Can you summarize this article in tow or three sentences and explain the difference between the theory and the practice of free trade as related to outsourcing.
The recent assertion by Greg Mankiw, chairman of the US Council of Economic Advisers, in the president's annual economic report that the outsourcing of jobs abroad is good for the American economy brought predictable howls of protest from leaders of both Democrats and Republicans. Just as predictably, many economists rushed to his defence, insisting that, unlikely as it might seem, the report was exactly right. In fact, both sides are wrong.All too frequently, politicians trying to keep work in the US have introduced protectionist policies that only delay the loss of jobs in vulnerable industries at the expense of consumers and the overall economic growth that creates new jobs. Decades of protection of the textile industry have not prevented its continuing relocation abroad because US seamstresses earning as little as $6 an hour cannot compete with Asians and South Americans who earn $1 an hour.Nor did the Bush administration's emergency tariffs on steel prevent the bankruptcy of several steel companies and the further loss of American steel jobs. They did, however, hurt US carmakers that lost sales and jobs because they had to pay more for steel than the foreign producers of the imported cars US consumers were snapping up.That free trade is the best strategy is one of the few propositions about which economists do not give an "on the one hand, but on the other hand" reply. They unanimously agree with it, not only because it is theoretically and mathematically compelling but also because it has been proved in real life. Over the past 50 years, the growth of world trade has been much faster than that of global gross domestic product and has been a primary factor in the rise of living standards in the US and much of the rest of the world. Thus Mr Mankiw praised outsourcing as part of an assertion of the efficacy of free trade, and that is why the economists defended him against the politicians.The problem is that the economists are right only if the assumptions of free trade obtain in the marketplace. For example, free trade doctrine assumes that there is no government intervention in foreign exchange markets and that exchange rates are determined by market forces. So the prices of imports and exports reflect the relative productivity of national workforces and employment levels in various industries depend on the skills and efficiency of the workers.In other words, Mr Mankiw is right if you assume that Japan has not spent more than $300bn in the past year to prop the dollar up against the yen. But of course Japan has intervened massively in the exchange markets, which means that its exports are being subsidised and that their prices are not being determined by market forces. As a result, movement of jobs offshore - in principle unnecessary, costly and undesirable - may occur.By the same token, free trade assumes that there are no financial investment incentives and that companies build factories and service centres round the world on the basis of local market demand, labour productivity, location and other natural factors. Again, this is necessary if employment is to be determined by market forces.For Mr Mankiw to be right it must be assumed that many countries do not offer tax incentives, capital grants and provision of infrastructure to attract what are identified as vital plants from "strategic industries" into their countries. But of course they are widely offered, so one country is often, in effect, buying particular jobs from another country. The displaced jobs may be replaced by others but there is often a significant cost involved that has nothing to do with free trade.Finally, free trade assumes that there are no industrial policies that coerce investment and technology transfer. If such practices were to exist they would distort market forces and negate the benefits of free trade. Thus, for Mr Mankiw to be right, it must be assumed that governments do not insist on approving investments or on technology transfer and the establishment of joint ventures as conditions of approval. But of course such coercion is widely practised. As a result, crucial jobs may move offshore not because the market demands it but because a powerful government of a country with a large market may make access to its market conditional on it.
So the economists are right in theory but often wrong in practice. If jobs are moving offshore in response to market forces, those same forces are probably also creating or moving new jobs onshore. But if the jobs are moving because of market manipulation and subsidy, the virtuous circle is broken, with much less positive results.
This is not to justify the protectionists, who are wrong both in theory and in practice, for the best answer to mercantilism is not protectionism. Rather, it is for economists to stop hiding their heads in the sand. By acting as if mercantilism does not exist, the economists undermine the credibility of their own powerful theory of free trade.
A sermon on free trade is the wrong prescription if the malady is mercantilism, as it usually is. If they wish to avoid the political protectionist reaction, economists would do well to stop repeating the truisms of free trade and start insisting on hardheaded application of free trade rules to the mercantilists whose manipulations they so frequently ignore while telling workers to be happy about losing their jobs.
The writer is president of the Economic Strategy Institute and the author of Rogue Nation: American Unilateralism and the Failure of Good Intentions.