Comércio Internac/tional Business
Desabafos sobre a matéria/Opinions on the subject16 dezembro 2009
Is Globalization Shaking Up trade Theory? Really?
“The theory of comparative advantage is one of the few bits of statical logic that economists of all schools understand and agree with.” (Samuelson 1976, p. 96)
Alerted by a Business Week article (Bernstein 2004) to the fact that trade theory was under attack by several U.S. economists, among whom Paul Samuelson, I looked up his JEP article (Samuelson 2004), that somehow had passed unnoticed by me, where I was supposed to be able to read that “comparative advantage cannot be counted on to create…net gains greater than the net losses from trade.” (Samuelson 2004 as quoted by Bernstein 2004)
“Net gains greater than net losses” did not sound very Samuelsonlike prose, and indeed I was not able to trace that sentence in his text. The next best thing I could find in Samuelson’s worst case scenario (Act II) read more like this: “[T]he new Ricardian productivities imply that, this invention abroad that gives to China some of the com-parative advantage that had belonged to the United States can induce for the United States permanent lost per capita income – an Act II loss even equal to all of Act I(a)’s 100 percent gain over autarky.” (Samuelson 2004, p. 137)
That could be interpreted like this: Through technical progress in China/India, materialized as inventions and offshore outsourcing, in the goods/sectors where pre-viously the US registered a comparative advantage, relative productivity rates could evolve of sorts into a pattern where no comparative advantages could be identified any more. Productivity rates would become so aligned that in the absence of prevalent comparative advantage both the U.S. and the rest of the world (China/India) would evolve to a situation of autarky, where obviously all the previous gains from trade would be lost. That would mean that (per capita) income after technical progress in the import substituting industries of China/India would be less in autarky than with trade for the U.S., where technical progress had ceased to exist.
Even though this assumption looks more prone to scare naïve John or Jane Doe, U.S. economists or not, we gladly concede that comparative advantage patterns can change over time, that gains from trade can decrease, according with these develop-ments, but a return to autarky conditions could arrive only by chance under very spe-cific conditions.
I cannot avoid to notice how often and easily some highly regarded U.S. authors crack under pressure of events and pander to the fears of the common man, perhaps under the influence of mass media that are not able to confront the ideas of the hour. It was like that with the Soviet threat and the Sputnik phenomenon after World War II, then Japan bashing became de rigueur in the eighties, later with the Asian tigers of the nineties, and more recently with the China/India syndrome around the offshore out-sourcing and cheap manufacturing developments. In this context Paul Krugman’s in-terpretation of the Asia miracle (Krugman 1994) seems to convey the right attitude towards these one off developments of “input-driven growth”, that are an “inherently limited process”. All above mentioned threats are largely “one-time changes in behav-ior that cannot be repeated”. Most of those countries are “unlikely to achieve future growth rates comparable to those of the past”, because their growth can mostly be ex-plained “by increases in measured inputs” and not so much by increased efficiency in their use.
I dare to submit that we are presently dealing with this type of input-driven growth. It’s déjà vu all over again! Any traces of anxiety are misplaced and we do not need nerves of steel to stay confident that the U.S., and I dare say, Western total factor productivity growth rates will prove solid enough to keep these economies in the frontline of progress providing a well deserved well-being for their citizens. Salaries of high and low skilled labor will rise in the East, as it will become increasingly scarce. Unions and other democracy of sorts institutions will contribute towards that welcome development. The Chinese currency will become unstuck from the US dol-lar. Paraphrasing Paul Krugman (1994, p. 76), regarding what he described the China syndrome: “There will still be substantial shift of the world’s economic center of gravity, but it will be far less drastic than many people now imagine.” He found no reason to believe that, even if “imports from those nations undermine the West’s in-dustrial base” and the observed “diffusion of technology will place huge strains on Western society”, overall world technological gaps are vanishing. (Krugman 1994, p. 77) He refused then to give in to the views that “assert that East Asian economic suc-cess demonstrates the fallacy of our traditional laissez-faire approach to economic policy and that the growth of these economies shows the effectiveness of sophisti-cated industrial policies and selective protectionism.” (Krugman 1994, p. 78) So should we now not give in to the sirens of despair and fear. We should instead wel-come the arrival of these billions of human beings to the welfare modern capitalism can provide.
