A 21st Century U.S. trade policy.

Two centuries ago, trade between nations consisted largely of agricultural goods, minerals, and basic commodities. In those exchanges, most countries had a natural advantage in some areas, disadvantages in others.

The geography and climate of France, for example, encouraged the production of fine wines, while that of Great Britain favored the production of superior wools. If France concentrated on wine production and Britain on wool, and if the two nations allowed unrestricted trade in those goods, both nations would gain from their respective advantage.

The foundation of the free trade movement is that ideal--that is, capture the respective comparative advantage of nations, through unfettered trade, for the collective benefit of all. The basic concept, moreover, is sound so long as comparative advantage is based on natural endowments such as France's climate and soil, Australia's vast coal deposits, or Saudi Arabia's giant pools of oil.

But as experience revealed in the late 19th and early 20th centuries, nations can create a competitive advantage--particularly in the production of manufactured goods and often in agriculture as well. Capital, technology, and skills can be brought together behind a wall of government-imposed import barriers, thereby allowing an infant industry to mature into a world-class competitor. In such instances, natural advantages are useful, but the ultimate determination of advantage is the availability and quality of the factors of production (capital, technology, and labor) and the policies of government (subsidies and protection). The industrial economies of the United States, Germany, and Japan arose in the late 19th centuries, for instance, through the public-private creation of numerous competitive advantages for specific industries.

Now, a third type of advantage is emerging in the world economy--absolute advantage. In a post-Cold War world where capital and technology are highly mobile, former Assistant Secretary of Treasury for Economic Policy, Paul Craig Roberts, postulates that China and a handful of other populous countries are combining foreign capital and advanced foreign technologies with their talented penny-wage labor to create an unbeatable advantage in many economic sectors--what he describes as "absolute advantage."

So long as Chinese producers can hold their wages to a tiny fraction of U.S. producers' and maintain access to virtually unlimited amounts of foreign capital and the world's most advanced technologies, free trade with China will inevitably result in the destruction of vast numbers of U.S. producers and jobs--manufacturing, high-knowledge services, and agriculture.

America is vulnerable to such losses because U.S. trade policy is based on the 19th century economic theory of comparative advantage rather than 21st century realities of absolute advantage.

We think Dr. Paul Craig Robert's postulation merits wide public debate and the immediate attention of U.S. policy makers.

What do you think?