Following is the testimony of Ralph E. Gomory, Research Professor, Stern School of Business, New York University, New York, N.Y., before the U.S. – China Economic and Security Review Commission, Hearing on China’s Five-Year Plan, Indigenous Innovation and Technology Transfers, and Outsourcing on June 15, 2011.
Thank you for the opportunity to take part in this hearing of the China Commission. The subjects that we are discussing today are closely related to the topics to which I have devoted much of my working life. For almost 20 years I was the head of the research effort of a major international corporation, (IBM). For the next 18 years I was the head of a major foundation (Alfred P. Sloan) deeply interested in science and technology. In addition I have been a director of several major corporations and for the last two decades I have devoted considerable energy to understanding and writing about the economics of trade.
Many of the questions you have proposed to this panel relate to China’s efforts to move its people into more productive jobs where they can create more value for each hour worked, and to the means, ranging from foreign direct investment to direct acquisition of knowledge abroad, that China has used and will use to acquire the technical knowledge that is needed to produce that result. Explicit or implicit in many of the questions is also the question of the impact of these actions on the U.S. and the likelihood of their success in the future. A further implicit question posed is this: What can the U.S. do when these impacts are detrimental to the U.S.?
Summary
I will state here in short form what I will say in a more detailed way below. What we can expect in the future is simply more, and probably much more, of what we have seen to date.
What we have seen to date is this: rapid economic growth in China, coupled with a major negative impact of the imports of Chinese goods on the productive capability of this county. We have seen an enormous imbalance of trade as these imports are not balanced by a sufficient counter-flow of exports. In the U.S. we have seen greater corporate profits, accompanied by downward pressure on wages and employment.
While the inflow of cheaper consumer goods has been a benefit. That benefit, as we will show below, has come at too high a price.
It is also clear that U.S. global corporations, in their normal pursuit of profits, are strongly aiding these developments. Therefore it is time to realize that the interests of our global corporations and the interests of our country have diverged.
Without a major departure from current U.S. government policies, we can expect that that divergence too will continue.
Confusion Over Free Trade
Why is this happening when there is a strong and pervasive belief, especially among many of the most educated and influential, 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.
This view represents a fundamental confusion. In most standard economic models countries have fixed capabilities. In this situation market forces will sort themselves out in the way described and the free market free trade result is beneficial. Unfortunately that does not answer or even address the question we are interested in: we are interested in the effect of changes.
What is the effect when a trading partner, in this discussion China, does not hold its capabilities fixed, but rather improves them? Let me state clearly here that economic theory does not say that when your trading partner improves its capabilities, and then market forces act on these new capabilities, that the new free trade result is better for your country than where you were before the change. In fact it can be harmful.[1]
What standard models involving change do show, and this is the work that Professor Baumol [2] and I have been engaged in for many years (References 1 and 8), is this: That the initial development of your trading partner is good for you, but as your trading partner moves from a less developed to a more developed state, things turn around. Their further development becomes harmful to your country. Its impact is to decrease your GDP.
And this result takes into account all the effects. It includes the benefit to consumers of cheaper goods from the newly developed partner (in this case China) as well as the negative impact of losing productive industries in the home country (USA).
Consequently we cannot take refuge, as many do, in simply asserting, is spite of the evidence before their eyes, that China’s development is good for the U.S. In fact it is more reasonable to say that theory expects it to have a negative impact with further economic development, and it is further development that is being discussed here.
China’s Form of Mercantilism
China’s approach to trade cannot be described as free trade. It is traditional mercantilism, a pattern of government policies aimed at advancing Chinese industries in world trade, an approach that has many precedents.
The effect of mispriced currency, subsidies, and the rapid appropriation of foreign know-how allows many Chinese industries to appear on the world scene with prices and capabilities that would have taken decades (if ever) to attain without the aid of these practices. Professor Shih, who is testifying here today, has well described the destructive effect of these efforts on American industries in some of his writings (Reference 2).
