Brookings Institution Panel Discussion - Free Trade in the New Global Economy
Federal News Service
HEADLINE: BROOKINGS INSTITUTION PANEL DISCUSSION
SUBJECT: FREE TRADE IN THE NEW GLOBAL ECONOMY: THE STATE OF U.S. TRADE POLICY
MODERATOR: RON NESSEN, THE BROOKINGS INSTITUTION
PANEL: LAEL BRAINARD, SENIOR FELLOW, BROOKINGS; THOMAS J. DONOHUE, PRESIDENT AND CEO, U.S. CHAMBER OF COMMERCE; PAUL CRAIG ROBERTS, SENIOR RESEARCH FELLOW, HOOVER INSTITUTION; SENATOR CHARLES E. SCHUMER (D-NY)
LOCATION: BROOKINGS INSTITUTION, WASHINGTON, D.C.
BODY:
SECTION: PRESS CONFERENCE OR SPEECH
LENGTH: 13078 words
HEADLINE: BROOKINGS INSTITUTION PANEL DISCUSSION
SUBJECT: FREE TRADE IN THE NEW GLOBAL ECONOMY: THE STATE OF U.S. TRADE POLICY
MODERATOR: RON NESSEN, THE BROOKINGS INSTITUTION
PANEL: LAEL BRAINARD, SENIOR FELLOW, BROOKINGS; THOMAS J. DONOHUE, PRESIDENT AND CEO, U.S. CHAMBER OF COMMERCE; PAUL CRAIG ROBERTS, SENIOR RESEARCH FELLOW, HOOVER INSTITUTION; SENATOR CHARLES E. SCHUMER (D-NY)
LOCATION: BROOKINGS INSTITUTION, WASHINGTON, D.C.
BODY:
MR. NESSEN: I'm Ron Nessen. I'll be the moderator for this afternoon's forum. And I especially want to welcome those who are watching today's discussion on C-SPAN.
A couple of housekeeping notes first. Biographies of our panelists and other background information is available outside at the registration desk, if you didn't pick it up when you came in.
A summary of today's forum will be on the Brookings website later this afternoon. That's at brookings.edu. And a full transcript of this discussion will be on the website in the morning. Also, a great deal of additional information on trade issues can be found on the website at brookings.edu.
We're going to begin our forum this afternoon with brief statements from Democratic Senator Charles Schumer, the senior senator from New York; and Paul Craig Roberts, the senior research fellow at the Hoover Institution, who was assistant Treasury secretary for economic policy in the Reagan administration. I know most of you probably saw their op-ed article in yesterday's New York Times, in which they called for a reexamination of America's trade policies in light of changes in the global economy; and, if necessary, revisions of those policies to reflect what they call the new realities. Today they will elaborate on their thoughts in that op-ed piece.
Next we'll hear from Thomas J. Donohue. He is the president of the U.S. Chamber of Commerce, an organization obviously representing business. He will briefly outline the Chamber's view on trade issues. And then Brookings trade expert Lael Brainard, a senior fellow and holder of the New Century Chair here at Brookings, who was deputy assistant to President Clinton for international economics, will comment on what we've heard. Then we'll have a lively discussion among ourselves and panelists.s Finally, the panel will answer questions from you in the audience.
Those watching today's discussion on C-SPAN, you can submit your questions by e-mail to questions@brookings.edu
So let's begin with Senator Schumer and Mr. Roberts.
SEN. SCHUMER: Great. Well, thank you, Ron. And I want to thank Brookings for hosting this little gathering on short notice. And I want to thank my unlikely partner, Paul Craig Roberts. We really don't know each other very well, but when I started thinking about trade issues, I just called a whole variety of people, and I found his thoughts to be-well, I guess a more satisfying fit of the new facts that we are seeing, then just about anybody else's. And so we began talking, and hence our unlikely collaboration.
And I want to also thank our fellow panelists-Tom Donohue, who represents the Chamber very well, and Lael Brainard and, Ron, you as well.
Before I begin with the substance-and I'll be kind of brief and let Paul Craig-I just learned this, that he likes to be called Craig-we don't know each other that well. The one sort of admonition that I would offer is there's a great temptation on this issue to say everything-Are you for free trade, or are you protectionist? And almost everybody-economists, writers, thinkers-sort of like to just classify people one or the other. And what we a re trying to do here is different than that. We think that he fundamental model for free trade has changed, due to all the changes we have seen in the world economy. We don't know what should replace it. We are certainly not advocating old-time protectionist answers. But we do think that people have to start thinking about this in a new and unconventional way. And I have found in the places where I have begun to discuss this issue there's almost an overwhelming tide to say, Well, that's free trade, that's protectionist, and see things in that regard. And that's not what we are trying to do.
