Gomory-Baumol Challenge to the Church of Global Free Trade
William Greider reviews Global Trade and Conflicting National Interests by William Baumol and Ralph Gomory who used to be a senior vice president at IBM. The challenge goes something like this:
At IBM back in the 1980s, Gomory watched in awe as Japan and other Asian nations captured high-tech industrial sectors in which US companies held commanding advantage. IBM invented the disk drive, then dropped out of the disk-drive business, unable to compete profitably. Gomory marveled at Singapore, a tiny city-state, as it lured American manufacturers with low-wage labor, capital subsidies and tax breaks. The US companies turned Singapore into a global center for semiconductor production. "It was an unforgettable transformation," Gomory remembers. "And it was pretty frightening. "The offer that many Asian countries will give to American companies is essentially this: 'Come over here and enhance our GDP. If you are here our people will be building disk drives, for example, instead of something less productive. In return, we'll help you with the investment, with taxes, maybe even with wages. We'll make sure you make a profit.' This works for both sides: the American company gets profits, the host country gets GDP. However, there is another effect beyond the benefits for those two parties--high-value-added jobs leave the U.S." China and India, he observes, are now doing this on a large scale. Microsoft and Google opened rival research centers in Beijing. Intel announced a new, $2.5 billion semiconductor plant that will make it one of China's largest foreign investors. China's industrial transformation is no longer about making shirts and shoes, as some free-trade cheerleaders still seem to believe. It is about capturing the most advanced processes and products.The multinationals' overseas deployment of capital and technology, Gomory explains, is the core of how some very poor developing nations are able to ratchet up their technological prowess, take over advanced industrial sectors and rapidly expand their share in global trade--all with the help of US companies and finance, as they roam the world in search of better returns. The Gomory-Baumol book describes this as "a divergence of interests" between multinational firms and their home country. "This overseas investment decision may then prove to be very good for that multinational firm," they write. "But there remains the question: Is the decision good for its own country?" In many cases, yes. If the firm is locating low-skilled industrial production in a very poor country, Americans get cheaper goods, trade expands for both sides and the result is "mutual gain." But the trading partners enter a "zone of conflict" if the poor nation develops greater capabilities and assumes the production of more advanced goods. Then, the authors explain, "the newly developing partner becomes harmful to the more industrialized country." The firm's self-interested success "can constitute an actual loss of national income for the company's home country." American multinationals, as principal actors in this transfer of wealth-generating productive capacity, are distinctively free to make the decisions for themselves without interference from government. They want profit and future consumer markets. Their home country wants to maintain a highly productive high-wage economy. Without recognizing it, the two are pulling in opposite directions--the "divergence of interests" most US politicians ignore, evidently believing church doctrine over visible reality.
Technology transfers are often a good means for increasing productivity in less developed nations. Ah but those transfers of technology undermined IBM monopoly rights. As this David Altig critique of something from the Nattering Naybob economists often disagree as to whether protecting monopoly rights by patents are good in that they reward innovation or bad because they restrict competition.
This summary has me embarrassed that I have yet to read Global Trade and Conflicting National Interests:
In this book Ralph Gomory and William Baumol adapt classical trade models to the modern world economy. Trade today is dominated by manufactured goods, rapidly moving technology, and huge firms that benefit from economies of scale. This is very different from the largely agricultural world in which the classical theories originated. Gomory and Baumol show that the new and significant conflicts resulting from international trade are inherent in modern economies.
Today improvement in one country's productive capabilities is often attainable only at the expense of another country's general welfare. The authors describe why and when this is so and why, in a modern free-trade environment, a country might have a vital stake in the competitive strength of its industries.
I don't remember falling on my head. But suddenly PGL is making sense?
cursed | 04.13.07 - 6:57 pm | #
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At last! Someone making some sense. How in the world anyone ever thought that theories that came about in the age of agrarian societies that had no communications faster than the same sailing ships and horsedrawn wagons that provided their transportation and had yet to hear about, much less comprehend modern manufacturing methods would still apply to the modern world has always baffled me. We're not talking about Newton's Third Law of Motion or the Second Law of Thermodynamics here.
Jim S | Homepage | 04.13.07 - 6:58 pm | #
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Written seven years ago I understand. My how time flies when we're living a nightmare.
ken melvin | 04.13.07 - 8:50 pm | #
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Pgl,
Tis an interesting post.
