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America¡¡and¡¡the¡¡Flat¡¡World¡¡

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America¡¡and¡¡Free¡¡Trade¡¡
Is¡¡Ricardo¡¡Still¡¡Right£¿¡¡
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it¡¡was¡¡becoming¡¡a¡¡hot¡¡issue¡¡in¡¡the¡¡presidential¡¡campaign¡¡of¡¡2004¡¡but¡¡also¡¡because¡¡
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free¡¡trade¡¡won't¡¡necessarily¡¡benefit¡¡every¡¡American£»¡¡and¡¡that¡¡our¡¡society¡¡will¡¡have¡¡
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can¡¡collaborate£»¡¡and¡¡compete£»¡¡with¡¡my¡¡kids£¿¡¡It¡¡seems¡¡that¡¡so¡¡many¡¡jobs¡¡are¡¡going¡¡to¡¡
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David¡¡Ricardo¡¡£¨1772¡­1823£©¡¡was¡¡the¡¡English¡¡economist¡¡
226¡¡
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and¡¡services¡¡were¡¡not¡£¡¡There¡¡was¡¡no¡¡undersea¡¡fiberoptic¡¡cable¡¡to¡¡make¡¡knowledge¡¡jobs¡¡
tradable¡¡between¡¡America¡¡and¡¡India¡¡back¡¡then¡£¡¡Just¡¡as¡¡I¡¡was¡¡getting¡¡worked¡¡up¡¡with¡¡
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Infosys¡¡India¡¡received¡¡¡¨one¡¡million¡¡applications¡¨¡¡from¡¡young¡¡Indians¡¡for¡¡nine¡¡
thousand¡¡tech¡¡jobs¡£¡¡
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want¡¡to¡¡lose¡¡mine¡£¡¡When¡¡you¡¡lose¡¡your¡¡job£»¡¡the¡¡unemployment¡¡rate¡¡is¡¡not¡¡5¡£2¡¡percent£»¡¡
it's¡¡100¡¡percent¡£¡¡Nobook¡¡about¡¡the¡¡flat¡¡world¡¡would¡¡be¡¡honest¡¡if¡¡it¡¡did¡¡not¡¡acknowledge¡¡
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is¡¡still¡¡right¡£¡¡
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majority¡¡of¡¡economists¡¡come¡¡down¡­that¡¡Ricardo¡¡is¡¡still¡¡right¡¡and¡¡that¡¡more¡¡American¡¡
individuals¡¡will¡¡be¡¡better¡¡off¡¡if¡¡we¡¡don't¡¡erect¡¡barriers¡¡to¡¡outsourcing£»¡¡
supply¡­chaining£»¡¡and¡¡offshoring¡¡than¡¡if¡¡we¡¡do¡£¡¡The¡¡simple¡¡message¡¡of¡¡this¡¡chapter¡¡
is¡¡that¡¡even¡¡as¡¡the¡¡world¡¡gets¡¡flat£»¡¡America¡¡as¡¡a¡¡whole¡¡will¡¡benefit¡¡more¡¡by¡¡sticking¡¡
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are¡¡goods¡¡tradable£»¡¡but¡¡many¡¡services¡¡have¡¡become¡¡trad¡­able¡¡as¡¡well¡£¡¡Because¡¡of¡¡this¡¡


change£»¡¡America¡¡and¡¡other¡¡developed¡¡countries¡¡could¡¡be¡¡headed¡¡for¡¡an¡¡absolute¡¡decline£»¡¡
not¡¡just¡¡a¡¡relative¡¡one£»¡¡in¡¡their¡¡economic¡¡power¡¡and¡¡living¡¡standards¡¡unless¡¡they¡¡
move¡¡to¡¡formally¡¡protect¡¡certain¡¡jobs¡¡from¡¡foreign¡¡competition¡£¡¡So¡¡many¡¡new¡¡players¡¡
