Economics

-2 Refer back to Chapter 9. How are some ways in which outsourcing may have affected the effectiveness of taxation in the redistribution of income?

History has proven that outsourcing leads to wage inequality.

Capital flows that sustain trade imbalances eventually stop, and when they do, adjustments in sources of comparative advantages must take place so that the trade surplus countries—such as China today—become less competitive (lose sources of comparative advantage) and the trade deficit countries—in this case, the United States—become more competitive (gain sources of comparative advantage). This adjustment can occur in a number of ways. The two most likely adjustments today are that wages in China rise relative to wages in the United States, or the U.S. exchange rate (discussed in the next section) falls. Both adjustments will make Chinese goods relatively more expensive and U.S. goods relatively cheaper, just as these adjustments did with countries such as Japan, Taiwan, and Korea in previous decades. Neither of these is especially pleasant for us, which is why we will likely hear continued calls for trade restrictions in the coming decade.

The U.S. wage advantage can only be maintained to the degree that total cost of production of a good in the United States is no more than the total cost of that same good abroad.

Unfortunately, as I will discuss in the next chapter, the trade restriction policies that governments can undertake will generally make things worse. In a globalized free-trade economy, the U.S. wage advantage can be maintained only to the degree that the total cost of production of a good in the United States (with all the associated costs) is no more expensive than the total cost of producing that same good abroad (with all the associated costs). The degree to which production shifts because of lower wages abroad depends on how transferable are the U.S. comparative advantages that we listed above. Some of them are generally...