None of this makes a case for protectionism. Offshoring, like trade, is beneficial to developed economies as a whole. The increased mobility of capital and technology does not invalidate the theory of comparative advantage, as some commentators like to argue. China and India cannot have a comparative advantage in everything; they will export some things and import others. Emerging economies' comparative advantage will largely remain in labour-intensive industries. A country's trading pattern is determined by its relative capital intensity compared with other economies. Emerging economies still have relatively little capital, so they are unlikely to become significant capital-intensive exporters until their capital-to-labour ratio catches up. That will take time. Developed economies will retain their comparative advantage in knowledge-intensive activities because they have relatively more skilled labour, but that advantage will be eroded more quickly in future.


The developed economies as a whole will still benefit hugely from trade with emerging economies. Increased competition and greater economies of scale will boost the growth in productivity and output. Consumers will enjoy lower prices and a greater variety of products, and shareholders will enjoy higher returns on capital. Although workers will continue to see their pay squeezed, they can still gain as consumers or as shareholders, either directly or through their pensions. The snag is that richer people own more shares, so the increased return on capital tends to reinforce income inequality.

In recent years the stagnation of real wages in America has been masked by surging house prices, which make families feel better off. If the housing market stumbles and the growth in pay remains feeble, there will be increased calls for the introduction of import barriers, restrictions on overseas investment and higher taxes on profits. But in a globalised economy, such measures would be worse than useless. Firms would simply move their head offices to friendlier countries.

The fact that many workers seem to be excluded from the spoils of globalisation is a big challenge to orthodox economics. Many of its practitioners refuse to come clean about the costs to workers of trade with emerging economies for fear of handing ammunition to protectionists. At the same time, protectionists exaggerate those costs and ignore the benefits. It is time for a more honest debate about trade.



A study by the Institute for International Economics estimates that globalisation is benefiting America's economy by $1 trillion a year, equivalent to $9,000 a year for every family. But in practice the average family has not seen such a gain because much of it has gone to those at the top or into profits. This explains the lack of support for globalisation from ordinary people. Unless a solution is found to sluggish real wages and rising inequality, there is a serious risk of a protectionist backlash. Rather than block change, governments need to ease the pain it inflicts in various ways: with a temporary social safety-net for those who lose their jobs; better education to equip workers for tomorrow's jobs; and more flexible labour markets to encourage the creation of new jobs.

More controversially, governments may need to redistribute the benefits of globalisation more fairly through the tax and benefits system. Studies suggest that countries with more generous social welfare policies are less likely to support protectionism.

For instance, one reason why opposition to offshoring in Europe is less vocal than in America is that European health-care systems tend to be independent of employment, whereas in America losing your job means losing your health insurance too. In a riskier labour market, there may be a stronger case for health care to be financed by the state rather than by firms. Tax redistribution does not mean a return to taxing high earners at 70-80%, which would blunt economic incentives. Instead, scrapping tax breaks such as those given to home-buyers could make the tax system more progressive. It is often argued that generous social-insurance and redistribution policies are inconsistent with globalisation because in an open world governments cannot raise taxes and spending in isolation. But if real wages continue to stagnate and no compensation is forthcoming, political support for globalisation may fade and the vast gains from the biggest economic stimulus in world history will be lost.