"At IBM back in the 1980s, Gomory watched in awe as Japan and other Asian nations captured high-tech industrial sectors in which US companies held commanding advantage"
80's? that was 20 years ago. And yet we still stand. Japan meanwhile 20 year recession. There's been trade gloom and doom since, well, forever. Yet, our standard of living keeps increasing.
Japan/asia leads in electronics, and now automobiles. We USA have moved on to the internet, software, and biotech, and, hopefully, whatever transformative technology is in the future. Maybe our comparative advantage is our freedom.
PS If it ends up that we are living on borrowed time I'll have to eat my words
sammy | 04.13.07 - 9:24 pm | #
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sammy
permit me to observe that "our standard of living keeps increasing" is not obvious.
also that people i knew who were there said the Japanese didn't seem overworried about their recession.
maybe they know something we don't know about standard of living.
coberly | 04.13.07 - 10:27 pm | #
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sammy,
The claim was that we are just posponing the day of reckoning when our standard of living falls.
"The persistent offshoring of domestic production is leading to a perverse consequence: The United States finds itself paying more for imports. The production that originally moved offshore to get low-wage labor and cheaper goods is now claiming a larger and larger share of national income, as the growing trade deficits literally subtract from US domestic growth. "All the stuff you were already importing from them becomes more expensive," Gomory explains. "That's why you can start going downhill--because you pay more for what you were previously getting." Put another way, one hour of US work no longer buys as many hours of Chinese work as it once did. China can suppress its domestic wages to keep selling more of its stuff, but that does not alter the fundamental imbalance in productive strength.
"The US predicament is vividly reflected in the nation's swollen trade deficits, now running at nearly 7 percent of GDP every year. The country consumes more than it produces. It borrows heavily from trading partners, led by China, to pay for its "excess" consumption. This allows America to dodge--temporarily--a reckoning with its weakened condition, that is, falling living standards. But that will eventually occur, when Americans are compelled to reduce their consumption and pay off the overdue bills. Postponement will deepen the ultimate injury because, meanwhile, the trading partners will gain greater industrial capabilities, while US productive strength weakens further." From William Greider's article
I rather liked this because I've always felt that free traders didn't know how to subtract.
What I didn't like about this peice was Gormay's one sided insistence that companies would have to be rewarded to take an American stakeholders approach. Nothing about punishing them if they didn't.
wjd123 | 04.13.07 - 11:01 pm | #
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Sammy,
Take a look at the graphs of MEW and tell me again about standard of living.
http://calculatedrisk.blogspot.c...mew-on- pce.html
ken melvin | 04.13.07 - 11:23 pm | #
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coberly: Not to debate you or make any particular point on the topic, but there is "standard of living" and then there is "quality of life". Not that working-age Japanese are known to shine in the latter department, by "our" standards.
cm | 04.14.07 - 1:24 am | #
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When one hour of U.S. work no longer buys as many hours of Chinese work as it once did, then we'll just go back to making the stuff domestically.
Higher natural-resource costs may or may not be able to be avoided through conservation or substitution, but there's absolutely no reason to buy manufactured goods abroad unless they're cheaper than American-made goods.
If that stops being true, then there's no penalty for switching back to American-made.
Reepicheep | Homepage | 04.14.07 - 2:18 am | #
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Japan is going to take over the world!!!!!!
Sebastian Holsclaw | 04.14.07 - 2:31 am | #
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We have a lead in nothing but aircraft.
Our markets are no longer the largest capitalization in the world. World marekts sans US us 6.7% this year. How are the US indexes since Bush has been president?
me | 04.14.07 - 9:22 am | #
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Not sure I follow the leap from
American multinationals, as principal actors in this transfer of wealth-generating productive capacity, are distinctively free to make the decisions for themselves without interference from government. They want profit and future consumer markets. Their home country wants to maintain a highly productive high-wage economy. Without recognizing it, the two are pulling in opposite directions--the "divergence of interests" most US politicians ignore, evidently believing church doctrine over visible reality.
(which I would maintain is precisely what is happening in many industries, regardless of intellectual property rights)
and
Technology transfers are often a good means for increasing productivity in less developed nations. Ah but those transfers of technology undermined IBM monopoly rights.
In my opinion--and stated well over a year ago--, we are entering an era when mnc's might be the real power brokers, not governments. Just as companies play towns off against on another, so now they play countries off one another.
"Cut me a better deal," they say. "And I will move there. I want cheap labor, nice tax breaks, good energy supply and infrastructure..and maybe some subsidies....and stability so that I can plan."
