Free Trade Works, But Can Cause Real Pain

I understand and appreciate free trade. I was an economics major at a college with a pretty conservative econ department (our professors regularly write op-eds in the Wall Street Journal), so I was well inculcated in the ways of Ricardo. Comparative advantage works: each country exports what it’s good at and everyone comes out ahead.

The developing world’s comparative advantage is generally cheap labor. That’s why China exports clothing and furniture. America’s comparative advantage is innovation and creativity. That’s why we export Avatar. Unfortunately, we also export Charlie’s Angels 2, but that’s a different issue. This theory also explains why the US invents iPods and China makes them.

The theory postulates that in the long run, as the developing world does more and more labor, the developed world will move into higher value services and creativity and all will be good. Everybody’s standard of living continues to go up. In the short term, however, dislocations can occur. Think of the television factory in Pennsylvania that shuts down, laying off a thousand workers, because the corporate parent can make things cheaper in China. Under free trade theory, those workers will shift into jobs that leverage America’s comparative advantage: something creative or innovative, something involving technology.

But in the short run, how do they do that? They live in the middle of Pennsylvania, likely with just a high school education. They can’t design iPods or program social networking sites. They can’t all move to Hollywood and become gaffers. For classic blue collar factory workers, their comparative advantage IS their labor. That advantage is now gone, taken by the developing world. So for free trade to work for everyone (at the micro level that is; we know it works at the macro level), we need to figure out ways to smooth those short term dislocations. Education and training for dislocated workers is the most obvious path, but I’m sure there are others.

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