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Greatest Economist of the 20th Century Cannot Be Described as an 'Apostate' on Free Trade

Author: Jagdish N. Bhagwati
December 16, 2004
Financial Times


Sir, The Observer item "Free traitor" (December 14), recording the glee of Gary Burke, Paul Samuelson's McGraw-Hill editor, at the allegedly "apostate comments" by his author against free trade, is funny, but the mirth obfuscates the fact that Prof Samuelson has not abandoned free trade at all. With stories multiplying in the major media, with me set up prominently as the free trader opposed to Paul Samuelson the protectionist, let me hasten to clarify matters.

All that Prof Samuelson's theoretical argument in the Journal of Economic Perspectives (Summer 2004) shows is that external, "exogenous" developments can diminish the gains from trade of a country. For example, if the UK is exporting cars, and the Japanese learn to produce cars, the gains to the UK from trade will diminish as the price of cars falls. There are three comments to be made.

First, there is no reason to think that free traders do not understand this. Second, even though the gains from trade diminish, a switch to a protectionist policy will only diminish them further. Third, whether this possibility is something one needs to worry about in reality is a practical, empirical issue. For instance, one can argue, based on actual experience with Japanese car competition, that UK and US car producers will shape up, copying the better "just-in-time" techniques and reducing the extent of vertical integration that is less efficient than having several suppliers in a "keiretsu" system, Japanese-style. The resulting improvement of productivity, induced by the Japanese production of cars, can then outweigh the initial reduction in the gains from trade. For reasons such as these, few trade economists working on policy would attach much policy relevance to the Samuelson scenario.

All this is different from Prof Samuelson warning, quite independently of his theoretical analysis in the recent article, that free trade will harm our workers and the middle class. This is, of course, possible: no trade economist - certainly not Prof Samuelson, who wrote decades ago on the subject - will claim otherwise. The only question is an empirical one. Much empirical work shows that technical change, not trade with poor countries, has been the principal culprit in putting downward pressure on our workers' real wages. In my recent book, In Defense of Globalization, the past evidence has been discussed at length. And in my article in the winter issue of JEP on "Muddles over outsourcing", co-authored with Profs Arvind Panagariya and T. N. Srinivasan, I have discussed the future prospects as well, with optimistic conclusions. The debate has to be joined here, not on theory again, but on empirical analysis and prognosis.

None of this makes Prof Samuelson, for many of us the greatest economist of the last century, an "apostate" on free trade. The proof of the pudding is in the eating. The evidence for "doctrinal" apostasy must be extracted from him by asking him directly and distinctly about these matters. I am certain then that the protectionists who are opening bottles of champagne at allegedly gaining a giant as their ally will have to put the corks back into the bottles.

Jagdish Bhagwati, Professor, Columbia University and Senior Fellow, Council on Foreign Relations.

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