What Is The Competition From Cheap Foreign Labor?

Of all the arguments for protection, the most persistent is that free trade exposes U.S workers to competition low wage foreign labor. The only way to preserve high U.S wages, so the argument goes, is to protect domestic workers by keeping out or putting high tariffs on goods produced in low wage countries. An extreme version of this connection is that under free trade U.S wages could converge to the low foreign wages.

This is superficially appealing, but it has a big flaw because it ignores the principle of comparative advantage. The reason American workers have higher wages is that they are on average more productive. If our equilibrium wage is 3 times that in Mexico, it is because we are on average roughly 5 times more productive in the production of tradable goods and services. Trade flows according to comparative advantage, not wage rates or absolute advantage.

The economic answer to the cheap foreign labor argument rests on the comparative advantage analysis. This shows that a country will benefit from trade even though its wages are far above those of its trading partners. High wages come from high efficiency, not from tariff protection.