propelling and profiting from "free trade" and outsourcing. The fact of the matter is this—trade is not based on a universally beneficial principle of comparative advantage. It is rather based on the aggressive development of competitiveness, and it involves real human costs in terms of both wages and work. Developing countries across the globe continue to face these costs, as trade liberalization measures are enforced through IMF and World Bank conditionalities and the working class in the US is also being forced to bear the brunt of the relentless logic of competition.



Ramaa Vasudevan teaches economics and is involved in civil rights work in New Delhi, India. She is currently working on her Ph.D. in economics at New School University in New York City.



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The Corn Laws

The Corn Laws [1815-1846] were import tariffs designed, ostensibly, to protect British landlords -- the owners and beneficiaries of agricultural production -- against competition from cheap, imported grain.

In reality, the Corn Laws were designed to protect the interests of the aristocracy by outlawing imported grain until the price of domestic grain had risen to extremely high levels.

At the time, the British economy was the most developed in the world, thanks to the dynamic growth promoted by industrialization. The Corn Laws thus protected British landlords -- not from foreign competitors -- but from the rising capitalist class in England, which depended on factory workers, who needed affordable staples to survive.

David Ricardo, a leader of the new capitalist class in Britain, struck it rich in the stock exchange, retired from business and bought a seat in British Parliament in 1819. He used his parliamentary position and scholarship to repeal the Corn Laws and promote free trade. This economic agenda threatened both the aristocracy's income from crops and their political power.

When the Corn Laws were eventually abolished in 1846, in the context of increasingly militant agitation by the Anti-Corn Law League [established by capitalists in Manchester in 1839], the aristocracy ceeded a significant portion of its traditional political power to the new, capitalist class.

The struggle over the Corn Laws marked the transition of Britain from a feudal society to a more modern, industrial society.