Let me just walk you through what made me start thinking about this. My record in the past has been-I guess I would say mixed. I have generally supported free trade, but I have voted against a number of free trade measures. I did lose at one point the AFL-CIO endorsement when I was in the House for preventing the override of Ronald Reagan's veto of a textile-there was a textile barrier that I thought was very, very regressive, and I was one of the-I rounded up five Democratic votes, and the AFL-CIO was mad at me for five years.
But I began looking at the new issues, and two or three things-two or three people commented to me as I began to ask them about this. One was the head of a New York securities firm who said to me that they had 800 people doing high-level computer software programming-not mundane stuff, but the highest level. These are the guys who put together the programs for the derivatives, where billions of dollars are at risk. Their average salary was $150,000. And he said to me that within three years all of those jobs will be in India, where we can pay the average worker about a quarter of what we are paying here.
And then I met somebody who was active in the American Radiological Society, who represents the radiologists, and he said to me within five years the number of radiologists needed in America is going to greatly decline, because when you need a typical type of X ray-you break a leg or you need a chest X ray-you will still go to a technician who will take the picture. But that picture will be beamed to India or China, where a very capable radiologist will read it for a quarter of the cost. Now, he said, mind you, the high end, if it's a very difficult radiological reading, it probably won't be beamed. But for the vast majority which are more standard, it will.
And I began thinking-because in those two situations it's not the classic free trade model which has sort of kept us going, which is, Well, the high-value jobs, the ones that take a lot of education and creative thought and intellectual property, will stay here, and it doesn't matter if the-in fact, it's probably good in the classic Ricardian-I don't know what the adjective is --
MR. NESSEN: That's right.
SEN. SCHUMER: Ricardo-an. (Laughter.) Since, you know, that that fits the free trade. But it doesn't fit the free trade model when these very high-end jobs migrate overseas.
And I began thinking about it, and realized that there are three factors that are different today than they were even 10 years ago, and are different than at any time in the history of the modern free enterprise Adam Smith world. And the first is that capital can flow very freely between countries. Ten years ago people would not have invested in India and China in significant amounts, because their political structures were regarded as too unstable. That, second, communications changes allow broad band-allow communications to occur at such a more sophisticated level, that things could be done anywhere. But, third, and most important, that for the first time we had two countries-and this is to their credit-China and India-which will turn out millions and millions of high-end, well-educated, college-educated people, who are well motivated, who are highly educated-probably as well educated as here, or almost as well in most instances, who make about a quarter of the money-who make much lower salaries for doing those jobs. And you put those three-and this is not a couple of million-this is probably 50 million new people entering the world labor market in the next 10 years. Now, admittedly, that's a small percentage of the Indian and Chinese populations, but it's such a large number absolutely that this presents a new challenge to us that we never had before. Mexico or Brazil did not present such a challenge, because their education systems weren't so large-their populations weren't so large, and their educational systems weren't as sophisticated.
You put those three things together, and you think, something is different than classically, because if overseas can out-compete us-and maybe they can, and maybe they can't, but it's certainly a possibility-not only for the low-end, low value-added job, and the middle value-added jobs, but also for the high value-added jobs, then maybe something is awry. At least maybe we ought to reexamine our fundamental precepts that high value-added jobs will always be created here. Now, that may be.
Again, what Craig and I are doing is not positing what the future is-just saying that the past, the recent past, has changed so quickly that we ought to reexamine our fundamental assumptions and see if they stay fit. And what we have found is sort of an atavistic pulling back: No, we can't do that. In the beginning of our essay-I forget exactly the words, but you know, Keynes described free trade to economists as close to religion, and you couldn't step on it.
So I just have to-we'll talk about-I'll let Craig talk about the theoretical underpinnings and where some of Ricardo's assumptions-he's the developer of the free trade theory-I remember reading him in Ec 1 in college-although I know far less about him than many of you in the audience. But the bottom line again is we are not positing a solution, we are not saying just you know go back and build trade barriers. We are saying something different has changed than in the past, which has been a progression from agriculture to textiles to higher-end manufacturing. Something different is in the air now, and we ought to look at it and examine it. Now I'll turn it over to Craig, because I've been told just five minutes each-to go over the theoretical parts of this, where Ricardo-these assumptions that Ricardo assumed in his own world may not be true in our 21st century world.
