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framework for this hugely important political debate and the great sorting out that
is just around the corner。
To that end； the next three sections look at how the flattening of the world and the
triple convergence will affect Americans； developing countries； and companies。
Brace yourself： You are now about to enter the flat world。
America and the Flat World
：：：：： FIVE
America and Free Trade
Is Ricardo Still Right？
As an American who has always believed in the merits of free trade； I had an important
question to answer after my India trip： Should I still believe in free trade in a
fiat world？ Here was an issue that needed sorting out immediately…not only because
it was becoming a hot issue in the presidential campaign of 2004 but also because
my whole view of the flat world would depend on my view of free trade。 I know that
free trade won't necessarily benefit every American； and that our society will have
to help those who are harmed by it。 But for me the key question was： Will free trade
benefit America as a whole when the world becomes so flat and so many more people
can collaborate； and compete； with my kids？ It seems that so many jobs are going to
be up for grabs。 Wouldn't individual Americans be better off if our government erected
some walls and banned some outsourcing and offshoring？
I first wrestled with this issue while filming the Discovery Times documentary in
Bangalore。 One day we went to the Infosys campus around five p。m。 …just when the
Infosys call…center workers were flooding into the grounds for the overnight shift
on foot； minibus； and motor scooter； while many of the more advanced engineers were
leaving at the end of the day shift。 The crew and I were standing at the gate observing
this river of educated young people flowing in and out； many in animated conversation。
They all looked as if they had scored 1；600 on their SATs； and I felt a real mind…eye
split overtaking me。
My mind just kept telling me； 〃Ricardo is right； Ricardo is right； Ricardo is right。〃
David Ricardo （1772…1823） was the English economist
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who developed the free…trade theory of comparative advantage； which stipulates that
if each nation specializes in the production of goods in which it has a comparative
cost advantage and then trades with other nations for the goods in which they
specialize； there will be an overall gain in trade； and overall income levels should
rise in each trading country。 So if all these Indian techies were doing what was their
comparative advantage and then turning around and using their income to buy all the
products from America that are our comparative advantage…from Corning Glass to
Microsoft Windows…both our countries would benefit； even if some individual Indians
or Americans might have to shift jobs in the transition。 And one can see evidence
of this mutual benefit in the sharp increase in exports and imports between the United
States and India in recent years。
But my eye kept looking at all these Indian zippies and telling me something else：
〃Oh； my God； there are so many of them； and they all look so serious； so eager for
work。 And they just keep coming； wave after wave。 How in the world can it possibly
be good for my daughters and millions of other young Americans that these Indians
can do the same jobs as they can for a fraction of the wages？〃
When Ricardo was writing； goods were tradable； but for the most part knowledge work
and services were not。 There was no undersea fiberoptic cable to make knowledge jobs
tradable between America and India back then。 Just as I was getting worked up with
worry； the Infosys spokeswoman accompanying me casually mentioned that last year
Infosys India received 〃one million applications〃 from young Indians for nine
thousand tech jobs。
Have a nice day。
I struggled over what to make of this scene。 I don't want to see any American lose
his or her job to foreign competition or to technological innovation。 I sure wouldn't
want to lose mine。 When you lose your job； the unemployment rate is not 5。2 percent；
it's 100 percent。 Nobook about the flat world would be honest if it did not acknowledge
such con…
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cerns； or acknowledge that there is some debate among economists about whether Ricardo
is still right。
Having listened to the arguments on both sides； though； I come down where the great
majority of economists come down…that Ricardo is still right and that more American
individuals will be better off if we don't erect barriers to outsourcing；
supply…chaining； and offshoring than if we do。 The simple message of this chapter
is that even as the world gets flat； America as a whole will benefit more by sticking
to the basic principles of free trade； as it always has； than by trying to erect walls。
The main argument of the anti…outsourcing school is that in a flat world； not only
are goods tradable； but many services have become trad…able as well。 Because of this
change； America and other developed countries could be headed for an absolute decline；
not just a relative one； in their economic power and living standards unless they
move to formally protect certain jobs from foreign competition。 So many new players
cannot enter the global economy…in service and knowledge fields now dominated by
Americans； Europeans； and Japanese…without wages settling at a newer； lower
equilibrium； this school argues。
The main counterargument from free…trade/outsourcing advocates is that while there
may be a transition phase in certain fields； during which wages are dampened； there
is no reason to believe that this dip will be permanent or across the board； as long
as the global pie keeps growing。 To suggest that it will be is to invoke the so…called
lump of labor theory…the notion that there is a fixed lump of labor in the world
and that once that lump is gobbled up； by either Americans or Indians or Japanese；
there won't be any more jobs to go around。 If we have the biggest lump of labor now；
and then Indians offer to do this same work for less； they will get a bigger piece
of the lump； and we will have less； or so this argument goes。
The main reason the lump of labor theory is wrong is that it is based on the assumption
that everything that is going to be invented has been invented； and that therefore
economic competition is a zero…sum game； a fight over a fixed lump。 This assumption
misses the fact that although jobs are often lost in bulk…to outsourcing or
offshoring…by big individ
ual companies； and this loss tends to make headlines； new jobs are also being created
in fives； tens； and twenties by small companies that you can't see。 It often takes
a leap of faith to believe that it is happening。 But it is happening。 If it were not；
America's unemployment rate would be much higher today than 5 percent。 The reason
it ishappening is that as lower…end service and manufacturing jobs move out of Europe；
America； and Japan to India； China； and the former Soviet Empire； the global pie not
only grows larger…because more people have more income to spend…it also grows more
complex； as more new jobs； and new specialties； are created。
Let me illustrate this with asimple example。 Imagine thatthere are only two countries
in the world…America and China。 And imagine that the American economy has only 100
people。 Of those 100 people； 80 are well…educated knowledge workers and 20 are
less…educated low…skilled workers。 Now imagine that the world goes flat and America
enters into a free…trade agreement with China； which has 1；000 people but is a less
developed country。 So today China too has only 80 well…educated knowledge workers
out of that 1；000； and it has 920 low…skilled workers。 Before America entered into
its free…trade agreement with China； there were only 80 knowledge workers in its world。
Now there are 160 in our two…country world。 The American knowledge workers feel like
they have more competition； and they do。 But if you look at the prize they are going
after； it is now a much expanded and more complex market。 It went from a market of
100 people to a market of 1；100 people； with many more needs and wants。 So it should
be win…win for both the American and Chinese knowledge workers。
Sure； some of the knowledge workers in America may have to move horizontally into
new knowledge jobs； because of the competition from China。 But with a market that
big and complex； you can be sure that new knowledge jobs will open up at decent wages
for anyone who keeps up his or her skills。 So do not worry about our knowledge workers
or the Chinese knowledge workers。 They will both do fine with this bigger market。
〃What do you mean； don't worry？〃 you ask。 〃How do we deal with the fact that those
eighty knowledge workers from China will be willing
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to work for so much less than the eighty knowledge workers from America？ How will
this difference get resolved？〃
It won't happen overnight； so some American knowledge workers may be affected in the
transition； but the effects will not be permanent。 Here； argues Stanford new economy
specialist Paul Romer； is what you need to under