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Rethinking Trade and Trade Policy: Gomory, Baumol, and Samuelson, on Comparative Advantage

Rethinking Trade and Trade Policy: Gomory, Baumol, and Samuelson, on Comparative Advantage. Thomas I. Palley e-mail: mail@thomaspalley.com. Overview. GBS concern = future impact of international trade on U.S. national income.

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Rethinking Trade and Trade Policy: Gomory, Baumol, and Samuelson, on Comparative Advantage

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  1. Rethinking Trade and Trade Policy: Gomory, Baumol, and Samuelson, on Comparative Advantage Thomas I. Palley e-mail: mail@thomaspalley.com

  2. Overview • GBS concern = future impact of international trade on U.S. national income. • (1) NOT about “protectionsim”. GBS are strong free traders  gains for all. • (2) Issue = “how gains from trade & their distribution can change over time.” • (3) Opens new policy agenda = how to maximize share of gains & hold on to them. • (4) GBS break new theoretical ground = important  trade policy will not be changed by empirical critique (e.g. job & wage loss studies) alone.

  3. What’s the Issue? • GBS critique NOT about trade & income distribution (Stolper – Samuelson) • GBS critique NOT about trade-induced wage loss & job dislocation • Issue = dynamic evolution of comparative advantage & impact on distribution of gains from trade.

  4. Distribution of the Gains from Trade • Depends on global Demand & Supply conditions. • Strong global demand for country’s product increases its share of gains. • Increases in country productivity can hypothetically decrease gains by increase supply & decrease price (Johnson & Bhagwati) • Post WWII U.S. did well  strong demand for capital goods, few suppliers. • Will this continue?

  5. Samuelson (2004) • Examines implications of “economic catch-up”. • Catch-up may be due to “own efforts” or “outsourcing”. • If catch-up concentrated in US export industries, may reduce US share of gains from trade. • Trade still benefits, but not as much as before. • Why? Increasing supply of type of goods that US produces  decrease price. • US does not automatically benefit when foreign countries develop… though world income rises.

  6. Gomory & Baumol (2000) • Examine trade in a world with IRTS • Multiple equilibria possible & US share of gains from trade vary with each. • Country that produces first gets head start & moves down AC curve. • Only by chance does actual equilibrium maximize world income. • IRTS equilibria are fragile & can be changed by policy that gives firms a hand-up.

  7. Overview - Policy Implications • Opens broad new trade policy agenda • Far more than tariffs & quotas • Countries must focus on “competitiveness” & forces driving industrial and technical development • Possibility for rivalrous strategic policy between countries

  8. Policy Implications - Corporations • Deep conflict company interests vs. national interest • Companies gone global  Maximizes global output & maximizes company profits… but does NOT maximize national income. • U.S. policymakers do NOT understand this • China does…their corporations are compelled to internalize Chinese national interest. • Need agenda for re-aligning corporate & national interest.…No longer GM of 1950s.

  9. Policy Implications - Corporations • Outsourcing companies happy to outsource as earns profits that repatriate  but may reduce US gains from trade (eg. Boeing) • Education, Science,Innovation not enough  even if develop innovations at home, they may be applied offshore rather than in new US factories.

  10. Strategic Policy • Use under-valued exchange rate to lower costs  displace existing global leader & capture industry. • Exploit labor to lower costs & capture industry China/301 case. • Use domestic procurement to favor domestic suppliers  move down AC curve & displace leader. • Financing of health & social insurance costs  in US = a job cost  finance from federal revenues  remove incentive to offshore & partially paid for by taxing of foreign profits.

  11. Policy Principles • STRUCTURE & ATMOSPHERE. • STRUCTURE = national (& international) laws & rules that create right incentives. • ATMOSPHERE = economic conditions that favorable to business performance (full-employment, low interest rates, competitively valued ex.rate)

  12. Parallel Macroeconomic Critique • GBS = microeconomic critique based on pure trade theory assumes full employment & balanced trade. • Arguments bolstered by macroeconomics  unemployment, trade deficits, & danger of financial instability.

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