In a prosperous country such as the United States, a fallacy that sounds very plausible is
that American goods cannot compete with goods produced by low-wage workers in
poorer countries. Both history and economics refute it. High-wage countries have been
exporting to low-wage countries for centuries.
The key flaw in the high-wage argument is that it confuses wage rates with labor
costs—and labor costs with total costs.
When workers in a prosperous country receive twice the wage rate as workers in a poorer
country and produce three times the output per man-hour, then it is the high-wage
country that has the lower labor costs. It is cheaper to get a given amount of work done
in the more prosperous country simply because it takes less labor, even though individual
workers are paid more. The higher-paid workers may be more efficiently organized and
managed, or have far more or better machinery to work with.
A prosperous country usually has a greater abundance of capital and, because of supply
and demand, capital tends to be cheaper than in poorer countries where capital is scarcer
and earns a correspondingly higher rate of return.
That “giant sucking sound” we were forewarned about fearing that American jobs would
go to Mexico in the wake of the North American Free Trade Agreement of 1993 turned
out to be completely wrong. The number of American jobs increased and the
unemployment rate in the United States fell to record lows. This did not come at the
expense of Mexico, however. Both countries gained for the same reasons that countries
have gained from international trade for centuries—absolute advantage and comparative
advantage.
Just as free trade provides economic benefits to all countries simultaneously, so trade
restrictions reduce the efficiency of all countries simultaneously, lowering standards of
living, without producing the increased employment that was hoped for.
A protective tariff for other import restrictions may provide immediate relief to a
particular industry and thus gain the financial and political support of corporations and
labor unions in that industry. But, like many political benefits, it comes at the expense of
others who may not be as organized as visible, or as vocal.
Whatever the merits or demerits of various political proposal, what must be kept in mind when evaluating them is that the good fortunes and misfortunes of different sectors of the economy may be closely related as cause and effect - and that preventing bad effects may prevent good effects. It was not accidental that Smith Corona was losing millions of dollars on its typewriters while Dell was making millions on its computers. It was not accidental that Safeway surged to the top of the grocery business while A&P fell from its peak to virtual oblivion. The efficient allocation of scarce resources, which have alternative uses, means that some must lose their ability to use those resources in order that others can gain the ability to use them Typewriters were no longer what the public wanted after they had the option to achieve the same end result and more with computers. Scarcity implies that resources must be taken from some places, in order to go to other places.
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