Mercantilist-protectionists such as Donald Trump (and Bernie Sanders, and Lou Dobbs, and Pat Buchanan, and … the list is distressingly long) believe that high-wage American workers can’t successfully compete without “protection” against low-wage foreign workers. The standard – and still-best – economist response to this mercantilist assertion is that wages are not arbitrarily determined: American-workers’ high wages reflect American-workers’ high productivity; Chinese-workers’ low wages reflect Chinese-workers’ low productivity.
The Higher Productivity of American Workers
This standard (and correct) economist response continues: American-workers’ relatively high productivity is, in turn, the result of America having a different economic environment than China. The typical American worker has more and better machines to work with; America has a denser pattern of better roads than does China on which inputs and outputs are shipped to factory and to market; workers in America generally have better human capital than do workers in China.
The more open is any national economy to global trade, the more specialized are workers in that economy.
Another source of higher American productivity is the greater experience (and, in many case, greater integrity) of American courts and other dispute-resolution institutions.
Specialization and the Global Economy
But there’s yet another source of high productivity (and, hence, of high wages) that too-often goes unmentioned in public discussions of trade – namely, the deep market-directed specialization of labor made possible by global trade itself.
Economists since the time of Adam Smith have understood that greater specialization raises worker productivity. An hour’s worth of work from a family-practice physician generally produces less, or less-valuable, medical care than does an hour’s worth of work from a gastroenterologist. And an hour’s worth of work from a gastroenterologist generally produces less, or less-valuable, medical care than does an hour’s worth of work from a pediatric gastroenterologist. The more specialized the worker – assuming that that specialization is driven by the size of the market – the more productive the worker.
It follows that the more open is any national economy to global trade, the more specialized are workers in that economy (or the more specialized will those workers become as their economy becomes more integrated into the global economy). This greater specialization made possible by fuller exposure to global markets makes workers more productive. And this greater productivity raises their wages.
American-workers’ wages are high precisely because jobs formerly done in America are now done by lower-wage foreigners.
It is therefore economic ignorance of the most contorted sort for politicians, pundits, and even some professors in any high-wage, global-economy country (such as the United States) to argue that reducing that country’s exposure to the global economy will raise average wages in that economy. People in America who make this ignorant argument – and the hordes of Americans who swallow it – do not realize that one of the important reasons why American-workers’ wages are now as high as they are is precisely because lots of jobs once formerly done in America are now done by lower-wage foreigners. Higher-wage American workers today specialize more fully in making the machines used to make steel rather than, as in the past, making both the machines and the steel. Higher-wage American workers today specialize more fully in engineering the phone rather than, as in the past, both engineering the phone and manufacturing the phone.
To the extent that Trump or Clinton succeeds in using tariffs and other trade barriers to ‘bring jobs back to America,’ he or she will cause American workers to become less specialized than we would otherwise be. This diminished specialization will lower our productivity. American workers will, therefore, on the whole be paid less, not more.
Again, Adam Smith knew all of the above. But Adam Smith’s successors – the generations of economists since that great Scot wrote – have done a poor job of conveying to the public such Smithian wisdom.