A More Detailed Description
If we look more closely at the development of China we can see what U.S. corporations contribute. We see 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 since these imports are not balanced by a sufficient counter-flow of exports from this country. We see that today this has resulted in 2 to 3 trillion dollars at the disposal of the Chinese government for the purchase of more treasury notes etc. as in the past, or, as is more likely in the future, for the acquisition of companies and their technology.
In addition, we see U.S. corporations increasingly locating their research and development in China. This is a further and very direct way for China to acquire the necessary know how.
The Consequences
While many economists have been slow to realize that all is not well, we now have this from the Nobel Prize winning economist Michael Spence writing in a widely noticed paper: (Reference 3)
Until about a decade ago, the effects of globalization on the distribution of wealth and jobs were largely benign… Imported goods became cheaper as emerging markets engaged with the global economy, benefiting consumers in both developed and developing countries.
But as the developing countries became larger and richer … they moved up the value-added chain. Now, developing countries increasingly produce the kind of high-value-added components that 30 years ago were the exclusive purview of advanced economies.
The major emerging economies are becoming more competitive in areas in which the U.S. economy has historically been dominant, such as the design and manufacture of semiconductors, pharmaceuticals, and information technology services.
Its not the interests of US Corporations, it’s the interests of the executives and board-members of those corporations. Corporations don’t have interests. Only human beings have interests. And human beings vary within a corporation and among those on the board.
Still, what has been erected — by several congresses and several presidents — is a set of incentives for the board members and executives to do things which are not in the best interests of the citizenry of the USA.
I also which writers would be more precise in defining what they mean by being “competitive”. Certainly, when you give away hundreds of thousands of additional student visas every year, and over 110K H-1B visas every year, and when the cross-border bodyshops and off-shoring firms abuse those visas for the purpose of transferring knowledge and techniques from the USA to their home bases, it makes the USA less competitive. Giving away the keys to the treasury and the armory puts the USA at a disadvantage.
“Information technology services” is just a form of bodyshopping. The shift has been from real jobs to domestic bodyshopping to cross-border bodyshopping and off-shoring. Any form of bodyshopping is a scam, because it involves a cut in life-time pay for workers in the field in a dishonest way. To recruit candidates into their stables, the bodyshoppers dangle higher “hourly rates” than the hourly pay of someone in a real job, but fail to mention they’ll be dumped at the drop of a hat, there is no employment security, the cut in total benefits (and hence total compensation), and they’ve driven down investment by those exec employers in both new-hire and retained emloyee training and education. That’s where their arbitrage comes from.
When it comes to trade, Red China has intentionally targeted only the technology we have that they do not, so they can reverse engineer and copy it. They’ve openly declared this is part of their policy. At the same time, they have erected barriers to import of other US goods. What it boils down to is that there’s no reciprocity, no mutual benefit in the arrangement.
you sir must be a well educated individual as your examination of this process is quite well headed in the rigth direction ,cutting thru some of the B,S in this article where proponets whom are reaping large profits from selling out thier own nation ,if not for profit alone ,then greed must be a partner.If the american blue collar worker buys the establishment politicians,(going back as far a eisenhower) arguments on this matter .neither finds away to divert these principles,the the most logical place in the future for america is for it workers unions and union wages to fail first,then all private sector jobs will continue to disapear until we are forced to beg to move to china,where our government(U.S.A.) is compensating the chinese industry and promoting employment in china or learn to work here for pennies on the hour,change on the days,where 64 dollars in a month under extreme working conditions must be met!!!!!!
Corporate interests have diverged from US interests since before the US helped the Brits make China safe for the opium trade. Adam Smith said something to the effect that all for pay for impearialism and the few profit.