The problem Bhagwati and co-authors (2004) deal with is somewhat more re-stricted to trade in services , namely in those amenable to be supplied from a distance, “with the supplier and buyer remaining in their respective locations“, probably with the help of broadband internet connection. Besides reminding us that such trade in services “cannot be readily subjected to customs inspection”, they come to a similar conclusion to Samuelson’s: first, that “the aggregate effect of outsourcing has so far been negligible” (Bhagwati et al. 2004, p. 98) on the U.S. economy (and the less so for the other developed countries); second, that “even if outsourcing sometimes re-duces jobs proximately at certain firms or in certain sectors, in other cases it can help to create new U.S. jobs” (Bhagwati et al. 2004, p.99); third, that the net trade balance in this type of services “is almost certainly in America’s favor”, since the U.S. econ-omy offers high-value while importing low-value ones instead; fourth, “the overall message of the models is that offshore outsourcing is generally beneficial to an econ-omy” with the conventional theoretical caveats of distributional and terms of trade effects. (Bhagwati et al. 2004, p.101) They presented three models of trade in ser-vices, according to which “free trade with outsourcing will be preferable to free trade without outsourcing in an economy with fixed terms of trade and no other distor-tions”. (Bhagwati et al. 2004, p.104) “In the first model, outsourcing benefits society, but the benefits arrive in a combination of higher returns to capital and lower wages. In the second model, with multiple factors of production and fixed goods prices, out-sourcing again provides aggregate benefits, but some workers gain while others lose. In the final model, outsourcing provides benefits in a way that, at least after workers make a transition to other industries, leads to higher real incomes for all workers.” (Bhagwati et al. 2004, p.105)
According to these authors, there is only one chance that this results in net losses for the U.S. economy. “If terms of trade deteriorate for the United States, this secondary loss can outweigh the primary gain from the lower wage of skilled offshore services, resulting in a net loss of U.S. welfare.” (Bhagwati et al. 2004, p.106) This is the old model of immiserizing growth, standard now in the international economics textbooks, that applies only when the country has market power in the international transactions of the good or service in question.
Johnson & Stafford (1993) had already contemplated the possibility now envi-sioned by Samuelson (2004) again. “The effect of foreign competition in reducing the relative price of the goods that the United States formerly exported can lower aggre-gate real income in the United States even as world income rises.” (Johnson & Staf-ford 1993) This doesn’t coincide with the “immiserizing growth” case, as the terms of trade deterioration affects “formerly exported” goods, and not the expanded export sector anymore. They seem however to equate aggregate real income with “average living standard”, and “real wage”, when they expect the fall of both these latest indi-cators “relative to trend”.
According to them, “[m]ore than 100 percent of the benefits of an increase in world GNP due to an increase in the productivity of the B industry in one of the coun-tries goes to the source country.” Hence, the role for restrictive trade practices they allow, under certain conditions and up to a certain point, in order to increase real wages to levels higher than under free trade. “[R]eal wage growth can fall below pro-ductivity growth as international competition changes the terms of trade. It is possible to have a productivity slowdown and a wage decline.” (Johnson & Stafford 1993)
References
Bernstein, Aaron. 2004. “Shaking Up Trade Theory” Business Week. December 6, pp. 52-55
Bhagwati, Jagdish, Arvind Panagariya and T. N. Srinivasan. 2004 “The Muddles over Outsourcing” Journal of Economic Perspectives. 18:4, Fall, pp.93-114
Johnson, George E. and Frank P. Stafford 1993 “International Competition and Real Wages” American Economic Review. 83:2, May, pp.127-130
Krugman, Paul. 1994. “The Myth of Asia’s Miracle” Foreign Affairs. Novem-ber/December, 73:6, pp. 62-78
Samuelson, Paul A. 1976. “Illogic of Neo-Marxian Doctrine of Unequal Exchange” in Inflation, Trade, and Taxes. Essays in Honor of Alice Bourneuf. David A. Bel-sley et al., eds. Columbus, Ohio State University Press, pp. 96-107
Samuelson, Paul A. 2004. “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization” Journal of Economic Per-spectives. 18:3, pp. 135-146
Shackmurove, Yochanan and Uriel Spiegel. 2004. “Size Does Matter: International Trade and Population Size” Penn Institute for Economic Research Working Pa-per 04-035
“The theory of comparative advantage is one of the few bits of statical logic that economists of all schools understand and agree with.” (Samuelson 1976, p. 96)
