Myth 2: Foreign competition is unfair and hurts other countries when it is based on low wages.
This argument, sometimes referred to as the pauper labor argument, it is particular favorite of labor unions seeking protection from foreign competition. People who adhere to this belief argue that industries should not have to cope with foreign industries that are less efficient but pay lower wages. This view is widespread and has acquired considerable political influence. In 1993 Ross Perot, a self-made billionaire and former presidential candidate, warned that free trade between the United states and Mexico, with its much lower wages, would lead to a “great sucking sound” as U.S. industry moved south. In the same year Sir James Goldsmith, another self-made billionaire who was an influential member of the European Parliament, offered similar if less picturesquely expressed views in his book The Trap which became a best-seller in France.
Suppose that Home is more productive than foreign in both industries. Foreign’s lower wage rate is, however, irrelevant to the question of whether Home gains from trade. Whether the lower cost of cloth produced in foreign is due to high productivity or low wage does not matter. All that matters to Home is that it is cheaper in terms of its own labor for Home to produce food and trade it for cloth than to produce cloth for itself.