Free Trade Doesn't Work
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688 Marcelo de P. Abreu, Afonso S. Bevilaqua, and Demosthenes M. Pinho, “Import Substitution and Growth in Brazil, 1890s-1970s,” Department of Economics, Pontifical Catholic University of Rio de Janiero, p. 21.
689 Betsy Rakocy, Alejandro Reuss, Chris Sturr et al., Real World Globalization (Boston: Economic Affairs Bureau, 2007), p. 210. One of the hidden stories of Chile is the conflict within the Pinochet regime between the notorious free market “Chicago boys” and their right-wing opponents in the military government who leaned, like militarist regimes from General Park’s Korea to General Franco’s Spain, towards authoritarian developmentalism and disliked free markets.
690 Anthony Elson, “What Happened? Why East Asia Surged Ahead of Latin America and Some Lessons for Economic Policy,” Finance & Development, June 1, 2006.
691 This section largely based on Eric Reinert, How Rich Countries Got Rich and Why Poor Countries Stay Poor (New York: Carroll & Graf, 2007), pp. 311-2.
692 Michael Porter, The Competitive Advantage of Nations (New York: The Free Press, 1990) p. 117.
693 This paragraph: see Michael Porter, The Competitive Advantage of Nations (New York: The Free Press, 1990), p. 15.
694 Eric Reinert, How Rich Countries Got Rich and Why Poor Countries Stay Poor (New York: Carroll & Graf, 2007), p. 182.
695 “Americans Are Misinformed: Caterpillar, Deere and NAM Say Multinationals Are Saving the U.S. Economy,” Manufacturing & Technology News, June 30, 2008, p. 6.
696 Michael Porter, The Competitive Advantage of Nations (New York: The Free Press, 1990), p. 50. Porter is actually referring to competitive, not comparative, advantage in this passage, but the import of the two concepts is the same in this context.
697 Martha Caldwell Harris and Gordon E. Moore, eds., Linking Trade and Technology Policies: An International Comparison of the Policies of Industrialized Nations (Washington: National Academies Press, 1992), p. 125.
698 Laura D’Andrea Tyson, Who’s Bashing Whom? Trade Conflict in High-Technology Industries (Washington: Institute for International Economics, 1993), p. 85.
699 Alert readers will have noticed that the case of ATT (and IBM and other quasi-monopoly companies) contradicts earlier assertions about the value of rivalry. It does: the truth here is complicated, different in different industries, and beyond the scope of this book.
700 Ibid., p. 88.
701 Michael Borrus, “Responses to the Japanese Challenge in High Technology: Innovation, Maturity, and U.S.–Japanese Competition in Microelectronics,” Berkeley Roundtable on the International Economy, University of California at Berkeley, 1983.
702 Dieter Ernst and David O’Connor, Competing in the Electronics Industry: The Experience of Newly Industrialising Economies (Paris: Development Centre Studies, OECD, 1992).
703 Office of Technology Assessment, Competing Economies: America, Europe, and the Pacific Rim, (Washington: U.S. Government Printing Office, 1991), p. 346.
704 Sydney Carroll, “The Market for Commercial Airliners,” in R. Caves and M. Roberts, eds., Regulating the Product: Quality and Variety, (Cambridge, MA: Ballinger Publishing Co., 1975), p. 148.
705 “Method for Scoring Documents in a Linked Database,” U.S. Patent Office, Patent ID U.S.6799176, http://www.patents.com/Method-scoring-documents-a-linked-database/U.S.6799176/en-U.S./
706 John Young, “Department of Defense Science and Technology (S&T) Program,” Memorandum to Robert Gates, Secretary of Defense, August 24, 2007, p. 5.
707 Author’s telephone conversation with Project Socrates Director, Michael C. Sekora, May 22, 2009.
708 Ibid., July 2, 2009.
709 “Cheney: Don’t Expect Pentagon to Bail Out Industrial Base,” Aerospace Daily, January 23, 1992, p. 115.
710 “Report of the Defense Science Board Task Force on High Performance Microchip Supply,” Office of the Under Secretary of Defense For Acquisition, Technology, and Logistics, February 2005, p. 15.
711 “Defense Industrial Base Assessment: U.S. Integrated Circuit Design and Fabrication Capability,” Bureau of Industry and Security, March 2009, p. 96.
712 “Swiss Delay of Military Parts Sparks ‘Buy American’ Push,” The Washington Times, July 24, 2003.
713 In the (unheeded) words of a 2003 memo by then Deputy Defense Secretary Paul Wolfowitz, “The health of the defense IC supplier community depends on the health of the larger commercial IC base...There-fore the DOD will support policies that provide a level playing field internationally for the procurement of commercial products.” See Richard McCormack, “DOD Broadens Trusted Foundry Program to Include Microelectronics Supply Chain,” Manufacturing & Technology News, February 28, 2008, p.1.
