Pauper labor fallacy
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The "pauper labor fallacy" is a term used by Paul Krugman to describe a political argument in international trade which claims that foreign competition based on low wages harms the domestic economy.[1] The pauper labor fallacy is usually used by employee organizations such as labor unions to promote protectionist trade policies restricting imports from abroad.[citation needed] Economic theory[which?], however, states that it does not matter whether a foreign country's advantage in producing goods at low cost is due to high productivity or low wages.[according to whom?] Instead, the domestic economy should specialize on the production of the goods for which it has a comparative advantage (and not necessarily an absolute advantage) and trade these efficiently produced goods against the goods for which foreign countries have comparative advantages. This approach is seen[weasel words] as consistent with the maximization of efficiency and theoretically allows countries to realize gains from trade.[2]
Examples[edit]
United States[edit]
Ross Perot, the founder of Electronic Data Systems and a former independent U.S. presidential candidate warned in 1993 that NAFTA, a free trade agreement between the United States, Canada and Mexico, would create a "giant sucking sound" as U.S. industries relocated abroad, in particular to Mexico and its lower wages. This use of the pauper labor fallacy followed considerable offshoring to Asia during the 1980s and 1990s.[3] Economic research on the effects of NAFTA found that "employment effects have been small" and that NAFTA had "multiplied gains from trade" due to an "explosion of trade", in addition to providing economic and political stability and progress to Mexico.[4]
Europe[edit]
Sir James Goldsmith, a billionaire and former Member of the European Parliament, expressed his opposition with regard to international economic integration in The Trap, a runaway best seller in France. Specifically taking issue with the GATT and global free trade, he argues that the adoption of global free trade would entail a general offshoring of production from Western countries to developing countries such as Vietnam or the Philippines by transnational corporations.[5][page needed]
References[edit]
- ↑ Krugman, P.R., Obstfeld, M., Melitz, M.J. (2012). International Economics: Theory & Policy (9th ed.). Harlow, UK: Pearson Education, pp. 67.
- ↑ Krugman, Obstfeld & Melitz (2012): p. 68.
- ↑ Perot, R. (1993). Not for Sale At Any Price: How We Can Save America for Our Children. New York: Hyperion Books, p. 133.
- ↑ Thorbecke, W., Eigen-Zucchi, C. (2002). Did NAFTA Cause a "Giant Sucking Sound"?. Journal of Labor Research, 23(4), pp. 647-658.
- ↑ Goldsmith, J. (1994). The Trap. London: Macmillan.
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