Last week’s World Trade Organization’s meetings in Seattle drew howls
of protest and riots against free trade. To figure out what some of the
ruckus is about, let’s consider a few economic principles.
Imagine 10 sweaters a day could be produced using one machine and one
high-skilled worker who’s paid $40. Or, 10 sweaters a day might be
produced, maybe in another country, using one machine and four
low-skilled workers who’re each paid $11 a day. It follows, then, that
an employer would use the high-skilled worker production technique.
Doing so would mean labor costs of $40 rather than $44 if he used the
four low-skilled workers — and would mean higher profits.
If you were the employer, and the high-skilled worker demanded $50 a
day, what would you do? You’d probably tell him to go play in the
traffic and use the low-skilled worker production technique. After all,
paying a labor cost of $44 would leave you with more profit. But the
high-skilled worker is not stupid. So before demanding higher wages,
he’d attempt to eliminate his cheaper-priced competition, but he’ll
conceal his agenda.
He’d make a pretense of humanitarian concerns such as the need to end
“sweat shops,” stamp out slave labor, pay “living wages” and above all
save the world’s children by ending child labor. If he’s successful, say
forcing U.S. companies to pay poor workers in poor country $15 a day, it
makes it more likely he can get away with his $50 wage demand. Why? The
labor costs of using the low-skilled production technique is now $60.
Have I correctly identified the intentions of labor unions, who are
the major proponents of higher wages for foreign workers? In terms of
effects, it makes no difference whether the intention is a sincere
concern for foreign workers or a cynical monopolistic ploy to benefit
union workers. In either case, low-skilled foreign workers have reduced
opportunities. After all, the reason a person works for a wage that we
might consider substandard is because he doesn’t have a higher wage
alternative. In other words, it’s the best he can do. How compassionate
is it for us to destroy that poor person’s best alternative?
Labor unions aren’t by themselves seeking collusive measures against
poor countries and their people. U.S. corporations that face a bevy of
costly environmental and workplace regulations emanating from the
Environmental Protection Agency, Occupational Safety and Health
Administration, and other agencies want these costs exported to other
countries. EPA and OSHA have no jurisdiction in Africa, Asia and Latin
America. As such, companies that locate in those countries don’t bear
all production costs borne by American firms. That gives them a
Whether our business and labor regulations are good or bad for us is
one question, and their cost is another. One benefit of free trade is
that regulatory costs are revealed. Trade restrictions kill the
messenger. If the production cost of a pair of sneakers is $15 in one
country and $30 in another, we could chalk the difference up to “slave”
labor if we want but surely some of the cost differential has to do with
By the way, neither the agreements associated with the World Trade
Organization nor those associated with the North America Free Trade
Agreement is truly free trade. These agreements contain thousands of
pages of specifications. You don’t need thousands of pages to tell
people they can trade freely.
Here’s a free trade agreement I like. It’s from Article I, Section 9
of our Constitution: “No Tax or Duty shall be laid on Articles exported
from any State.” That’s an agreement that helped make us a rich nation
and, if applied to the world, we and everybody else would be richer.