cannot¡¡enter¡¡the¡¡global¡¡economy¡­in¡¡service¡¡and¡¡knowledge¡¡fields¡¡now¡¡dominated¡¡by¡¡
Americans£»¡¡Europeans£»¡¡and¡¡Japanese¡­without¡¡wages¡¡settling¡¡at¡¡a¡¡newer£»¡¡lower¡¡
equilibrium£»¡¡this¡¡school¡¡argues¡£¡¡
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may¡¡be¡¡a¡¡transition¡¡phase¡¡in¡¡certain¡¡fields£»¡¡during¡¡which¡¡wages¡¡are¡¡dampened£»¡¡there¡¡
is¡¡no¡¡reason¡¡to¡¡believe¡¡that¡¡this¡¡dip¡¡will¡¡be¡¡permanent¡¡or¡¡across¡¡the¡¡board£»¡¡as¡¡long¡¡
as¡¡the¡¡global¡¡pie¡¡keeps¡¡growing¡£¡¡To¡¡suggest¡¡that¡¡it¡¡will¡¡be¡¡is¡¡to¡¡invoke¡¡the¡¡so¡­called¡¡
lump¡¡of¡¡labor¡¡theory¡­the¡¡notion¡¡that¡¡there¡¡is¡¡a¡¡fixed¡¡lump¡¡of¡¡labor¡¡in¡¡the¡¡world¡¡
and¡¡that¡¡once¡¡that¡¡lump¡¡is¡¡gobbled¡¡up£»¡¡by¡¡either¡¡Americans¡¡or¡¡Indians¡¡or¡¡Japanese£»¡¡
there¡¡won't¡¡be¡¡any¡¡more¡¡jobs¡¡to¡¡go¡¡around¡£¡¡If¡¡we¡¡have¡¡the¡¡biggest¡¡lump¡¡of¡¡labor¡¡now£»¡¡
and¡¡then¡¡Indians¡¡offer¡¡to¡¡do¡¡this¡¡same¡¡work¡¡for¡¡less£»¡¡they¡¡will¡¡get¡¡a¡¡bigger¡¡piece¡¡
of¡¡the¡¡lump£»¡¡and¡¡we¡¡will¡¡have¡¡less£»¡¡or¡¡so¡¡this¡¡argument¡¡goes¡£¡¡
The¡¡main¡¡reason¡¡the¡¡lump¡¡of¡¡labor¡¡theory¡¡is¡¡wrong¡¡is¡¡that¡¡it¡¡is¡¡based¡¡on¡¡the¡¡assumption¡¡
that¡¡everything¡¡that¡¡is¡¡going¡¡to¡¡be¡¡invented¡¡has¡¡been¡¡invented£»¡¡and¡¡that¡¡therefore¡¡
economic¡¡competition¡¡is¡¡a¡¡zero¡­sum¡¡game£»¡¡a¡¡fight¡¡over¡¡a¡¡fixed¡¡lump¡£¡¡This¡¡assumption¡¡
misses¡¡the¡¡fact¡¡that¡¡although¡¡jobs¡¡are¡¡often¡¡lost¡¡in¡¡bulk¡­to¡¡outsourcing¡¡or¡¡
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ual¡¡companies£»¡¡and¡¡this¡¡loss¡¡tends¡¡to¡¡make¡¡headlines£»¡¡new¡¡jobs¡¡are¡¡also¡¡being¡¡created¡¡
in¡¡fives£»¡¡tens£»¡¡and¡¡twenties¡¡by¡¡small¡¡companies¡¡that¡¡you¡¡can't¡¡see¡£¡¡It¡¡often¡¡takes¡¡
a¡¡leap¡¡of¡¡faith¡¡to¡¡believe¡¡that¡¡it¡¡is¡¡happening¡£¡¡But¡¡it¡¡is¡¡happening¡£¡¡If¡¡it¡¡were¡¡not£»¡¡
America's¡¡unemployment¡¡rate¡¡would¡¡be¡¡much¡¡higher¡¡today¡¡than¡¡5¡¡percent¡£¡¡The¡¡reason¡¡
it¡¡ishappening¡¡is¡¡that¡¡as¡¡lower¡­end¡¡service¡¡and¡¡manufacturing¡¡jobs¡¡move¡¡out¡¡of¡¡Europe£»¡¡
America£»¡¡and¡¡Japan¡¡to¡¡India£»¡¡China£»¡¡and¡¡the¡¡former¡¡Soviet¡¡Empire£»¡¡the¡¡global¡¡pie¡¡not¡¡
only¡¡grows¡¡larger¡­because¡¡more¡¡people¡¡have¡¡more¡¡income¡¡to¡¡spend¡­it¡¡also¡¡grows¡¡more¡¡
complex£»¡¡as¡¡more¡¡new¡¡jobs£»¡¡and¡¡new¡¡specialties£»¡¡are¡¡created¡£¡¡
