The Miracle Of Trade, Is Free Trade Good For American Workers?

946 words - 4 pages

Opponents of free trade often claim that trade with other countries destroys domestic jobs. For example, according to them, free trade in automobiles industry would cause the price of automobiles to fall. That would reduce the quantity produced by the domestic automobile companies. As a result, since the labor demand curve is a derived demand curve, the reduction in the price of automobiles would reduce the demand for labor in the car industry. At the end some car workers would loose their jobs and wages would go down. If the story had ended like this, the opponents of free trade would have been correct in the above analysis. However, as we have known from earlier discussions partial equilibrium analysis focusing only one market is not enough to derive realistic conclusion about real life situations. We have to look at the other dimension of the free trade, which is job creation side.Yes, free trade creates jobs at the same time it destroys them. Therefore, a rational analyst in judging merits and perils of free trade should do its analysis at the margin. That is to say, it should apply Principle #3 of Gregory Mankiw, stating, "rational people think at the margin", to his or her analysis. When the country under consideration buys automobiles from the rest of the world, the rest of the world obtains funds in terms of increasing income to buy other goods from the country. The automobile workers having lost their jobs because of the trade would move from the automobile industry to those other industries in which the country under consideration has a comparative advantage, that is, it has produce them by incurring lower opportunity costs relative to the rest of the world. This transition might not be easy and even might create structural unemployment in the short run. However, government by retraining these workers to make them compatible for those industries in which the country under consideration, which is the United States of America in our case, can shorten this painful transition. In any case, in the long run everyone in the United States including both workers and consumers would enjoy a higher standard of living due to free trade.However, we should mention the fact that opponents are not only claiming that free trade destroys more jobs than it creates but also insisting that it might not create any jobs because everything can be produced cheaply in the rest of the world. This claim, fortunately, is based on the false premise that trade is based on the absolute advantage, that is, the underlying force of trade, as formulated by Adam Smith, is the relative differences in productivity of labor in different countries. Thus, according to the Absolute Advantage principle, a country having reached to higher productivity levels in all industries relative to the rest of the world would be...

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