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Our trade policy debate is stuck in the 1950's. Comparative
advantage does not matter now. It has been supplanted by capital
mobility. GE's Jack Welch wanted to put every factory on a barge,
traveling between countries as necessary to take advantage of the
lowest cost country of the day - based upon currency manipulation, tax
rates, fleeting subsidies, cheap labor, etc.
Tom Palley has a
wonderful explanation of this new math below. Talk "comparative
advantage" if you want, but if you do, you are either deceitful or have
not progressed in trade policy thought since Eisenhower.
****
Jack Welch’s Barge: The New Economics of Trade
Copyright Thomas I. Palley
The classical theory of comparative advantage has driven US trade
policy for the past fifty years. That policy, in combination with
technical innovations that have lowered costs of transportation and
communication, has opened the global economy. Yet paradoxically, this
opening has rendered classical trade theory obsolete. That in turn has
left the US economically vulnerable because its trade policy remains
stuck in the past and based on ideas that no longer hold.
(Read More)
The logic behind classical free trade is that all can benefit when
countries specialize in producing those things in which they have
comparative advantage. The necessary requirement is that the means of
production (capital and technology) are internationally immobile and
stuck in each country. That is what globalization has undone.
Several years ago Jack Welch, former CEO of General Electric, captured
the new reality when he talked of ideally having “every plant you own
on a barge”. The economic logic was that factories should float between
countries to take advantage of lowest costs, be they due to
under-valued exchange rates, low taxes, subsidies, or a surfeit of
cheap labor. Globalization has made Welch’s barge a reality. However,
in doing so it has made capital mobility rather than country
comparative advantage the engine of trade. And with that change, “free
trade” increasingly trades jobs and promotes downward wage equalization.
The U.S. and European response to Welch’s barge has been
competitiveness policy that advocates measures such as increased
education spending to improve skills; lower corporate tax rates; and
investment and R&D incentives. The thinking is increased
competitiveness can make Europe and the US more attractive to
businesses.
Unfortunately, competitiveness policy is not up to the task of
anchoring the barge, and it can even be counter-productive. The core
problem is corporations are globally mobile. Thus, government can
subsidize R&D spending, but the resulting innovations may simply
end up in new offshore factories. Moreover, competitiveness policy
easily degenerates into a race to the bottom. For instance, if the US
cuts corporation taxes, other countries may match to stay competitive.
The result is no gain for the US, while profit taxes are lowered and
tax burdens shifted on to wages, which widens income inequality.
Worse yet, capital mobility prompts countries to adopt unfair policies
to increase their relative business attractiveness. These policies
include disregard of environmental damage; suppression of labor to keep
wages low; direct subsidies; and under-valued exchange rates. All are
visible in China, which is the poster-child for such abuses.
A critical consequence of Welch’s barge is the creation of a
“corporation versus country” divide. Previously, when corporations were
nationally based, profit maximization by business contributed to
national economic success by ensuring efficient resource use. Today,
corporations still maximize profits, but they do so from the standpoint
of their global operations. Consequently, what is good for corporations
may not be good for country.
When companies raise profits by rearranging production according to
global cost patterns, those shifts can lower country income. For
instance, when Boeing transfers production to China, the US loses high
value adding jobs and national income can fall. Moreover, though Boeing
makes larger short-run profits on its Chinese production, even it may
lose in the long run if it inadvertently creates a rival Chinese
aircraft producer.
From an American worker perspective, the global economy has always had
abundant supplies of cheap labor. In the past American workers were
still able to compete and benefit from trade. The critical difference
today is American corporations are taking their capital and technology
offshore and equipping low-wage foreign workers. Those investments
undermine American workers because that foreign production is intended
for the US market.
The emergence of barge-like corporations has reduced the scope for
effective competitiveness policy, increased the temptations for unfair
policy, and created a wedge between corporate and national interests.
This poses two critical policy challenges. First, there is need for
rules against unfair competition, which is where exchange rate rules
and labor and environment standards enter.
Second, there is need to close the wedge between corporation and
country. In the U.S. that calls for such measures as ending
preferential tax treatment of profits earned offshore; making it
illegal for corporations to reincorporate outside the US to escape US
tax laws; and new tax arrangements that encourage jobs and value
creation within the US.
Addressing globalization’s challenges poses enormous analytical
difficulties. Unfair competition must be prevented and companies
re-anchored. But this must be done without losing the benefits of real
trade based on comparative advantage or ending investment that fosters
development.
These economic challenges are compounded by political difficulties. In
Washington, elite policy thinking is funded and lobbied for by
corporations. Consequently, corporations control trade policy at a time
when corporate interests differ from the national interest. That is
also increasingly true in Brussels. Fifty years ago what was good for
GM may really have been good for the US. With Jack Welch’s barge, that
may no longer hold.
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GREAT ARTICLE! -- very sound. I'm sending it to many.
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Clay