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Global Competition and Comparative Advantage Woodrow Wilson International Center for Scholars Science, Technology, America, and the Global Economy Science, Technology, America, and the Global Economy a New Thinking in Woodrow Wilson International Center for Scholars One Woodrow Wilson Plaza International Trade: 1300 Pennsylvania Avenue, NW Washington, DC 20004-3027 Global Competition and T 202.691.4000 F 202.691.4001 [email protected] Comparative Advantage Science, Technology, America, and the Global Economy www.wilsoncenter.org/stage Edited by Lynn Sha and Kent H. Hughes New Thinking in International Trade a New Thinking in International Trade: Global Competition and Comparative Advantage WOODROW WILSON INTERNATIONAL CENTER FOR SCHOLARS The Woodrow Wilson International Center for Scholars, established by Congress in 1968 and headquartered in Washington, D.C., is a living national memorial to President Wilson. The Center’s mission is to commemorate the ide- als and concerns of Woodrow Wilson by providing a link between the worlds of ideas and policy, while fostering research, study, discussion, and collaboration among a broad spectrum of individuals concerned with policy and scholarship in national and international affairs. Supported by public and private funds, the Center is a nonpartisan institution engaged in the study of national and world affairs. It establishes and maintains a neutral forum for free, open, and informed dialogue. Conclusions or opin- ions expressed in Center publications and programs are those of the authors and speakers and do not necessarily reflect the views of the Center staff, fellows, trustees, advi- sory groups, or any individuals or organizations that provide financial support to the Center. The Center is the publisher of The Wilson Quarterly and home of Woodrow Wilson Center Press, dialogue radio and television, and the monthly newsletter “Centerpoint.” For more information about the Center’s activities and publica- tions, please visit us on the web at www.wilsoncenter.org. Lee H. Hamilton, President and Director BOARD OF TRUSTEES Joseph B. Gildenhorn, Chair Sander R. Gerber, Vice Chair PUBLIC MEMBERS: James H. Billington, The Librarian of Congress; Hillary R. Clinton, The Secretary, U.S. Department of State; G. Wayne Clough, The Secretary, Smithsonian Institution; Arne Duncan, The Secretary, U.S. Department of Education; Carole M. Watson, Acting Chairman, National Endowment for the Humanities; Charles E. Johnson, Acting Secretary, U.S. Department of Health and Human Services; Allen Weinstein, Archivist of the United States PRIVATE CITIZEN MEMBERS: Charles Cobb, Robin Cook, Charles L. Glazer, Carlos M. Gutierrez, Susan Hutchison, Barry S. Jackson, Ignacio E. Sanchez Science, Technology, America, and the Global Economy a New Thinking in International Trade: Global Competition and Comparative Advantage 2009 Woodrow Wilson International Center for Scholars Washington, D.C. www.wilsoncenter.org Cover Illustration: © Christopher Zacharow, Getty Images ISBN: 1-933549-36-X TABLE OF CONTENTS 1 INTRODUCTION Kent Hughes, Woodrow Wilson Center 5 OPENING REMARKS Senator Paul S. Sarbanes 9 PANEL I: GLOBAL TRADE, CONFLICTING NATIONAL INTERESTS, AND COMPARATIVE ADVANTAGE William Baumol, New York University and Princeton University Ralph Gomory, Alfred P. Sloan Foundation Stephen Roach, Morgan Stanley Paul Samuelson, Massachusetts Institute of Technology Paul Solman, The NewsHour with Jim Lehrer (moderator) 37 PANEL II: IMPLICATIONS FOR ECONOMIC AND TRADE POLICY Edward Graham, Peterson Institute for International Economics Thomas Palley, Economics for Democratic & Open Societies Clyde Prestowitz, Economic Strategy Institute Phillip Swagel, American Enterprise Institute Paul Solman, The NewsHour with Jim Lehrer (moderator) 59 BIOGRAPHIES 69 APPENDIX I - THE MODERN GLOBAL ECONOMY AND INHERENT TRADE RIVALRY: INTRODUCTION (an excerpt from Global Trade and Conflicting National Interests) by Ralph Gomory and William Baumol 77 APPENDIX II - WHERE RICARDO AND MILL REBUT AND CONFIRM ARGUMENTS OF MAINSTREAM ECONOMISTS SUPPORTING GLOBALIZATION by Paul Samuelson 101 APPENDIX III - PERILS OF A DIFFERENT GLOBALIZATION by Stephen Roach 109 APPENDIX IV - COMMENT ON GLOBAL TRADE AND CONFLICTING NATIONAL INTERESTS by Edward Graham 115 APPENDIX V - RETHINKING TRADE AND TRADE POLICY: GOMORY, BAUMOL, AND SAMUELSON ON COMPARATIVE ADVANTAGE by Thomas Palley 133 APPENDIX VI - THE END OF THE DOLLAR (an excerpt from Three Billion New Capitalists: The Great Shift of Wealth and Power to the East) by Clyde Prestowitz a Introduction by Kent Hughes In the world where policy mixes with politics, international trade has become an increasingly contentious topic. Recently, new ideas about trade and com- parative advantage have created new challenges for policy analysts and