714 A good discussion of the complexities of how industries fall apart on the inside and lose the dynamics that push them to excel is in Michael Porter, The Competitive Advantage of Nations (New York: The Free Press, 1990), p. 166.
715 James Kynge, China Shakes the World (New York: Houghton Mifflin, 2006), p. 112.
716 Richard J. Elkus, Winner Take All: How Competitiveness Shapes the Fate of Nations (New York: Basic Books, 2008), p. 75.
717 “SEMI Reports 2009 Global Semiconductor Equipment Sales of $15.92 Billion,” Semiconductor Equipment and Materials International, March 10, 2010.
718 Richard J. Elkus, Winner Take All: How Competitiveness Shapes the Fate of Nations (New York: Basic Books, 2008), p. 149.
719 “Commentary: Manufacturers Know All About Economic Collapse,” Manufacturing & Technology News, September 30, 2008, p. 4.
720 Laura D’Andrea Tyson, Who’s Bashing Whom? (Washington: Institute for International Economics, 1993), p. 146.
721 See, for example, Christine Tierney, “Ford Slams Toyota on Hybrids,” Detroit News, August 8, 2005.
722 “U.S. Trades Dependence on Foreign Oil for Dependence on Foreign Batteries,” Manufacturing & Technology News, February 28, 2008, p. 8.
723 “Overview of Global Li-ion Battery Industry,” Market Avenue, Inc., March 14, 2008.
724 Anthony H. Harrigan et al., Putting America First: A Conservative Alternative (Washington: United States Industrial Council Educational Foundation, 1987), p. 21.
725 Laura D’Andrea Tyson, Who’s Bashing Whom? (Washington: Institute for International Economics, 1993), p. 14.
726 Testimony of Michael Borrus before the Committee on Science and Technology, Subcommittee on Technology and Innovation, U.S. House of Representatives, February 15, 2007.
727 Dani Rodrik, One Economics, Many Recipes (Princeton, NJ: Princeton University Press, 2008), p. 119.
728 David Bucholz, “Business Incentives Reform: Case Study: Mercedes Benz: the Deal of the Century,” Corporation For Enterprise Development, 2002.
729 “Sematech History,” SEMATECH, 2009, http://www.sematech.org/corporate/history.htm.
730 “The Research & Development Credit: Creating Jobs, Growing America's Economy,” R&D Credit Coalition, October 21, 2009, p. 1, http://www.investinamericasfuture.org/PDFs/TalkingPoints10212009.pdf
731 Martin Neil Baily and Alok K. Chakrabarti, Innovation and the Productivity Crisis (Washington: Brookings Institution Press, 1988), p. 39.
732 Charles W. Wessner, The Advanced Technology Program: Assessing Outcomes (Washington: National Academies Press, 2001), p. 5.
733 Richard McCormack, “The Plight of American Manufacturing” in Richard McCormack, ed., Manufacturing a Better Future for America (Washington: Alliance for American Manufacturing, 2009), p. 45.
734 Wendy H. Schacht, “The Technology Innovation Program,” Congressional Research Service, August 20, 2008.
735 “A Stimulus for Everyone Save Domestic Manufacturers,” Manufacturing & Technology News, February 20, 2009, p. 1.
736 “Barack Obama Campaign Promise No. 7: Double Funding for the Manufacturing Extension Partner-ship, A Program That Encourages Manufacturing Efficiency,” St. Petersburg Times, http://www.politifact.com/truth-o-meter/promises/promise/7/double-funding-for-the-manufacturing-extension-
par/. The program did get a 13.4% increase in the regular 2010 budget.
737 “What the Data Show,” Manufacturing Extension Partnership, http://www.mep.nist.gov/manufacturers/
services/business-operations/results.htm, accessed December 31, 2009.
738 Gomory and Baumol themselves largely disavow the protectionist policy implications of their work, for various reasons.
739 Their first published work of multiple-equilibrium trade theory was Ralph E. Gomory, “A Ricardo Model With Economies of Scale,” Proceedings of the National Academy of Sciences, September 1991. Their book is Ralph Gomory and William Baumol, Global Trade and Conflicting National Interests. (Cambridge, MA: MIT Press, 2000).
740 Gomory and Baumol were not the first economists to identify the value of winning retainable industries or establish firm theoretical grounds for the possibility that government intervention might help a nation win them. Credit for rediscovering this ancient truth and putting it into the theoretical framework of modern economics must go to James Brander and Barbara Spencer of the University of British Columbia, who developed a theory of so-called strategic trade around 1983. Their point, elaborated without Gomory and Baumol’s multiple-equilibrium approach, was that in monopoly industries a well-timed government subsidy could potentially hand a “winner take all” industry to one nation or another by getting a national industry to high volume production first.
741 Lawrence F. Katz and Lawrence H. Summers, “Can Interindustry Wage Differentials Justify Strategic Trade Policy?” in Robert C. Feenstra, ed., Trade Policies for International Competitiveness (Chicago: University of Chicago Press, 1989), p. 86.
