Outsourcing and the World Trade Organization
Jeffrey M. Perloff
One of the most hotly debated current issues concerns free trade and outsourcing. For
years, protesters have made it very difficult for countries to hold meetings of the World
Trade Organization (WTO). The WTO’s objective is to promote free trade among its 151
member countries. World trade was $11.8 trillion in 2006. As part of this agreement,
member countries are supposed to remove many domestic distortions, such as by
eliminating subsidies to farmers and others. Protesters complain that the WTO
contributes to world poverty and pollution, and they object to outsourcing jobs. (A firm
if it retains others to provide services that the firm would otherwise perform
The U.S. Constitution guarantees free trade among the 50 U.S. states. However, free
trade occurs between the United States and other countries only if the countries agree to
it. International trade has become increasingly important for the U.S. economy. Today,
trade is over a quarter of the U.S. gross domestic product, up from 10% in 1970—the
largest such increase of any major developed country over this period.
The United States has signed free-trade agreements—which eliminate or reduce
tariffs and quotas—and liberalized rules on foreign investment to increase trade. The
North American Free Trade Agreement with Canada and Mexico has been in effect for
over a decade. The United States also has pacts with Singapore, Israel, Jordan, and Chile.
In 2004, it established agreements with Australia, Bahrain, and Morocco. In 2005, the
United States signed the Central American Free Trade Agreement (with Nicaragua, El
Salvador, Honduras, Costa Rica, and Guatemala). The United States signed an agreement
with Peru in 2007.
Arguments for and Against
The basic result from economic theory is that in a perfectly competitive market, a country
that engages in free trade gains enough to improve everyone’s lot (see the discussion of
trade in Chapter 9 and of comparative advantage in Chapter 10). Business and jobs lost in
one sector are more than offset by gains in other sectors.
Nonetheless, the WTO has been attacked from both the left and the right. Many U.S.
opponents criticize restrictions on the United States’ ability to subsidize domestic groups.
Some people complain because the WTO, a foreign body, is empowered to enforce
global commerce rules with the imposition of economic sanctions on member countries,
although a country can withdraw from the agreement.
WTO foes primarily raise three economic objections. They contend that (1) free trade