1. Rethinking Trade and Trade Policy: Gomory, Baumol, and Samuelson, on Comparative Advantage Thomas I. Palley e-mail: mail@thomaspalley.commail@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 (1)Multiple equilibria possible & US share of gains from trade vary with each. (2)Country that produces first gets head start & moves down AC curve. (3)Only by chance does actual equilibrium maximize world income. (4)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.