On what grounds can we, as free trade advocates, assert that globalization can harm the country? A straightforward explanation suffices: In standard analyses of trade, economists usually assign fixed values to a country’s productive capabilities and define trade as the exchange of the goods and services, with each country supplying those items in which its productive capabilities are relatively greatest. With this definition, trade can easily be shown to offer benefits to both parties. Economic analysis repeatedly bears this out. Hence, economists emphatically reject tariffs and other forms of protectionism as impediments to those benefits. We accept this conclusion for the assumed scenario. But when productive capabilities are changing, not fixed, the world enters a whole new ball game. As long shown by many economists – the latest being Nobel Prize winner Paul Samuelson – the end result of that productivity change, even after the period of adjustment, may be better for one’s country or it may be worse, depending on circumstances.
More concretely, when the United States trades semiconductors for Asian t-shirts, for example, that is trade in the narrow sense. And we concur with the most basic theoretical conclusion that this exchange clearly benefits both countries. But when Intel properly pursues the interests of its shareholders by building a multi-billion dollar semiconductor plant in China rather than the United States, a shift in comparative productive capability suddenly occurs. Globalization is not simply free trade; it is trade plus shifting productivity. We have not sent China consumer goods, but the capability to produce more effectively.
Gomory is a former IBM executive and Alfred P. Sloan Foundation chief. Baumol is a veteran and much-honored economist (and co-author of my freshman-year econ textbook) who now teaches at NYU. These aren’t your usual trade warriors. And it seems to me that they’re on to something.