With the digital revolution and the dramatic fall in international telecommunications costs comes the prospect that white-collar jobs—once insulated from global competition—can be performed offshore, in low-wage nations such as India, where labor can be hired for as little as one-tenth its cost in the United States. Call-center agents, data processors, medical technicians, and software programmers could all find their jobs at risk from the nation's growing trade in services with emerging markets. In fact, offshoring is frequently blamed for the agonizingly slow pace of job growth in the United States, despite a recovering economy.

Even free traders have wavered in their beliefs. Critics warn that millions of people in the United States will become jobless. The response from Congress has been to include in a fiscal 2004 spending bill a provision prohibiting federal agencies from outsourcing some kinds of work to private companies that use workers in foreign countries. Indeed, 23 states are considering similar restrictions; 4 have already passed them. Jobs and trade have become the hot-button issues of the 2004 presidential election race.

The current debate is misplaced, however, because the problem is neither trade itself nor globalization more broadly but rather the question of how the...