James d. Gwartney

Read:
Markets and Freedom by Dwight Lee
Many people believe that workers from high-income countries cannot compete with
foreigners who sometimes make as little as $2 or $3 per day. This view is wrong and stems
from a misunderstanding of both the source of high wages and the law of comparative
advantage. Workers in high-income countries are well-educated, possess a high skill level, and
work with large amounts of capital equipment. These factors contribute to their high

---

116
productivity, which is the source of their high wages. In low-wage countries like Burundi and
Ethiopia, wages are low precisely because productivity is low. The fact that Ukrainians have
average incomes over twenty-five times those of Burundians should not prevent Ukrainians
from enjoying a cup of Burundian coffee.
Each country will always have some things that it does relatively better than others.
Both high- and low-wage countries will benefit when they can focus on using more of their
resources pursuing productive activities that they do comparatively well. If a high-wage
country can import a product from foreign producers at a lower cost than it can be produced
domestically, importing it makes sense. Fewer resources will be tied up producing items that
could be supplied domestically only at a high cost, and more will be directed toward
production of goods and services that domestic producers can supply at a low cost.
(44)
Trade
will make it possible for workers in both high- and low-wage countries to produce a larger
output than would otherwise be possible. In turn, the higher level of productivity will lead to
higher wages for both.
What if foreign producers were able to provide consumers with a good so cheap
(45)
 that
domestic producers were unable to compete? The sensible thing to do would be to accept the
economical goods and use domestic resources to produce other things. Remember, it is
availability of goods and services, not jobs, that determines our living standards. The French
economist Frédéric Bastiat dramatically highlighted this point in his 1845 satire, “A Petition on
Behalf of the Candlestick Makers.” The petition was supposedly written to the French
Chamber of Deputies by French producers of candles, lanterns, and other products providing
indoor lighting. The petition complained that domestic suppliers of lighting were “suffering
from the ruinous competition of a foreign rival who apparently works under conditions so
superior to our own for production of light that he is flooding the domestic market with it at an
incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him,
and a branch of the French industry whose ramifications are innumerable is all at once reduced
to complete stagnation.”
Of course, this rival is the sun, and the petitioners were requesting that the Deputies
pass a law requiring the closing of windows, blinds, and other openings so that sunlight could
not enter buildings. The petition goes on to list the occupations in the lighting industry in

---

117
which there would be a large increase in employment if the use of the sun for indoor lighting
was outlawed. Bastiat’s point in this satire is clear: As silly as the proposed legislation in the
petition is, it is no sillier than legislation that reduces the availability of low-cost goods and
services in order to “save” domestic producers and promote employment.
During the past several decades, transportation costs have fallen and trade barriers have
declined. The reduction in trade barriers has been most pronounced in low-income countries.
In 1980, it was commonplace for poor, less-developed countries
(?)
to impose tariffs of 20
percent or more. Many also imposed exchange rate controls, which made it difficult for their
citizens to get their hands on the foreign currency needed to purchase imports. Today, the
situation is dramatically different. Beginning in the 1980s, numerous less-developed countries,
including China and India, lowered their tariffs, relaxed exchange rate controls, and removed
other trade barriers. As a result, international trade has grown rapidly.
The growth of international trade has made it possible for the world to produce a larger
output and achieve a higher level of consumption than otherwise would have been the case. Per
capita income has increased rapidly in many less-developed countries, particularly the
populous nations of Asia. The poor in particular have benefited from the freer trade.
Worldwide the number of people in extreme poverty fell by over 1.1 billion between 1980 and
2015, falling from 40% of the world’s population to less than 10%. Today approximately two-
thirds of products exported from developing countries to the rest of the world face zero tariffs.
Further, the growth of international trade has narrowed the income gap between rich
and poor nations. In recent decades, less-developed countries have grown more rapidly than
high-income developed nations. Moreover, the growth of income has been particularly rapid in
China and India, home to nearly one-third of the world’s population. As a result, the
distribution of income worldwide is becoming more and more equal, especially since the year
2000.
(46)
However, the impact of the expansion in trade on the distribution of income is often
different in high-income countries such as the United States, Canada, Japan, and those of
Western Europe. Predictably, high-income countries will tend to export goods requiring lots of
high-skill, well-educated labor while disproportionately importing goods produced by low-skill
labor. Thus, trade may increase the demand for high-skill labor relative to low-skill labor. To

---

118
the extent that this is the case, the earnings of high-skill workers will rise relative to low-skill
workers, increasing domestic income inequality. Income inequality has increased in almost all
high-income countries in recent decades, and the growth of international trade may well be a
contributing factor.
Currently, there appears to be a surge in hostility toward international trade in several
high-income countries. Leading political figures have called for various types of trade barriers,
particularly restrictions directed toward imports from poor countries. The increased income
inequality and slow growth in the earnings of low-skill, poorly educated workers contribute to
this hostility. But there is another crucially important factor here: the political power of well-
organized interests. Trade restrictions benefit specific producers and their resource suppliers,
including some workers, at the expense of consumers and suppliers in other industries.
Typically, industries lobbying the government for protection against foreign rivals are well-
organized and their gains are concentrated and highly visible, while consumers, other workers,
and other resource suppliers are generally poorly organized and their gains from international
trade widely dispersed. Predictably, the organized interests will have more political clout (in
the form of contributions and other forms of political support), providing politicians with a
strong incentive to cater to their views.