Barlett and Steele’s Why jobs keep vanishing Op-ed
http://articles.philly.com/2011-06-19/news/29677025_1_trade-deficit-imports-jobs
connects-the-dots between the decades of Trade Deficit neglect and the hypocrisy of the current Budget Deficit hysteria. The last paragraph of Why jobs keep vanishing reveals the deficit shell game, stating:” Because turning a trade deficit into a surplus could be harmful to the ruling class and the superrich whose investments are spread around the globe. Congress intends to correct the budget deficit, on the other hand, by hammering the middle class and the working poor, slashing Social Security and Medicare.” During the last 17 years, destroyers of David Ricardo’s comparative advantage have achieved unprecedented potency as to virtually de-couple Free Trade and U.S. competitiveness, enriching the ruling class and decimating the American workforce.
We have read how America is accusing Iran of supplying weapons to Iraq and Afghanistan, and perhaps this is just another lie from America.
We know that America can perfectly copy any Iranian weapons, and manufacture them in America, and give them to France to give to the Libyan Coup Plotters are suspected by some People of being Al-Qaeda, who many People think is America’s creation and Secret Ally.
These claims were made by the Bush Administration in 2007, and we also know the lies that the Bush Administration said concerning Saddam Hussein.
It could be another evil scheme by America to slander Iran, and we know that America will always slander others to siphon much needed America Money into the Military Industrial Complex to further enrich Anglo-French Plutocrats and their Puppet Politicians.
It is said that the Iraqi Government who could be just a Puppet of America blames America’s Ally Al-Qaeda for the deaths of its citizens.
If Al-Qaeda is really an American creation, and an American funded Secret Ally, then we can understand why the Iraqi Politicians would be Puppets of America, and therefore gives America the pretend legitimacy to occupy Iraq.
It should be noted that the American Military accuses Iranian backed Shiite groups for the attacks that kill American Occupiers.
This seems that it could be a subliminal message that Al-Qaeda give America the pretend legitimacy it desperately craves to stay in Iraq, while blaming the deaths of American Soldiers not on Al-Qaeda, but on Iran.
We all know that Iraq and Iran fought a war for over seven years, and so it is not surprising if there are Iranian weapons in Iraq, because any captured Iranian weapons would have been sold on the black market.
It is also logical to assume that corruption in Iranian’s Military of those days, would have resulted in Iranian soldiers stealing and weapons to sell for money during those poor years.
There will always be a minority of Soldiers of any ethnicity that will seel weapons for money, because a Soldier does not know if he will survive the war, and he want to provide money for his family.
America used it Puppet, Saddam Hussein to start the war between Iraq and Iran, and there are always unintended consequences of wars, even by those who scheme, plan, and create them.
We all know that Anglo-France has used France to give weapons to the Benghazi Al-Qaeda, but those weapons were made in territories of Anglo-France, and perhaps some of those weapons are an indistinguishable copy of weapons that are used by the Iranian Military.
Anglo-France may claim that it has policy of strategic ambiguity concerning the Middle East and Rest of the World.
There is no need to guess at the intentions of Anglo-France, because they want to rule the entire World.
The author certainly is coming from academia’s circle. However, his expose is anything but scientific. It is rather in service of social engineering or in service of imperial aim whose which he serves.
Not sure why this article is posted here and on what merit, paradoxically just bellow this article is this one:
http://www.foreignpolicyjournal.com/2011/06/28/egypt-and-tunisia-plutocracy-won/
which telling us true story of US foreign “trade” policy. US corporation are relying on US Department of War to impose its “model”, otherwise talking about “competition” or “market forces” is exercise for naive or fools.
I should have written a sentence to be less ambiguous, and to provide further explanation.
The sentence should have said: It is yet another Evil Scheme by America to Slander Iran, and we know that America will always slander others in order to siphon off Domestically needed America Taxpayers Money into the Military Industrial Complex to further enrich Anglo-French Plutocrats, and their Puppet Politicians.
We all know of the mass unemployment in America; the huge debts, the huge Budget Deficits, we see the attitude of Anglo-France trying to expand, even while their Evil Empire is tottering.
It reveals what they Attitudes are not only to Innocent Countries, but more importantly to those who are, and who should be viewed as their own Citizens.