A popular argument against free trade is the following: Workers in high-wage countries are impoverished if they trade freely with workers in low-wage countries.
If valid, this argument presents a legitimate economic reason for high-wage countries to avoid trading with poorer countries.
This argument, though, is bunk.
It rests on the mistaken assumption that wages are arbitrary. In fact, wages in America are higher than wages in Mexico because American workers are more productive than are Mexican workers. And American workers’ higher productivity is the result of these workers having more capital to work with and to get their outputs to market — more and better tools; more and safer roads, bridges and docks; more and better education and job training; and more co-workers who are highly specialized (and, hence, who possess deeper knowledge of how to perform their tasks).
These advantages oblige employers to pay workers in America more than employers pay workers in Mexico. American firms that stubbornly refuses to pay their workers wages that reflect those workers’ productivity eventually lose those workers to other employers who aren’t so stubborn.
Here’s a challenge: When you next hear a politician or pundit exclaim that “high-wage Americans can’t compete with low-wage foreigners,” re-word the claim so that it becomes “high-productivity Americans can’t compete with low-productivity foreigners.” The two statements, for all practical purposes, mean the same thing; they’re just worded differently. Yet no one would for a moment take the re-worded version seriously.
More generally, if higher-income people are made poorer by trading with lower-income people, then Bill Gates — the world’s wealthiest man — should, for his own good, trade with no one. But of course Gates’s $75 billion has value only because he trades with others.
To possess money is to possess the ability, by spending this money, to persuade others to trade with you. The more money you have, the more you can trade with others — the more opportunities you have to persuade others to serve you.
But if you refuse to spend any of your money, then — no matter how much you have — you impoverish yourself. No one does anything for you. Everything you consume you must personally produce yourself, completely and from scratch.
Let’s assume that Gates earns a very low, 1 percent annual rate of return on his fortune. Even this paltry return would generate for him an annual income of $750,000,000. Assuming a 40-hour work week, Gates’ hourly wage would therefore be $360,577 — far higher than the hourly wage earned by any other worker in the world.
If trade skeptics are correct to insist that Americans impoverish themselves by trading freely with people whose wages are lower than Americans’ wages, then Gates should not hire housemaids; he should mop his own floors and clean his own toilets. Nor should Gates buy automobiles; he should produce his own cars, with his own hands, for all auto-workers’ wages are lower than Mr. Gates’.
Obviously, Gates enriches himself by trading with people whose wages are lower than his own. And what’s true for Mr. Gates is no less true for every other person.
Donald J. Boudreaux is a professor of economics and Getchell Chair at George Mason University in Fairfax, Va. His column appears twice monthly.