Evaluate this argument for a trade barrier: “The U.S. needs protection from cheap foreign labor.”

Question

What will be an ideal response?

Answer 1

The argument is flawed on several grounds. First, U.S. consumers benefit from being able to purchase a product at a lower price than they would have if they had to buy a domestically produced product. Second, U.S. workers earn a high wage because they are productive. Gains from trade are based on comparative advantage, not absolute advantage. Although the U.S. labor can produce many goods and services, according to comparative advantage, it should produce those products for which the domestic opportunity cost is the least. If it does so, it will earn more income and the nation will have a higher standard of living. Whether foreign labor is cheap is not important. What is important for the nation’s standard of living is to use labor resources most productively and efficiently. Another problem with this argument is that its supporters focus on labor costs per hour instead of labor costs per unit. Country differences in labor cost per unit of output tend to be small because countries such as the United States, where wages tend to be high, are also very productive and are able to closely equate their cost per unit to the costs per unit of other nations that may offer lower wages.