MR. ROBERTS: Yes. You see, Senator Schumer and I are not attacking the doctrine of free trade. We are not saying that it's a wrong doctrine or a bad one or that we shouldn't have it. What we are asking is whether the conditions specified in the trade theory for free trade to be mutually beneficial to the trading partners, whether those conditions hold when factors of production are as mobile as traded goods. That's the question.
The case for free trade since the time of Ricardo rests on the principle with comparative advantage. And the principle of comparative advantage in turn rests on the immobility of factors of production. This is in all the textbooks, it's in the literature. I have a recent piece from a trade Roy theorist, Roy Ruffin. It's basically addressing Ricardo's theory of comparative advantage and why he has the claim to it. And he says: "The key assumption of trade theory is the inability of factors to move from a country where productivity is low to another where productivity is higher." And it goes on to give Ricardo's example, where he's talking about Portugal and England, and wine and cloth. And Portugal has the absolute advantage in the production of both commodities, and why should England be able to come out of this when it only has relative advantage, and he explains the principle. And then he says as well that since Portugal has an absolute advantage in the production of both cloth and wine, it would undoubtedly be advantageous to the capitalists of England and to the consumers of both countries, that under such circumstances the wine and the cloth should both be made in Portugal, and therefore the capital and labor of England employed in making cloth should be removed to Portugal for that purpose.
So, in other words, if the factors of production can flow freely across international borders, they moved to where the absolute advantage is greatest, and there is no comparative advantage, and there are no shared benefits from trade. One country gets rich and one gets poor.
As I understand it, this is still the basis for trade theory. And this particular trade theorist asserts that is the case. This is what is in the textbooks. And yet it's changed out from under us, and economists apparently disagree with this interpretation of the basis of trade, or they are not aware that it has changed out from under them.
When resources and factors of production can flow across borders-in fact, they can actually move quicker than goods, because goods have to be shipped; capital and technology and ideas can move with the speed of light. And I think that Senator Schumer is right in observing that things have changed. There's always been some mobility of capital, but it was mainly confined in the First World. It's the new political stability in India and China that lets it move beyond the First World.
Moreover, there's another difference. When the capital flows between Japan, the United States and Europe were different than the kinds of capital flows now-you see, when the Japanese, the Germans, come here and build plants to produce cars, they don't do that in order to send them back to Japan and Germany. They do it to sell in this market. But the way it's working today, firms close facilities here, remove them to China, produce there, and send the products back here. This is not covered in the Ricardian case for free trade.
So these kinds of differences-and of course the Internet, which lets tradeable services be performed anywhere. People in India check into their offices in Los Angeles or Chicago or wherever. This has made labor mobile. So Ricardo stresses the immobility of capital and labor. The Internet makes labor mobile, and the mobility of capital and technology makes labor mobile. Chinese labor doesn't need to come to the United States, if American capital and technology goes to China. That makes the Chinese labor mobile.
So you end up with a situation where labor that is not paid the value of its marginal product because of huge excess supplies of labor in those labor markets-China and India for example-labor that is not paid the value of the marginal product-is highly mobile, whereas U.S. labor, which tends to be paid the value of its marginal product is not. And so you see a substitution of labor that is paid the value of its contribution-it is substituted out of production functions, and its place is taken by labor that is paid less than the value of its marginal product.
So the issue we are discussing here is really, Is comparative advantage the basis for free trade? If not, what is? If comparative advantage is the basis for free trade, how can it exist when the factors of production are as mobile as the goods? That is, where does the relative advantage lie when the factors of production can move to where their productivity is greatest?
So it's clear that in Ricardo's own words the model breaks down under the conditions we currently see in the world. And this is the issue that we are trying to raise. We don't have a solution. We don't know what-in fact, we may be wrong. We are perfectly willing to admit that we may be mistaken in the way we see this. But we have yet to have it explained to us why we are mistaken. Generally economists are in denial. They go into denial, because they are very protective of free trade, and they learn throughout decades that you defend it, and they learn that anybody that says anything about it is a protectionist and should be slammed down. And so you can't get engaged with them. It's very difficult to get them engaged. But I hope I've made it clear what we are really asking. Again, Do the conditions on which the theory of free trade rest, do they hold when factors of production are internationally mobile?