Stormy | 04.14.07 - 12:30 pm | #
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To continue my thought: There are a number of issues that might call this corporate strategy into question:
1. The cost of energy. That Brazil sends nuts to India to be peeled by cheap Indian labor boggles the mind. (Just an example that I still occasionally chuckle about.) I have hestitated to say anything on this score, but I have the sense that the era of cheap energy is coming to a close.
2. Growing dislocations in the balance of trade and debt. (CB's financing American debt, etc. just to keep the game going so that Americans don't have to face their real national debt. But that has a lifespan of how long?)
3. How long can the U.S. be the consumer of last resort? Nouriel says...and I agree with some reservations...that the world economy and the U.S. economy are linked. As goes the U.S. economy, so goes the world's economy. Cracks are appearing in our economy.
While I have not been surprised that the world and the U.S. have chugged along so far, despite what the doomsayers say, there is a limit to what easy credit can do. The world economy is an amazing and complex entity. It will take a lot to bring it to its knees...so, too, the U.S. economy. Yet, there are stresses everywhere. And from my way of thinking, those stresses appear stronger with each passing month.
(Please note: I have not mentioned global warming. Oops!)
Stormy | 04.14.07 - 12:46 pm | #
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cm
actually the "quality of life" thought did cross my mind. not sure i know enough about japan to make the distinction. in this country "standard of living" seems to usuallly mean how much money do you spend. while quality of life refers to how you feel after the heart transplant.
but yeah, having a million dollars and having to spend it in Las Vegas would leave me feeling pretty poor in quality of life.
coberly | 04.14.07 - 1:03 pm | #
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Stormy,
"In my opinion--and stated well over a year ago--, we are entering an era when mnc's might be the real power brokers, not governments. Just as companies play towns off against on another, so now they play countries off one another."
Right idea. Mnc's create value; govts absorb it (yes they provide some value, but they need the economic creation first).
I don't think mnc's are at the stage where they actively do this; they just go where the grass is greenest, which is kind of the same thing. That's what they're supposed to do. If they don't they go out of business.
What do we, as a country, have to offer them? Are we willing to do this? If we don't play ball, and just rant about fairness, what will happen?
sammy | 04.14.07 - 10:22 pm | #
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To whit:
When the foreign auto companies were building plants in the US, they essentially put it out to bid. They wanted tax breaks and they wanted no unions, the Southern states stepped up. Detroit did not. Who is better off now?
sammy | 04.14.07 - 10:36 pm | #
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"When the foreign auto companies were building plants in the US, they essentially put it out to bid. They wanted tax breaks and they wanted no unions, the Southern states stepped up. Detroit did not. Who is better off now?"
Toyota.
Matthew Kennel | 04.15.07 - 1:38 am | #
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"What do we, as a country, have to offer them? "
How about a boycott?
me | 04.15.07 - 9:57 am | #
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Very far sighted, big picture; the south.
ken melvin | 04.15.07 - 10:53 am | #
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Given that the most poverty stricken states are still in the South sammy's point is highly questionable.
Jim S | Homepage | 04.15.07 - 12:02 pm | #
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I think this post made a lot of sense. Things are different today than some 200 years ago, at least in some respects. We are not just buying t shirts from China, instead China is the recipient of huge amounts of FDI and the Chinese are setting up factories. What is important is not what those factories produce, but that they are not only learning to produce those (often high or higher tech) items yet also learn important organization skills. This post seems to hit on that. And yes this is the trail the Japanese blazed twenty years ago and is still a sore point to the (US) big three as Toyota recently has overtaken Ford. But thats again another area.
Anyway, so far with China we see investment and jobs outflowing with the promise of tomorrow's high tech goods being produced there and low tech goods today. Today we get tshirts and rubber dog poop from China. They will consume more oil and drive up gas prices. American skills and factories will be mothballed. I am not so sure this is such a good deal...
JDF | 04.15.07 - 12:38 pm | #
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US must remove labor from the equation.
ken melvin | 04.15.07 - 7:48 pm | #
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""When the foreign auto companies were building plants in the US, they essentially put it out to bid. They wanted tax breaks and they wanted no unions, the Southern states stepped up. Detroit did not. Who is better off now?"
Toyota."
The American car buyer.
Sebastian Holsclaw | 04.15.07 - 8:04 pm | #
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"Today we get tshirts and rubber dog poop from China"
That is so funny. But what happens if there is a war, and we don't have domestic rubber dog poop producers?
sammy | 04.15.07 - 8:34 pm | #
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PGL,
A tip o the hat and many thanks... keep fightin the good fight.
The Nattering Naybob | Homepage | 04.18.07 - 1:10 pm | #
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