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Diverging Interests: Company and Country at a Crossroads
It is time to realize that globalization, while still only in its infancy, has already undermined some of the fundamental assumptions that underlie our thinking about the economy. Today, what’s good for America’s global corporations is not necessarily good for the nation’s economy. A firm that is moving production of goods or services overseas may be increasing its profits, but can be simultaneously cutting the national income and the wages of its home country. Neither economic analysis nor common sense force us to conclude that globalization and its resulting shift in productivity will automatically benefit our county, even in the long run.
In 1953, when General Motors Chairman Charlie Wilson told the U.S. Senate that what was good General Motors was good for the country, he was articulating a philosophy that was then closer to the truth because at that time American workers could hope to see their wages rise as their employer companies invested and prospered. Whether it was in GM manufacturing plants or in IBM’s research and development labs, companies gave American workers the tools that enabled them to out-produce the rest of the world. Companies thrived by having the best plants, equipment and information processing, and the American people shared in the productivity and prosperity. But that was before globalization created huge business opportunities for companies to increase profits by shifting production of both goods and services abroad.
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.
Our analysis, which is based on the most standard economic models, shows that increases in a trading partner’s productivity can favorably affect the home country if those increases occur in a highly undeveloped country. Under these circumstances, both countries benefit from globalization. But this mutual benefit becomes less certain as the developing nation acquires greater capabilities and assumes a larger share of world production. After a certain point the further development of the formerly undeveloped trading partner becomes harmful to the more industrialized nation. This conclusion is not based upon conjecture or any particular political view of the world. We obtain this result unequivocally from a careful mathematical analysis, using the standard equations long employed by economists for analysis of such issues.
Both economic analysis and common sense can now concur in showing why globalization is not always a win-win proposition. At some point, the ongoing productive progress of the newly developing partner becomes harmful to the more industrialized country. Analysis shows clearly that the people of this country cannot count on some benign outcome, even in the very ong run. If steps are not taken to realign the interests of companies with those of the country, that day may never come.
Certain measures can be taken to help realign the interests of company and country. One answer lies in what other nations are doing, for example, adopting tax benefits and other economic incentives that make it attractive for companies to invest in their country. Thus, consider the ideas of leading corporate CEOs in the Horizon Project Report, which call for a tax rate reduction for companies having high value-added jobs in the United States, among other recommendations.
Our country and the companies that call it home are at a crossroads. If we do not find the right means to realign their interests, company and country could well continue down divergent paths.
Ralph E. Gomory and William J. Baumol are co-authors of the book, “Global Trade and Conflicting National Interests”
Ralph E. Gomory is President Emeritus of the Alfred P. Sloan
Foundation. Dr. Gomory was President of the Sloan Foundation from 1989 through
2007. Prior to joining the Sloan Foundation, Dr. Gomory was Higgins Lecturer and Assistant Professor at Princeton
University, 1957-59. During this period he invented the first integer
programming algorithm.
He joined the Research Division of IBM in 1959, was named IBM Fellow in 1964, and became Director of the Mathematical Sciences Department in 1965 while continuing his research in mathematical programming. In 1970 he became IBM Director of Research with line responsibility for IBM’s Research Division. Under his leadership the Research division made major contributions to the computer industry, such as the invention of the Relational data base, and also won two Nobel Prizes. Dr. Gomory became an IBM Vice President in 1973 and Senior Vice President in 1985. In 1986 he became IBM Senior Vice President for Science and Technology.
William Baumol is the Harold Price Professor of Entrepreneurship and Academic Director of the Berkley Center for Entrepreneurial Studies in the Stern School of Business at New York University; and senior economist and professor emeritus at Princeton University.
He is past president of the American Economic Association, the Association of Environmental and Resource Economists, the Eastern Economic Association, and the Atlantic Economic Society. His honors and awards include eleven honorary degrees and membership in the U.S. National Academy of Sciences, the American Philosophical Society, the Accademia Nazionale Dei Lincei (Italy) and the British Academy.