Now, of course some factors can be mobile-it's all right. But the question is whether all of them are or so many of them are that the principle is eroded and there's no basis for relative advantage. There's no basis for each country to specialize in what it can do best, and then trade. And many of the things that we have noticed and discussed, it's hard to see what the trade is. It looks more like a substitution of one form of labor paid the value of its marginal production-it's substituted down to production function, and cheaper labor is substituted in. Now, I don't know how economists can describe that as the workings of free trade. It's a confusion in my view that they make between the free flow of goods and the free flow of factors of production.
In trade theory these things are different. If you look at Kindleberger's text, for example, he discusses these things quite separately. And the mobility of capital necessary for comparative advantage is mobility within a country. It has to be able to move within a country from where it hasn't a relative advantage to where it does-not out of the country.
So that is my summary of the economic aspects of what Senator Schumer has noticed in his experience.
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MR. NESSEN: Well, I want to follow up on a couple of Lael's specific suggestions, but let me throw out this general question first-why does it seem that there is more concern, including your op ed, which has obviously touched off a serious discussion-why does there seem to be more concern about the loss of jobs by white-collar workers; back-office workers; radiologists, as you cite in your piece; software developers, as you cite in your piece-much more concern and the beginning of a national debate that I don't think happened with the loss of factory jobs?
SEN. SCHUMER: Well, first, I guess I would disagree. I think it did happen with factory jobs. Certainly in Upstate New York where there are a lot of factory jobs. Maybe it wasn't heard as clearly in Washington, but I think it sort of misstates-and this is an important point, and it relates to what Lael said, too-we are not saying, "Oh, this is white-collar jobs, that was blue-collar jobs, this is different." We are saying, "This is high value-added jobs, which have traditionally stayed here." Whether it's the guy who works in the factory but took four years of computer training to work 16 robots at once, or it's the computer programmer, and that is the key point that's different here. It is very easy to say, "Oh, well, what happened in manufacturing will happen in white-collar." We are simply-what happened in white collar, basically, was they tended to be-the newer jobs-tended to be higher value-added jobs when, because of communications, because capital can flow freely, instead of it taking 15 or 20 years for those jobs to be exported, the minute some genius on Wall Street or in California thinks this up, it's all done over there.
Now, that's one-and then it affects-you know-there are lots of jobs that won't leave, as we mentioned in our piece. Radiologists may leave, figuratively speaking; internists won't, because they have to look at you. You know, you can't-it's very hard now-maybe they'll figure out at some point some mechanical fingers and mechanical eyes to look at you that way but, at the moment, that's even beyond what we can see.
And then there are a lot of white-collar jobs that have to stay here. You know, I mean, in New York City, one of the great ladders up for immigrants are jobs in restaurants, and who is eating in those restaurants-all the sort of Wall Street people and advertising people and lawyers who are making more money. But if those jobs go-the high-end jobs-so do the low-end jobs. You know, if Goldman Sachs ends up just being the partners who want to live here, everybody else, those 400 people, stay in New York but the other 10,500 are all overseas, whether they make $500,000 or $20,000. That's the change here. So, again, the admonition is this is not just, oh, the natural progression-agriculture to manufacturing to white-collar jobs.
This is rather the basic theory that we have posited, we have bet the ranch on here in the United States for a long time, which is, well, the highest value-added jobs stay here, because we're the best educated, we have the-you know, that system-but they go, or they never even start here-that's the difference. And, in fact, and Craig pointed this out to me-two little points that I don't know if they matter or not but just to think about-just in the recent job growth that we've seen over the last three, four months, the overwhelming majority of those jobs were the more poorly paid jobs, not the higher-end jobs, number one. That's sort of different. And-so, maybe the higher-end jobs are going more, and that's a difference. Well, I'll leave it there. There was another point I wanted to make, but I don't want to monopolize it here, and I'll make it in a minute.
MR. DONOHUE (?): Well, I wanted to follow up on one thing you said about education-and, Lael, you listed that as one of the things to think about. The response to the loss of manufacturing jobs used to be, Well, the people who worked on the assembly line are going to have to go back to school, get more training, more education, so they can do the higher tech or higher-end jobs, as you say, of the future. Now that the higher-end jobs of the future are also going overseas, what happened-does the education equation still work?
