Does the case for free trade require factor immobility?

by on January 9, 2004 at 7:07 am in Economics | Permalink

Paul Craig Roberts has been claiming that the traditional case for free trade requires immobile factors of production. Michael Kinsley offers his [critical] understanding of the argument as well. I take the bottom line to be as follows. If labor can migrate, trade will not always benefit both countries, in all conceivable circumstances. Those laborers will move to the country with the strongest absolute advantage. This may lead to a brain drain at home, and perhaps crowding and lower wages in the recipient country. In other words, there are potential externalities from the migration of labor.

Another scenario is that American capital flows, say, to China, instead of Chinese labor coming to America. America will not experience overcrowding, nor will China have a brain drain. Still the real wages of some American workers might fall. Chinese labor will be concentrated in some sectors more than others. Certainly some American workers will be worse off, though economists will continue to insist that wealth as a whole will go up.

None of these arguments are new and they do not represent a novel critique of free trade. The first version of the argument suggests, at best, that we cannot currently move to complete free immigration. It does not dent the case for free trade. The second argument simply points out that wealth-improving policies do not benefit everyone.

The ever-insightful Daniel Drezner offers some further commentary on the new anti-free trade arguments. He also notes that the “factor mobility” scenario does not involve fundamentally new considerations from the “factor immobility” scenario.

The bottom line: We should take care to minimize the negative externalities from foreign trade and investment, and this is best done by well-functioning labor markets and sound macroeconomic policy. Basically Roberts is peddling snake oil. His argument boils down to old-style protectionism, dressed up in new rhetorical garb, not new substance.

By the way, as an economist, I sometimes receive irate emails telling me I have never had to compete with subsidized foreign workers. It is then suggested that if I faced such competition, I would not favor free trade. This description of the facts is not true. Most of my Ph.d. class at Harvard came from other countries, and many of them were heavily subsidized by their governments. I was not subsidized by the American government and yet I had to compete with these people for jobs.

Addendum: See further remarks by Joseph Salerno. See also Truck&Barter., which offers further links of value.

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