Alerted by a Business Week article (Bernstein 2004) to the fact that trade theory was under attack by several U.S. economists, among whom Paul Samuelson, I looked up his JEP article (Samuelson 2004), that somehow had passed unnoticed by me, where I was supposed to be able to read that “comparative advantage cannot be counted on to create…net gains greater than the net losses from trade.” (Samuelson 2004 as quoted by Bernstein 2004)
“Net gains greater than net losses” did not sound very Samuelsonlike prose, and indeed I was not able to trace that sentence in his text. The next best thing I could find in Samuelson’s worst case scenario (Act II) read more like this: “[T]he new Ricardian productivities imply that, this invention abroad that gives to China some of the com-parative advantage that had belonged to the United States can induce for the United States permanent lost per capita income – an Act II loss even equal to all of Act I(a)’s 100 percent gain over autarky.” (Samuelson 2004, p. 137)
That could be interpreted like this: Through technical progress in China/India, materialized as inventions and offshore outsourcing, in the goods/sectors where pre-viously the US registered a comparative advantage, relative productivity rates could evolve of sorts into a pattern where no comparative advantages could be identified any more. Productivity rates would become so aligned that in the absence of prevalent comparative advantage both the U.S. and the rest of the world (China/India) would evolve to a situation of autarky, where obviously all the previous gains from trade would be lost. That would mean that (per capita) income after technical progress in the import substituting industries of China/India would be less in autarky than with trade for the U.S., where technical progress had ceased to exist.
Even though this assumption looks more prone to scare naïve John or Jane Doe, U.S. economists or not, we gladly concede that comparative advantage patterns can change over time, that gains from trade can decrease, according with these develop-ments, but a return to autarky conditions could arrive only by chance under very spe-cific conditions.
I cannot avoid to notice how often and easily some highly regarded U.S. authors crack under pressure of events and pander to the fears of the common man, perhaps under the influence of mass media that are not able to confront the ideas of the hour. It was like that with the Soviet threat and the Sputnik phenomenon after World War II, then Japan bashing became de rigueur in the eighties, later with the Asian tigers of the nineties, and more recently with the China/India syndrome around the offshore out-sourcing and cheap manufacturing developments. In this context Paul Krugman’s in-terpretation of the Asia miracle (Krugman 1994) seems to convey the right attitude towards these one off developments of “input-driven growth”, that are an “inherently limited process”. All above mentioned threats are largely “one-time changes in behav-ior that cannot be repeated”. Most of those countries are “unlikely to achieve future growth rates comparable to those of the past”, because their growth can mostly be ex-plained “by increases in measured inputs” and not so much by increased efficiency in their use.
I dare to submit that we are presently dealing with this type of input-driven growth. It’s déjà vu all over again! Any traces of anxiety are misplaced and we do not need nerves of steel to stay confident that the U.S., and I dare say, Western total factor productivity growth rates will prove solid enough to keep these economies in the frontline of progress providing a well deserved well-being for their citizens. Salaries of high and low skilled labor will rise in the East, as it will become increasingly scarce. Unions and other democracy of sorts institutions will contribute towards that welcome development. The Chinese currency will become unstuck from the US dol-lar. Paraphrasing Paul Krugman (1994, p. 76), regarding what he described the China syndrome: “There will still be substantial shift of the world’s economic center of gravity, but it will be far less drastic than many people now imagine.” He found no reason to believe that, even if “imports from those nations undermine the West’s in-dustrial base” and the observed “diffusion of technology will place huge strains on Western society”, overall world technological gaps are vanishing. (Krugman 1994, p. 77) He refused then to give in to the views that “assert that East Asian economic suc-cess demonstrates the fallacy of our traditional laissez-faire approach to economic policy and that the growth of these economies shows the effectiveness of sophisti-cated industrial policies and selective protectionism.” (Krugman 1994, p. 78) So should we now not give in to the sirens of despair and fear. We should instead wel-come the arrival of these billions of human beings to the welfare modern capitalism can provide.