MS. BRAINARD: Well, let me just say one thing about job categories, first of all. In terms of where have we been creating jobs recently, don't forget the technology boom-and-bust cycle. Don't forget the recession. So I think there's a lot of things going on in this economy that complicate what we can read. But if we look at recent numbers in the 2003 numbers compared with '99 -- so we are trying to kind of move outside of the business cycle-we actually saw 9 percent increases in business in financial categories. We saw 6 percent increases in computer and mathematical areas. We've seen employment pretty stable in engineering. And where we've seen the tremendous losses are really in manufacturing-and in management, interestingly.
In terms of this issue of education, what's happening, I think, is an incredibly accelerated cycle in terms of where is the highest- end innovation taking place? Where are there pockets of specialization that the U.S. is going to master? And so the notion that somehow there's a generic linear amount of education-that, you know, the more education you get the more kinds of jobs you can do, is wrong, we are simply going to have to keep moving the work force-whether it be adults who are going back for retraining, or younger kids who are preparing before they enter the work force, into areas that continue to be vital to the economy. And they're going to change. It may have been IT yesterday. It may be biotechnology tomorrow. That requires a tremendous, tremendous continued investment in our nation's work force. And we don't actually have a very good system for doing that right now.
MR. DONOHUE: I think you were also agreeing that the loss of white-collar jobs is not as great as perhaps --
SEN. SCHUMER: Well, can I just say I know that is true-no question. What we are saying is what's causing 2 percent of radiologists to be-radiology to go overseas, or 5 percent of high- end, high value-added computer programmers to go overseas, is not the peculiar nature of those two professions, but rather the fundamental change in broadband width, 50 million new educated, highly-educated people being put into the labor market-Lael is exactly right-it's brand-new labor markets being thrown together. And is this the tip of the iceberg? That's the question we are asking. And, if it is the tip of the iceberg, we ought to be thinking about it and preparing about it to see what we should do. It would seem logical that it is, unfortunately, because the fundamental conditions that allow the first few to happen, there's nothing to change the next whole bunch to do the same thing.
The head of a big insurance company told me that except for the sales people, who are like the interns, that if he's doing his job in 10 years, 80 percent of the people who work here in America-the low end, middle end and high end-should be overseas. Who is replacing them?
MR. DONOHUE: But, Chuck-just one sentence. One of the reasons CEOs are driven in that direction is that for the last 10 years you have not been able to get any price pressure at all. You can't put prices up on anything. The American people wouldn't sit still for it, you see? So what do you do if you want to keep your stock up and keep your job? You look for ways to become more and more and more productive. And part of that-a small part of that-is to --
SEN. SCHUMER: Right, and I would just make one other point-I know Craig is eager to say-one advantage of this which ought to be talked about and fits into the equation is goods are going to become cheaper. If you are only paying the radiologist $20,000, and you are only paying the computer programmer $25,000, and there continues to be cutthroat competition, which is what Adam Smith wanted-I mean, my problem with the free market system is not its fundamentals, but when things get in the way and prevent that competition. And we see a lot of that in the political realm right now. But once you have that competition, the price will come down. And maybe the scenario is incomes go down and prices go down, and standard of living stays just the same. I don't know. But that's a possible scenario.
MR. ROBERTS: No, you see the dollar goes too. And when the dollar goes, the prices will go up.
I think that the real problem is different. You see, young people are far more aware of the problem-I'm talking about seniors in high school, freshmen in universities. When I talk to them, they know more about it than any of my economist friends, no matter how distinguished they are. And the reason they know more about it is they spend a great deal of time searching for an occupation that can't be wiped out underneath them. And they are having great difficulty in finding one. And last night my son, who is just home from the university, handed me the current issue of Popular Science. He was going to go off to be an engineer. And here in the current issue, the February issue of Popular Science it says, "Nearly 750,000 high-paying jobs in high-tech industries have fled the United States in the past two years, says the American electronics Association. The lost jobs paid salaries averaging $66,300. Foreign workers receive far less. India leads in computer-related jobs. China has targeted electronics manufacturing, and Russia has become the lowest cost supplier of engineering services."
What they find is there is no career in engineering-civil engineering-because it's hands on and has to be here. Every other engineering can be done offshore. They are finding the same thing with architecture. Wherever they look, people sit around and say, Oh, education is the answer. Well, one of the trustees at Georgia Tech told me recently that the president of Georgia Tech is convening a study to see if engineering schools in America have any future, because the students don't see any reason to take engineering, because they don't expect there to be any jobs.
