Three More Principles of International Trade

(Don Boudreaux)

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Here’s the fourth and final installment in my series, at AIER, titled “Twelve Principles of International Trade.” A slice:

10. Because wages reflect worker productivity, workers and firms in low-wage countries do not have an “unfair” advantage over workers in high-wage countries.

Contrary to popular mythology, high wages earned by workers in countries such as the US do not put them at a competitive disadvantage relative to workers and firms in low-wage countries, such as Vietnam. The reason is that, in markets, wages reflect worker productivity. The higher is a worker’s productivity, the higher is that worker’s wage. It follows that low-wage workers are paid as poorly as they are because they are not very productive. (If the low wages in some country are the result of that country not having an adequately functioning market economy, then the inefficiencies in that country are even greater than whatever are the remaining inefficiencies that keep wages low in liberalizing countries.)

The same relationship between worker productivity and pay holds at home. American teenagers, for example, are paid wages much lower than are American workers in their 30s, 40s, and 50s. The reason is that teenagers – having far fewer skills and much less experience than do older workers – are much less productive than are older workers. Teenagers’ lower wages reflect this lower productivity.

Yet no one declares that low-wage teenagers have an unfair competitive advantage over high-wage adults. No one advocates tariffs on goods and services supplied by teenagers lest the untariffed supply of such goods and services drive adults’ wages down to those earned by teens.

For the same correct reason that no one worries about free trade between adults and teens, no one should worry about free trade between high-wage fellow citizens and low-wage foreigners. High wages in the US reflect American workers’ high productivity. And these wages are no more likely to be driven down by free trade with low-wage countries than they are to be driven down by free trade with teenagers.

A more revealing name for “low-wage workers” is “low-productivity workers.” And so when you next encounter the charge that low-wage foreign workers enjoy an advantage over high-wage American workers, replace “low-wage” with “low-productivity,” and “high-wage” with “high-productivity,” to get this bit of silliness: “Low-productivity foreign workers have an advantage over high-productivity American workers.” This rewording clearly reveals why it’s a mistake for people in high-wage countries to fear trade with people in low-wage countries.