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Wednesday, July 02, 2008

"Company and Country at a Crossroads"

I have supported freer trade, and still do, but each time I hear this argument it gives me pause (via Justin Fox):

Diverging Interests: Company and Country at a Crossroads,by Ralph Gomory and William Baumol, Global Strategy Watch: It is time to realize that globalization, while still only in its infancy, has already undermined ... our thinking about the economy. Today, what’s good for America’s global corporations is not necessarily good for the nation’s economy. A firm that is moving production ... overseas may be increasing its profits, but can be simultaneously cutting the national income and the wages of its home country. ...

On what grounds can we, as free trade advocates, assert that globalization can harm the country? ... In standard analyses of trade, economists usually assign fixed values to a country’s productive capabilities and define trade as the exchange of the goods and services, with each country supplying those items in which its productive capabilities are relatively greatest.  With this definition, trade can easily be shown to offer benefits to both parties. ... Hence, economists emphatically reject ... protectionism as impediments to those benefits. We accept this conclusion... But when productive capabilities are changing, not fixed, ... the 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.

More concretely,... when Intel properly pursues the interests of its shareholders by building a multi-billion dollar semiconductor plant in China rather than the United States, 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.

Our analysis ... shows that 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... But this mutual benefit becomes less certain as the developing nation acquires greater capabilities and assumes a larger share of world production. ... This conclusion is not based upon ... any particular political view of the world. We obtain this result unequivocally from a careful mathematical analysis, using the standard equations...

Certain measures can be taken to help realign the interests of company and country. One answer lies in what other nations are doing, for example,... tax benefits and other economic incentives that make it attractive ... to invest in their country. Thus, consider the ideas of leading corporate CEOs in the Horizon Project Report, which call for a tax rate reduction for companies having high value-added jobs in the United States, among other recommendations.

Our country and the companies that call it home are at a crossroads. If we do not find the right means to realign their interests, company and country could well continue down divergent paths. [...full article...]

Update: A comment by Dr. Steven J. Balassi makes a point I should have noted:

It depends on what perspective you take. If you take the U.S. perspective, jobs moving overseas are bad and good. They are bad for those losing jobs but good for the price of the product. If you take a global perspective, trade is good. If one job is lost in America but two are gained in India, that is good for humanity. It is once again good from the product price standpoint.

    Posted by on Wednesday, July 2, 2008 at 11:07 AM in Economics, International Trade | Permalink  TrackBack (0)  Comments (104)

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