policy- makers alike. With that in mind, the Woodrow Wilson Center’s Program on Science, Technology, America, and the Global Economy on June 13, 2006 held a conference on global competition and comparative advantage to explore the nature and policy implications of new thinking on international trade. TRADE, IDEAS, AND HISTORY: When President Reagan sought negoti- ating authority for the Uruguay Round of Trade Negotiations, the Congress responded with the Omnibus Trade and Competitiveness Act of 1988. Many of the articles of the Act triggered considerable debate—but not the basic idea of trade negotiating authority. With relatively little opposition, the President was granted fast track authority, allowing him to submit trade agreements to the Congress under rules that provided for no amendments, limited time for debate, and only an up or down vote. President Bush was granted similar authority (also referred to as Trade Promotion Authority) in the Trade Act of 2002. In this case, however, there was considerable debate and the President’s proposal survived three votes in the House of Representatives, twice by a single vote and once by three votes. The economic policy community was dismayed. Free trade has stood for almost two hundred years as a powerful and distinctive insight first developed in the early 18th century by David Hume.1 Economists viewed trade among nations as a universal win for all sides with each country being able to exploit its compara- tive advantage or to do more of what it did relatively best. 1. David Hume (1711–1776), Scottish economist, philosopher, and historian, observed that the expansion of trade between societies is a stimulus to economic growth and enhances the growth of civil society. 2 | Kent Hughes Within a country, there could be specific sectors and individuals that lost as the country moved from protection to more open markets. The near universal view of the economics profession was that the gains from trade were so substantial that the losing individuals could be readily compensated. The idea of gains with compensa- tion helped structure the Trade Expansion Act of 1962, which granted extensive tariff cutting authority to President John F. Kennedy coupled with a provision to extend adjustment assistance to individuals injured through expanded trade. NEW THINKING ON COMPARATIVE ADVANTAGE: Senator Sarbanes opened the Wilson Center’s conference on New Thinking in International Trade by emphasizing how much the world of trade had changed since David Ricardo initially formulated his theory of comparative advantage. In contrast to an era of relatively fixed factors of production, Sarbanes noted that governments or the investments of multinational companies can create a comparative advantage in a new region or country. He went on to stress the challenges posed by record cur- rent account deficits and the rise of new trading nations. Sarbanes set the stage for the initial panel made up of Nobel Laureate Paul Samuelson, New York University Professor William Baumol, and Ralph Gomory, then President of the Alfred P. Sloan Foundation who discussed their distinctive perspectives on comparative advantage. Samuelson drew on his 2004 article in the Journal of Economic Perspectives, which demonstrated that trading partners could reduce the U.S. gain from trade by developing a comparative advantage that was similar to our own. In Samuelson’s article, there is still a win-win from trade but the gains had been reduced. Gomory and Baumol, in their book, Global Trade and Conflicting National Interests, demonstrated the possibility of zones where trading partners gain and zones of conflict where productivity advances in one country come at the expense of the trade partner. In some cases, specific industries lost in one coun- try could be gained by another. Both Gomory and Baumol stressed the ability of countries to invest in ways that would shape and change their comparative advantage. In contrast to the 19th century world where factors of production—often land and labor—were relatively fixed and did not flow easily between countries, 21st century national policies could guide the development of new comparative strengths based on investment, research and development, and education. Panelists added their own perspective. While agreeing with the theoretical point made by Samuelson, Phillip Swagel of the American Enterprise Institute (later the Assistant Secretary for Policy at the U.S. Department of the Treasury) Introduction | 3 argued that, in practice, the rise of China has not led to a decline in the U.S. gains from trade but rather has been a significant benefit to the U.S. consumer through lower prices for a variety of manufactured goods. Edward Graham of the Peterson Institute for International Economics did not specifically disagree with
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