742 Ibid., p. 103.
743 Dieter Ernst and David O’Connor, Competing in the Electronics Industry: The Experience of Newly Industrialising Economies (Paris: Development Centre Studies, Organization for Economic Cooperation and Development, 1992) p. 27.
744 Paul E. Ceruzzi, A History of Modern Computing (Cambridge, MA: MIT Press, 1998), p. 248.
745 See p. 100.
746 See p. 99 for the original explanation of opportunity costs.
747 Technically speaking, each such distribution will be “locally” optimal (more efficient than any similar distribution) but may or may not be “globally” optimal (more efficient than any possible distribution). Therefore, any actually existing distribution may be suboptimal both for maximizing world output and for maximizing the output of any given nation.
748 Pace, of course, the fact that the German auto industry is in significant part a product of deliberate non-free-market industrial-policy decisions, starting with the Marshall Plan.
749 Based on the number of North American Industry Classification System (NAICS) codes.
750 Chart adapted from Ralph Gomory and William Baumol, Global Trade and Conflicting National Interests (Cambridge, MA: MIT Press, 2000), p. 31.
751 Ibid, p. 37.
752 Michael Porter, The Competitive Advantage of Nations (New York: The Free Press, 1990), p. 36.
753 Of course, if they do have something valuable, such as knowledge of medicinal plants, this changes.
754 Among other things, this means that old-fashioned colonialism, in which colonies are pushed into bad industries, is not the most profitable international economic strategy. If it had been, England would not have been outperformed economically by Germany in the late 19th century heyday of the colonial era.
755 This result is actually true independently of Gomory & Baumol’s insights and is known to economics as the Hicks Theorem. See Hicks, John, “An Inaugural Lecture,” Oxford Economic Papers, June 1953.
756 A similar result has also been confirmed, using a comparison between hypothetical technologically advanced and undeveloped nations, in Paul R. Krugman & Anthony Venables, “Globalization and the Inequality of Nations,” The Quarterly Journal of Economics, November 1995.
757 UK: see p. 130; U.S.: see p. 142.
758 See p. 25.
759 See Jagdish Bhagwati, Free Trade Today (Princeton, NJ: Princeton University Press, 2002), p. 27.
760 See p. 54.
761 There do exist, of course, circumstances when this is exactly what we want to happen, as when overseas production effectively complements domestic research and development, but generally, the point is to capture jobs based on R&D, not shed them.
762 See p. 59.
763 See p. 34.
764 See p. 109.
765 See pp. 52-55.
766 One can, of course, argue that free trade in goods and free movement of capital are different issues, as does Jagdish Bhagwati in Free Trade Today (Princeton, NJ: Princeton University Press, 2002), p. 10. But free movement of goods, without free movement of the money to pay for them, is only “free” trade in a pedantic sense: it is like freedom to shop without freedom to pay.
767 See pp. 45-49, 54.
768 See p. 187.
769 See p. 113.
770 Quoted in Ralph E. Gomory and William J. Baumol, “Toward a Theory of Industrial Policy–Retainable Industries,” C.V. Starr Center for Applied Economics, New York University, December 1992, p. 25.
771 See p. 138.
772 We are talking about average cost, not marginal cost. The reader can try this out in Excel or another spreadsheet program without difficulty.
773 See p. 189.
774 As noted in Chapter 9, Reagan’s industrial policy was purely military, but was as such very serious, and subsequent presidents have not even employed military industrial policy.
775 Costa Rica: CIA World Fact Book 2008, https://www.cia.gov/library/publications/the-world-factbook/geos/cs.html. Jacksonville: Bureau of Economic Analysis, “Gross Domestic Product by Metropolitan Area,” http://www.bea.gov/regional/gdpmetro/action.cfm.
776 See pp. 46-48.
777 See pp. 156-158.
778 See pp. 171-172.
779 See pp. 198-201.
780 Eric S. Reinert, How Rich Countries Got Rich and Why Poor Countries Stay Poor (New York: Carroll & Graf, 2007), p. 271.
781 See p. 158.
782 John Cavanagh, Jerry Mander et al., Alternatives to Economic Globalization: A Better World is Possible (San Francisco: Berrett-Koehler, 2002), p. 230.
783 Ch. 9: see p. 198; Ch. 10: see p. 227.
784 See p. 139.
785 See p. 176 for the original discussion of VAT.
786 See p. 144.
787 For example, there is something of an inverse relationship between protectionism and industrial policy, as is visible in nations such as Singapore which have fairly free trade but very aggressive industrial policy.
788 It is no accident that most nations with VAT have larger welfare states than the U.S., as this is an obvious way to mitigate the progressivity issues of a VAT.
789 Michael Porter, The Competitive Advantage of Nations (New York: The Free Press, 1990), p. 119.
790 This holds in many other Japanese industries as well. See Michael Porter, The Competitive Advantage of Nations (New York: The Free Press, 1990), p. 118.
791 See p. 90.
792 See p. 201.