Summary:
Gomory and Baumol argue that globalization is not always a win-win proposition for developed countries. Key argument is that globalization is not simply free trade, but trade plus shifting productivity. Similar to Larry Summers' closed versus open economy idea. Simply trade: e.g. selling semiconductors to China, buying t-shirts from it. Benefits both parties. Complication: in properly pursuing the interests of its shareholders, a company may decide to set up a high-tech manufacturing plant in China. I.e. we have not sent China consumer goods, but the capability to produce more effectively. At some point, the ongoing productive progress of the newly developing partner becomes harmful to the more industrialized country. Ultimately due to a misalignment between the interests of the company and those of the country (see also Summers' 'stateless elites' idea). Authors propose measures realign these. E.g. tax rate reduction for companies having high value-added jobs in the United States. (Published: 23/06/08)
Notes:
- Charlie Wilson, Chairman GM, 1953: "What is good General Motors is good for the country"
- then, close to the truth
- American workers could indeed hope to see their wages rise as their employer companies invested and prospered
- Ccompanies gave American workers the tools that enabled them to out-produce the rest of the world.
- Companies thrived by having the best plants, equipment and information processing, and the American people shared in the productivity and prosperity.
- but: that was before globalization created huge business opportunities for companies to increase profits by shifting production of both goods and services abroad
- standard analyses of trade
- economists assign fixed values to a country’s productive capabilities
- define trade as the exchange of the goods and services
- each country supplying those items in which its productive capabilities are relatively greatest
- With this definition: trade offers benefits to both parties
- Hence: economists emphatically reject tariffs and other forms of protectionism as impediments to those benefits
- for the assumed scenario, this is the valid conclusion
- e.g. US trading semiconductors for Asian t-shirts
- trade in the narrow sense
- concur with the most basic theoretical conclusion that this exchange clearly benefits both countries
- reality: productive capabilities may change, i.e. not fixed
- world enters whole new ball game
- e.g. Intel builds a multi-billion dollar semiconductor plant in China rather than the United States
- properly pursues the interests of its shareholders
- but: a shift in comparative productive capability suddenly occurs
- Globalization is not simply free trade; it is trade plus shifting productivity.
- We have not sent china consumer goods, but the capability to produce more effectively.
- Paul Samuelson
- shown that end result of that productivity change, even after the period of adjustment, may be better for one’s country or it may be worse, depending on circumstances
- cfr. Larry Summers' quote of Paul Samuelson:
- the valid proposition that trade barriers hurt an economy does not imply the corollary that it necessarily benefits from the economic success of its trading partners
- Productivity shift and degree of development of trading partner
- Increases in a trading partner’s productivity can favorably affect the home country if those increases occur in a highly undeveloped country
- under these circumstances, both countries benefit from globalization
- But: this mutual benefit becomes less certain as the developing nation acquires greater capabilities and assumes a larger share of world production
- After a certain point the further development of the formerly undeveloped trading partner becomes harmful to the more industrialized nation.
- globalization is not always a win-win proposition
- at some point, the ongoing productive progress of the newly developing partner becomes harmful to the more industrialized country
- analysis shows clearly that the people of this country cannot count on some benign outcome, even in the very ong run
- If steps are not taken to realign the interests of companies with those of the country, that day may never come.
- measures can be taken to help realign the interests of company and country
- One answer lies in what other nations are doing
- e.g. adopting tax benefits and other economic incentives that make it attractive for companies to invest in their country
- tax rate reduction for companies having high value-added jobs in the United States
