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Prof. Gomory On Our Need to Balance Our Trade With China
It is always a pleasure to read something written by Ralph Gomory, Research Professor at the Stern School of Business, New York University. He wasVice President for Science and Technology for IBM for two decades, then became President of the Alfred P. Sloan Foundation from 1989 through his retirement in 2007. What really distinguishes him for us is the seminal book that he and Prof. William J. Baumol, wrote in 2000 and published bythe MIT Press, Global Trade and Conflicting National Interests. It was the most important contribution to the theory of international trade made in recent decades.
In June, in written testimony before the U.S. – China Economic and Security Review Commission on China’s Five-Year Plan, Indigenous Innovation and Technology Transfers, and Outsourcing, he noted China’s rapid economic growth which is attributable to its favorable balance of trade with, mostly, the U.S. and its negative effect on growth and income distribution in the U.S. He writes:
As we have consistently pointed out since the publication of our book, Trading Way Our Future (Ideal Taxes Assn, 2008), the vast majority of American economists are ideologically committed to “free trade”. As Gomory writes in his testimony, “The dominant belief is that free trade benefits everyone; that when you lose manufacturing¸ it is because your comparative advantage is somewhere else, and that it benefits everyone to allow market forces to shift you in the direction of your comparative advantage rather than struggle to keep what you once had.” If comparative advantage were static, the preceding statement would be true. But as Gomory and Baumol showed in their book, countries are capable of creating comparative advantage.
As he states in his testimony, China’s trade policies are “traditional mercantilism”, mispriced currencies, barriers to imports, subsidies to exports, all intended to advance Chinese industries in world trade at the expense of her trading partners. And “U.S. corporations, either alone or in joint enterprises with Chinese corporations, building plants in China that enhance both that country’s’ productive abilities and its technical know how. We have seen the goods imported from these enterprises contribute largely to the enormous imbalance of trade. ”
He cites approvingly Nobel Prize winning economist Michael Spence writing in Foreign Affairs, June 2011:
If there is any weakness in Prof. Gomory’s testimony, it is when he discusses what to do about the trade deficits. He recommends balanced trade which he proposes to accomplish by granting tax incentives to those firms that produce value-added in the United States. These tax incentives may violate World Trade Organization rules if the favored companies attempt to export the goods they produce. Perhaps Gomory is unaware of our proposal for single-country-scaled tariffs. We believe our scaled tariffs are legal under the WTO rules. Countries which experience chronic trade deficits with any of their trading partners are authorized to take defensive action including tariffs, quotas, etc..
The scaled tariff is imposed on all the goods emanating from a country with which a country is experiencing significant chronic trade deficits. The tariff rises as the trade deficit increases and falls as the trade deficit decreases, disappearing when trade approaches balance.
We urge our readers to read Prof. Gomory’s testimony before the commission.
Comment by jj, 7/10/2011:
Do cheaper consumer goods result from free trade?
It seem that both advocates and opponents of free trade accept this as a given. Most likely imports from China and other countries put goods on store shelves at prices lower than if we had tariffs. But my money is not going as far as it once did so free trade is not doing it for me. Why? Well, free trade impacts other things.
First, American consumers pay higher prices for domestic consumption of the goods exported. Have you checked grain prices lately? Opening up new markets creates higher demand for those products exported. Higher demand leads to higher prices. If, for example, the Colombia FTA leads to grain exports the American consumers will pay even higher prices for grains. As collateral damage many of those grain farmers in Colombia will lose their jobs and come here as illegal aliens taking American jobs.
Second, we are trying to stimulate export growth by devaluing the dollar. A devalued dollar means that American consumers pay higher prices for all imported goods. Have you checked the price of a gallon of gasoline lately? Part of that price increase is the result of trying to increase trade with a cheap dollar.
Third, how much of the cost reduction do outsourcing companies really share with consumers? Greed having caused them to outsource in the first place it is unlikely they suddenly turned generous with their price. Their increased profits suggest they retained much of the cost savings for their own profit limiting any benefit to consumers.
Lower prices for consumers should lead to higher real wages for workers since the price deflator would go down. The opposite is happening. Any decline in consumer prices is absorbed by a greater decline in inflation adjusted wages.
Response to this comment by Raymond Richman, 7/12/2011:
Comment by vhhjbk jkih, 7/11/2011:
In general free trade is simply great for the poor countries because they are more competitive and it is obviously bad for the rich countries because their labor and materials are more expensive. Consequently without any barriers both money and prosperity would flow just like water until all the engaged economies would level themselves up - just like for instance in the reunited Germany. But in order for that to work out there must be one goverment that makes it fair for everyone. The trouble however is the Chinese goverment cares only about China, and our goverment does not care about it's people anymore - jast the richest guys! So it looks like all the rest of us is going to starve or we will have revolution, or perhaps finally China is going to take us over in the full glory of "our pathetic corrupted democraccy". Historically the economic tensions quite often resuted in wars. As of now China cranks up its military might and already makes fun of our lidership. And our military without production can only pray for mercy. Quite interestingly also about one year ego they already suggested Union to Canada (obviously they need more space and more resources), but that topic is tabu... Could possibly Prince William and Princess Kathy scare them? They already started to serve us new fortune cookies with "Learn Mandarin" content.
Response to this comment by Raymond Richman, 7/12/2011:
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