The problem Bhagwati and co-authors (2004) deal with is somewhat more re-stricted to trade in services , namely in those amenable to be supplied from a distance, “with the supplier and buyer remaining in their respective locations“, probably with the help of broadband internet connection. Besides reminding us that such trade in services “cannot be readily subjected to customs inspection”, they come to a similar conclusion to Samuelson’s: first, that “the aggregate effect of outsourcing has so far been negligible” (Bhagwati et al. 2004, p. 98) on the U.S. economy (and the less so for the other developed countries); second, that “even if outsourcing sometimes re-duces jobs proximately at certain firms or in certain sectors, in other cases it can help to create new U.S. jobs” (Bhagwati et al. 2004, p.99); third, that the net trade balance in this type of services “is almost certainly in America’s favor”, since the U.S. econ-omy offers high-value while importing low-value ones instead; fourth, “the overall message of the models is that offshore outsourcing is generally beneficial to an econ-omy” with the conventional theoretical caveats of distributional and terms of trade effects. (Bhagwati et al. 2004, p.101) They presented three models of trade in ser-vices, according to which “free trade with outsourcing will be preferable to free trade without outsourcing in an economy with fixed terms of trade and no other distor-tions”. (Bhagwati et al. 2004, p.104) “In the first model, outsourcing benefits society, but the benefits arrive in a combination of higher returns to capital and lower wages. In the second model, with multiple factors of production and fixed goods prices, out-sourcing again provides aggregate benefits, but some workers gain while others lose. In the final model, outsourcing provides benefits in a way that, at least after workers make a transition to other industries, leads to higher real incomes for all workers.” (Bhagwati et al. 2004, p.105)
According to these authors, there is only one chance that this results in net losses for the U.S. economy. “If terms of trade deteriorate for the United States, this secondary loss can outweigh the primary gain from the lower wage of skilled offshore services, resulting in a net loss of U.S. welfare.” (Bhagwati et al. 2004, p.106) This is the old model of immiserizing growth, standard now in the international economics textbooks, that applies only when the country has market power in the international transactions of the good or service in question.
Johnson & Stafford (1993) had already contemplated the possibility now envi-sioned by Samuelson (2004) again. “The effect of foreign competition in reducing the relative price of the goods that the United States formerly exported can lower aggre-gate real income in the United States even as world income rises.” (Johnson & Staf-ford 1993) This doesn’t coincide with the “immiserizing growth” case, as the terms of trade deterioration affects “formerly exported” goods, and not the expanded export sector anymore. They seem however to equate aggregate real income with “average living standard”, and “real wage”, when they expect the fall of both these latest indi-cators “relative to trend”.
According to them, “[m]ore than 100 percent of the benefits of an increase in world GNP due to an increase in the productivity of the B industry in one of the coun-tries goes to the source country.” Hence, the role for restrictive trade practices they allow, under certain conditions and up to a certain point, in order to increase real wages to levels higher than under free trade. “[R]eal wage growth can fall below pro-ductivity growth as international competition changes the terms of trade. It is possible to have a productivity slowdown and a wage decline.” (Johnson & Stafford 1993)
References
Bernstein, Aaron. 2004. “Shaking Up Trade Theory” Business Week. December 6, pp. 52-55
Bhagwati, Jagdish, Arvind Panagariya and T. N. Srinivasan. 2004 “The Muddles over Outsourcing” Journal of Economic Perspectives. 18:4, Fall, pp.93-114
Johnson, George E. and Frank P. Stafford 1993 “International Competition and Real Wages” American Economic Review. 83:2, May, pp.127-130
Krugman, Paul. 1994. “The Myth of Asia’s Miracle” Foreign Affairs. Novem-ber/December, 73:6, pp. 62-78
Samuelson, Paul A. 1976. “Illogic of Neo-Marxian Doctrine of Unequal Exchange” in Inflation, Trade, and Taxes. Essays in Honor of Alice Bourneuf. David A. Bel-sley et al., eds. Columbus, Ohio State University Press, pp. 96-107
Samuelson, Paul A. 2004. “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization” Journal of Economic Per-spectives. 18:3, pp. 135-146
Shackmurove, Yochanan and Uriel Spiegel. 2004. “Size Does Matter: International Trade and Population Size” Penn Institute for Economic Research Working Pa-per 04-035
Etiquetas: Globalization, Samuelson, trade theory
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