For most of the 21st century I have been pointing out that offshoring is not trade, free or otherwise. It is labor arbitrage. By replacing US labor with foreign labor in the production of goods and services for US markets, US firms are destroying the ladders of upward mobility in the US. So far economists have preferred their delusions to the facts.
It is becoming more difficult for economists to clutch to their bosoms the delusion that offshoring is free trade. Ralph Gomory, the distinguished mathematician and co-author with William Baumol, past president of the American Economics Association, of Global Trade and Conflicting National Interests, the most important work in trade theory in 200 years, has entered the public debate.
In an interview with Manufacturing & Technology News (September 17), Gomory confirms that there is no basis in economic theory for claiming that it is good to tear down our own productive capability and to rebuild it in a foreign country. It is not free trade when a company relocates its manufacturing abroad.
Gomory says that economists and policymakers “still are treating companies as if they represent the country, and they do not.” Companies are no longer bound to the interests of their home countries, because the link has been decoupled between the profit motive and a country’s welfare. Economists, Gomory points out, are not acknowledging the implications of this decoupling for economic theory.
A country that offshores its own production is unable to balance its trade. Americans are able to consume more than they produce only because the dollar is the world reserve currency. However, the dollar’s reserve currency status is eroded by the debts associated with continual trade and budget deficits.
The US is on a path to economic Armageddon. Shorn of industry, dependent on offshored manufactured goods and services, and deprived of the dollar as reserve currency, the US will become a third world country. Gomery notes that it would be very difficult—perhaps impossible—for the US to re-acquire the manufacturing capability that it gave away to other countries.
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