MR. DONOHUE: Which is not true.
MR. ROBERTS: So the problem-to come back to what the problem is, the problem is very simple: labor that is paid the value of its marginal product-that is, it's paid the value of its contribution to output-cannot compete with equally competent labor that is not paid the value of its marginal product. And that is the situation that we have now today in the world. That is the situation, period. And it has come about because factors of production are as mobile as traded goods. And, as Ricardo said, when that happens there is no longer a basis for comparative advantage. There is only absolute advantage. Where is the productivity of capital technology highest? Where labor is the cheapest. These are simple facts. They are in all the economic textbooks. Why won't economists acknowledge it?
See, we live in a delusion. We think everything that is happening is the workings of free trade. We all know free trade is good for us. We have all learned this. And we live in the delusion that what is going on is free trade. It is not free trade. It is factors flowing to where the absolute advantage is greatest. That is not free trade. That is not free trade. What is happening is not free trade. We think it is, so we don't worry about it, because we've all learned it's good for us. If you lose this industry, you get another one. That is not what's happening. Somebody has got to become aware of this.
You know, we can go-it's going very fast-very rapid. If high school seniors and college freshmen are aware of it, Nobel laureates ought to be aware of it. (Laughter.)
MR. NESSEN: We're going to take audience questions. I want to ask one other very quick question before we do that though, just to follow up on one of Lael's other ideas-get a very quick response from the panel to the idea of country-of-origin labels for services. Would you support something like that, senator?
SEN. SCHUMER: I mean, that's free market. People should have full knowledge. And if I want to make a decision to pay a little more to buy an American product, I should be able to do it. And there are advantages. I mean, we just had an example. Here this is classic in we passed, at the behest at the ranchers, a what's called COOL-country-of-origin labeling-for meat-it's technologically feasible, which it wasn't I guess 10 years ago. And it was supposed to take effect within the next few months. The meat industry opposed it, and in the big omnibus bill, the omnibus appropriations bill which the House passed and the Senate didn't, they delayed it. Now, that's free market-country-of-origin labeling is free market. Everyone wants to make up his or her own mind, and even by the free market model, if I want to pay more for an American-made good, because I'm patriotic and because it might be safer, or for whatever reason, I should have that knowledge.
MR. NESSEN: But this was for services. So if you --
SEN. SCHUMER: Either one.
MR. NESSEN: So if you call a customer service office, they have to be required to say --
SEN. SCHUMER: How is that not consonant with free market perfected knowledge?
MR. ROBERTS: But it won't do any good. It's just-we already know. Things are driven by lowest costs. So none of these things do any good. The question comes back to-you have to come back to the same point. We're saying what's operating as free trade. It is not. There is no basis for comparative advantage when factors of production are as mobile as traded goods.
MR. NESSEN: Tom, do your members support country-of-origin labels on services?
MR. DONOHUE: Well, first of all, I want to stay on the question of meat. (Laughter.)
MR. NESSEN: I didn't mean to get --
MR. DONOHUE: No, no, no, no. I want to point out something very, very interesting. We are going to go from where we were a couple of months ago to country of origin on the cow-not on the end product.
SEN. SCHUMER: Right.
MR. DONOHUE: Because we need to know now where that came from, so that we can protect ourselves, you see? So I think this goes back to what Craig and the senator were saying: Things are changing while we sit here and watch them.
You know, the senator is concerned, rightfully, about what happened in New York City to jobs. But part of what drove jobs out of New York City is after 9/11 everybody sat down and said, We have got to split it in a three-point deal-what we keep in New York, what we send to Hoboken or Buffalo, and what we are going to send to India. We have got to spread ourselves out to protect ourselves.
I think the country of origin stuff, there is some value in that-a lot of it you know already, although you think you know-because you say, Well, I'm buying a Chevrolet-that must have been made in the United States. Yeah, maybe it was-the hood was put on, but the parts were made in Canada or Mexico. It's very hard to know where country of origin is in manufacturing, because it's aggregated from all over the world.
Services? I don't duck things very often. Let's keep talking. (Laughter.)
MR. NESSEN: All right, we have-if you have questions, raise your hand. Wait for the microphone to come to you, and stand up and identify yourself. Bob, you want to go first?
Q Robert Solomon, Brookings. I wanted to address the question to Craig, if I may. First of all, I don't understand why you say this is not free trade. You may not like the effects of it, but I don't see what's unfree about it. But my main point is the following-my main question is the following.
