Does increased international mobility of factors of production weaken the case for free trade?

• Author: Boudreaux, Donald J.

Economist Paul Craig Roberts has recently argued, with some fanfare, that increases in the ability of factors of production to migrate internationally threaten to create conditions under which free trade no longer benefits all countries. These pronouncements are especially troubling. Roberts (unlike, say, protectionists Pat Buchanan and Lou Dobbs) is a professional economist with a genuine free-market bent to his work; his public skepticism of free trade is expressed in prestigious publications such as the New York Times; and he has formed an intellectual coalition skeptical of free trade with prominent members of Congress (most notably, Sen. Charles Schumer, D-N.Y., with whom he coauthored an op-ed in the Times).

Factor Mobility, Absolute Advantage, and Comparative Advantage

The bedrock justification for free trade is the principle of comparative advantage, articulated most famously in Chapter 7 of David Ricardo's Principles of Political Economy and Taxation (1817). This principle shows that a country can benefit from international trade even if it can produce each and every good and service in greater quantities than these things can be produced abroad, or, at the opposite end of the spectrum, even if it can produce everything only in smaller quantities than these can be produced abroad. In textbook models of comparative advantage, some factors of production are assumed to be internationally immobile.

Roberts argues that the factor immobility assumed in textbook models of comparative advantage is absolutely critical to the principle's applicability. As Schumer and Roberts (2004) put it, "Comparative advantage is undermined if the factors of production can relocate to wherever they are most productive.... In this situation, there are no longer shared gains--some countries win and others lose."

Roberts elaborates this point on the mises.org blog: "As economists have known for two centuries, the opportunity cost of one good in terms of another depends on the factors of production. If the factors of production can pick up and leave for greener pastures abroad, the internal cost ratios that determine a country's comparative advantage are gone with the factors of production." Elsewhere on the mises.org blog he insists that "If the factors can leave, they do not specialize within the country where they have a comparative advantage. They can move abroad where there is absolute advantage.... Consider, for example, a trading country specializing according to comparative advantage. Now introduce new developments that create opportunity for capitalists to reallocate productive factors from comparative advantage at home to absolute advantage abroad. The result is a collapse in the conditions under which free trade produces mutual gains to trading countries." (1)

Paul Craig Roberts does not understand the principle of comparative advantage. There are only two ways for international factor mobility to deprive a country--call it "Ricardia"--of all comparative advantage and, hence, deny that country the opportunity to gain from specialization and trade with people in other countries. Both of these ways are extraordinarily unlikely; they are the equivalent of a single monkey banging on a typewriter and by chance typing Hamlet.

One way is when factor mobility causes an international reshuffling of factors of production that results in every country in the world having the same internal costs as Ricardia of producing each and every good and service. (2) If such a outcome were to emerge, it would indeed be true that factor mobility eliminated all comparative advantage (and comparative disadvantage) for Ricardia with respect to every other country in the world. Also, all potential gains to the people of Ricardia from international...