Jack Welch's barge: New economics
of trade By Thomas I Palley
The classical theory of comparative
advantage has driven US trade policy for the past
50 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.
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 chief executive officer 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 US 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 incentives for investment and research
and development (R&D). The thinking is that
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 counterproductive. 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 undervalued
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's
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 that US 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 US, 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.
Thomas Palley is founder of the
Economics for Democratic and Open Societies
Project.
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