You've described a process that's very-really happening-and I think you've identified some real problems. But one thing you did not address is what are the dynamic effects? What's likely to happen in India and China as time goes on? Are wages and salaries likely to go up in those countries, and will all this tend to change over time? I'd like to see some discussion of the dynamic effects.
MR. ROBERTS: Sure, Bob, I'd be glad to. First of all, I say it's not free trade, because free trade is based in comparative advantage. That's the basis for free trade.
Q Unrestricted trade.
MR. ROBERTS: I'm using the word as it's used in economics, and free trade is based in comparative advantage. And comparative advantage is requires that the factors of production are not as mobile as the traded goods. And that condition I am saying doesn't hold any longer, and therefore it is not free trade. It is not what Ricardo defines as free trade. It's not what Kindleberger and the textbooks define.
Now, to come to your question --
SEN. SCHUMER: In other words, to put it in a sentence, whether you define it as free trade or not, the theory of comparative advantage depends pretty fundamentally on the immobility of the factors of production, and the latter has changed, whatever you want to call it.
MR. ROBERTS: All right, thank you. That's right. (Laughter.) Now, what are the changes and the future changes? You see, what really is happening-any time absolute advantage rules over-you know, in place of comparative advantage, you have an international redistribution of income and wealth. That's what Ricardo said would happen. The English labor and capital would move to Portugal and produce the wine and cloth there. So England would become poor and Portugal would become rich.
That's what's happening. The United States is undergoing a redistribution of income and wealth to India and China. And what will happen? They'll become richer. We'll become poorer. Somewhere along the way, the dollar is going to help us become poorer because the goods that we're importing are going to cost more when the dollar goes.
And so it is a big adjustment. And not only that; there's something really bad going to happen. The ladders of upward mobility in the United States are collapsing while we're importing millions of Third World immigrants, many of them poor and illiterate.
The ladders of upward mobility collapse when the high value-added jobs leave. Then you get real political instability, because the guys running the big companies-you know, you get a complete break between the stock market and the economy, because the United States economy becomes less and less of any meaning to multinational firms. Their profits are made with Indian and Chinese labor.
So you get tremendous political instability in a country where the ladders of upward mobility diminish. While poor immigrants pour in, the value-added jobs are leaving. It's not a very pretty picture. It will be challenging even for senators like Schumer.
SEN. SCHUMER: I just would make two other quick points in reference to what Mr. Solomon said; and I have such respect for him.
Number one is, just backing up Craig, as I understand it-and I caveat it; I haven't read it. I'm calling hundreds of people about this just to try to get ideas and stir the pot. And somebody told me that Keynes, in his latter days, backed off the theory or thought free trade might not work but was becoming not working, I guess, is the way he put it.
Second, very specific question that he asked, Mr. Solomon asked, is exactly right: What is the educational system? How broad and wide open is it in China and India? Does it get bottlenecked soon? And if it does, then the lower price of an Indian software programmer or a Chinese radiologist quickly evaporates.
But it seems logical, in countries that are so large, with rapidly growing educational systems and lots of people who are eager to take advantage of those systems and able to take advantage, that it will happen. But this may be 20, 30 years.
I talked to a leading businessman, one of the smartest men I know, who has a company that has jobs all over the place. And, by the way, you can't blame the company. They're supposed to seek lowest cost by the capitalist model, so they're doing what they're supposed to do. This has really got to be a governmental and even a world discussion eventually.
But he said, "Oh, yes, the only thing that will change this around is when American standards are lower, living standards are lower, and Chinese and Indian standards are higher, so the computer programmer in America only gets paid-you know, the guy of $150,000 I mentioned gets paid $80,000, and the guy in India or China gets paid $60,000, and it's close enough that it's not worth $20,000 to go relocate it elsewhere."
He said, "That'll take about 30 years." Well, that's not a scenario that I, who represent 19 million people, all of whom want jobs, want to sit back and say-and so I'm filled with a little anxiety about this, and I want to at least stir the pot so we begin thinking of solutions.
And his frustration, which is so palpable, is real and justified, because no one-just speaking for myself, and I don't know half as much about economics as either of the two of you-no one has given me a good answer to all these questions that I've been asking, other than faith. "Well, it's always worked out that way in the past, and there'll be new high-end jobs that we can't even think of in the future." Maybe that's right. But what if it's wrong?