Let¡¡me¡¡illustrate¡¡this¡¡with¡¡asimple¡¡example¡£¡¡Imagine¡¡thatthere¡¡are¡¡only¡¡two¡¡countries¡¡
in¡¡the¡¡world¡­America¡¡and¡¡China¡£¡¡And¡¡imagine¡¡that¡¡the¡¡American¡¡economy¡¡has¡¡only¡¡100¡¡
people¡£¡¡Of¡¡those¡¡100¡¡people£»¡¡80¡¡are¡¡well¡­educated¡¡knowledge¡¡workers¡¡and¡¡20¡¡are¡¡
less¡­educated¡¡low¡­skilled¡¡workers¡£¡¡Now¡¡imagine¡¡that¡¡the¡¡world¡¡goes¡¡flat¡¡and¡¡America¡¡
enters¡¡into¡¡a¡¡free¡­trade¡¡agreement¡¡with¡¡China£»¡¡which¡¡has¡¡1£»000¡¡people¡¡but¡¡is¡¡a¡¡less¡¡
developed¡¡country¡£¡¡So¡¡today¡¡China¡¡too¡¡has¡¡only¡¡80¡¡well¡­educated¡¡knowledge¡¡workers¡¡
out¡¡of¡¡that¡¡1£»000£»¡¡and¡¡it¡¡has¡¡920¡¡low¡­skilled¡¡workers¡£¡¡Before¡¡America¡¡entered¡¡into¡¡
its¡¡free¡­trade¡¡agreement¡¡with¡¡China£»¡¡there¡¡were¡¡only¡¡80¡¡knowledge¡¡workers¡¡in¡¡its¡¡world¡£¡¡
Now¡¡there¡¡are¡¡160¡¡in¡¡our¡¡two¡­country¡¡world¡£¡¡The¡¡American¡¡knowledge¡¡workers¡¡feel¡¡like¡¡
they¡¡have¡¡more¡¡competition£»¡¡and¡¡they¡¡do¡£¡¡But¡¡if¡¡you¡¡look¡¡at¡¡the¡¡prize¡¡they¡¡are¡¡going¡¡
after£»¡¡it¡¡is¡¡now¡¡a¡¡much¡¡expanded¡¡and¡¡more¡¡complex¡¡market¡£¡¡It¡¡went¡¡from¡¡a¡¡market¡¡of¡¡
100¡¡people¡¡to¡¡a¡¡market¡¡of¡¡1£»100¡¡people£»¡¡with¡¡many¡¡more¡¡needs¡¡and¡¡wants¡£¡¡So¡¡it¡¡should¡¡
be¡¡win¡­win¡¡for¡¡both¡¡the¡¡American¡¡and¡¡Chinese¡¡knowledge¡¡workers¡£¡¡
Sure£»¡¡some¡¡of¡¡the¡¡knowledge¡¡workers¡¡in¡¡America¡¡may¡¡have¡¡to¡¡move¡¡horizontally¡¡into¡¡
new¡¡knowledge¡¡jobs£»¡¡because¡¡of¡¡the¡¡competition¡¡from¡¡China¡£¡¡But¡¡with¡¡a¡¡market¡¡that¡¡


big¡¡and¡¡complex£»¡¡you¡¡can¡¡be¡¡sure¡¡that¡¡new¡¡knowledge¡¡jobs¡¡will¡¡open¡¡up¡¡at¡¡decent¡¡wages¡¡
for¡¡anyone¡¡who¡¡keeps¡¡up¡¡his¡¡or¡¡her¡¡skills¡£¡¡So¡¡do¡¡not¡¡worry¡¡about¡¡our¡¡knowledge¡¡workers¡¡
or¡¡the¡¡Chinese¡¡knowledge¡¡workers¡£¡¡They¡¡will¡¡both¡¡do¡¡fine¡¡with¡¡this¡¡bigger¡¡market¡£¡¡
¡¨What¡¡do¡¡you¡¡mean£»¡¡don't¡¡worry£¿¡¨¡¡you¡¡ask¡£¡¡¡¨How¡¡do¡¡we¡¡deal¡¡with¡¡the¡¡fact¡¡that¡¡those¡¡
eighty¡¡knowledge¡¡workers¡¡from¡¡China¡¡will¡¡be¡¡willing¡¡
229¡¡
to¡¡work¡¡for¡¡so¡¡much¡¡less¡¡than¡¡the¡¡eighty¡¡knowledge¡¡workers¡¡from¡¡America£¿¡¡How¡¡will¡¡
this¡¡difference¡¡get¡¡resolved£¿¡¨¡¡
It¡¡won't¡¡happen¡¡overnight£»¡¡so¡¡some¡¡American¡¡knowledge¡¡workers¡¡may¡¡be¡¡affected¡¡in¡¡the¡¡
transition£»¡¡but¡¡the¡¡effects¡¡will¡¡not¡¡be¡¡permanent¡£¡¡Here£»¡¡argues¡¡Stanford¡¡new¡¡economy¡¡
specialist¡¡Paul¡¡Romer£»¡¡is¡¡what¡¡you¡¡need¡¡to¡¡under

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