The US should be more concerned about a quantum leap in the production and specialisation of idea-based goods. It will be unbecoming of the US to drown itself in an unwarranted din of protectionism.
Self-interest had been the driving force behind the opening up of trade between and among nations — not altruism to do good to others. It was pure and simple, perceived and revealed, self-interest. The English classical economists put it in a philosophical manner called utilitarianism, which attached significance to something that reduced pain and increased pleasure. Nations did trade and still do it because it increases the mass of commodities and the sum of enjoyment. However, instances surfaced when some nations deviated from free trade and did something opposite of it. For instance, despite their vigorous advocacy of the merits of free trade, one of the classicists, namely, David Ricardo, continued his support of the Corn Laws, brought in the wake of the Continental System simply because it raised the share of landed interests in Britain against other income groups till they were repealed in 1846.
The first opposition was voiced by the German economist Friedrich List in his celebrated work The National System. In this he argued that trade should be between and among equals. A nation not matching another should not take to free trade because it might lose. Accordingly, the former should strive to develop its productive potential under tariff protection, match the level of the other nation, and engage in trade. This stipulation has some grain of truth in that it speaks of an unequal situation and seeks to rectify it in a time-bound manner. The United States argued for moving away from free trade because it thought it might harm the ‘community of interest’ between industry and agriculture vis-à-vis the economy. Japan sought development under an inward-looking policy, avoiding trade initially. The US, again during the Great Depression of the ’30s, imposed the Smoot-Hawley Act hiking some 900 tariffs. It clamped the Omnibus Trade and Competitiveness Act incorporating Super and Special 301 provisions declaring nations unilaterally as practitioners of ‘unfair’ trade according to it.
To cap it all, now it has promulgated the American Recovery and Reinvestment Act withdrawing some 1 lakh H-1B visas. Obama has even suggested that any firm practising outsourcing will be treated with harsher measures of taxation. The US policy responses — including that of protectionism — arise from short- to medium-term concerns such as protecting employment. But what about an appropriate and rational long-term response? America must re-orient its thinking from short-run exigencies to long-term development imperatives. In that lies the key to the resolution of its present predicament and future prosperity.
In the ‘50s of the last century, the world economy confronted the issue of the long run dollar problem. The problem was, every country needed dollar and ran a surplus trade with the US so that it could get it. This was because dollar provided infinite possibilities to its owner in terms of material benefits. The more significant and overpowering reason was the high productivity level of the US economy. It is the high productivity of the US that made dollar so strong and also coveted. Riding on the waves of this high productivity, the US reigned supreme in a most positive manner for two decades since the end of the Second World War.
We quote Jagdish Bhagwati to bring home this point: ”Free trade comes naturally to countries that possess actual or perceived competitiveness”. This competitiveness stems from productivity growth within countries and also from productivity growth differences in comparable products between and among countries who wish to do trade relatively free from restrictions. And it is this productivity growth difference that explained the relative superiority enjoyed by the US in production and trade after World War II and also the long run dollar shortage. This was pointed out by Thomas Balogh and reiterated by J H Williams in his Stamp Memorial Lecture in 1952.
It is this productivity growth difference that has swung back with venom to hit the US economy in a different situation that witnesses both the decline of US productivity and the rise of the same in other countries. This productivity slide coupled with visible inability of policymakers to arrest wage rise has adversely affected the US and rendered it into a diminished giant and afflicted it with what Bhagwati calls the ‘diminished giant syndrome’. It is this that bursts into restrictions on trade of all forms and magnitudes. If the US is capable of overcoming this smallness in productivity growth someday it will not only be able to roll back its protectionist policies but also be able to create a Brave New World based on free society and free markets. How that conjuncture can be created will measure up the potential of the US and its ability and genius to translate it into a possibility.
Paul Romer explains the matter in a persuasive manner. According to him there are two types of goods — physical goods and idea-based goods. While the former can be produced by any country depending on its facilities and opportunities, the latter are the preserve of those having good stock of knowledge and knowledge workers. All idea-based goods depend for their production on an elastic supply of updated knowledge and education standards with appropriate upgradation of the syllabi and their contents. This process of updating is a continuous one and needs large investment in human beings and their development.
Professor Schultz has written extensively on this and also about its importance in economic development. The importance of investment and innovation in knowledge and education becomes all the more important because growing nations previously looked down upon, are catching up with their developed counterparts as never before. This makes an additional demand on the development of knowledge on the part of the developed countries like the US. Today the US should, therefore, be more concerned about a quantum leap in the production and specialisation of ideabased goods. It will be a disservice done to the US economy and also unbecoming of it to drown itself in an unwarranted din of protectionism for smaller causes.
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