CPA ISSUES FORUM MEMO:

Globalization and the Growing Divergence Between Corporate and National Interests

                                                                                    prepared by Carolyn Avery, IAS Group, June 17, 2008

Speaker: Ralph Gomory, Research Professor

                NYU Stern School of Business

Charles Wilson famously articulated the enduring idea that what was good for an American company was also
good for the United States. The idea that free trade is good for us is also deeply ingrained in our national
dialogue. But when Intel builds a $2.5 billion high-tech semiconductor plant in China, how does this benefit the
U.S. national interest? As globalization reshapes the relationships between companies, countries, and trade, the U.S. should reassess its ideas about corporate and national interests.

The U.S., Globalization and Free Trade

- With globalization, the interests of countries and their companies can diverge.

-The same theory that shows free trade to be beneficial, shows that globalization can be harmful to developed countries.

-The U.S. needs to respond to this reality with an economic strategy.

I.     INTERESTS OF COMPANY AND COUNTRY: Is there a link?

Companies need profits/Countries need GDP

• In 1776, Adam Smith wrote: “It is not from the benevolence of the butcher, the brewer, or the baker, that we     expect our dinner, but from their regard to their own self-interest.” • In 1953, Charles Wilson explained         because for years I thought that what was good for the country was good for General Motors and vice  versa.”
• Both were fundamentally right: more output from the same input produces both more profit and more GDP if      the GDP and profit are in the same country.

II.      Rhetoric, Theory and Reality

   1. A typical discussion

       • Off-shoring etc. are all part of free trade.
       • Comparative advantage tells us this is good for the country in the long run.
       • In the short term there is pain in the displaced industries, but there are also cheaper goods for
         consumers.
       • In the long term the country benefits.
    2. What theory actually shows
       • Free trade is always mutually beneficial, but assumes that a country’s capabilities are fixed.
       • With globalization, a country’s capabilities change. The same theory shows that this can be harmful.
    3. The standard economic example revisited:

                                                                                 Scenario:

                                                                                    - England is productive in high-value textiles

                                                                                    - Portugal is productive in low-value wine

No Trade:        Both countries produce both wine and textiles

                          Result: LOW CONSUMPTION

Free Trade:      Both countries specialize in what they do best

                          Result: Portugese textile and British wine: CONSUMPTION RISES

Globalization: Portugal learns to make textiles at the British rate

                          Portugal produces textiles (1/3) and wine (2/3)

                          Result: WAGES AND CONSUMPTION FALL IN ENGLAND AND RISE IN PORTUGAL

Comparative Advantage is satisfied in both the Free Trade and Globalization cases; it does not discriminate between them. In fact, since the Comparative Advantage condition is one of the conditions for a free trade economic equilibrium, it is satisfied at any free trade equilibrium. Comparative advantage does not
discriminate between the different free trade equilibria that are obtained by changing country capabilities
even though the economic outcomes for the countries involved can be vastly different.

III. Mutual Gains, Inherent Conflict, and Mercantilism

    • In the area of conflict a move from one equilibrium to another that benefits country A will generally
      harm country B. The best possible equilibrium for country A is always a poor one for country B. When
      two countries are at a 50/50 equilibrium point, there is a conflict as both countries attempt to move up
      their curves and increase their utility at their trading partner’s expense.
    • Countries gain the upper hand in trade relations via mercantilism. Under the colonial system,
      mercantilism consisted of importing cheap raw materials and exporting high value-added goods.

Modern Mercantilism:

                    Companies want high value-added + profits > Deal profitability in exchange for high value-added jobs

• To accomplish this, some countries offer:
- Special tax treatment
- Built facilities
- Wage supplements

• Within the free trade world, there are billions of possible outcomes that vary greatly in their utility yields.
If the United States wants high-utility free trade, it needs to have a policy that develops high value-added industries.

• The U.S. response to increase competitiveness is usually: 1) more basic science, 2) encourage R&D,
3) better K-12 science teachers, 4) strengthen infrastructure (bridges and broadband). Although these
are all good steps to make, only the last one could directly improve our trading position. Basic science
flies around the world quickly, so the first step would not give the U.S. a comparative advantage. As for
the second step, the real payoff to R&D is its effect on production. If products are made elsewhere,
another country will reap the GDP gains from U.S. R&D investment. Regarding step 3, productivity
increases stem less from education than from the capital that companies invest alongside their workers.

IV. The U.S. Needs an Economic Strategy

• The U.S. needs to align country and company goals in a free market economy• Different taxes, corporate interests, and legal frameworks produce different market results. Government
rules for the free market determine the outcomes. For example, the government could base corporate
tax rates on the average value-added per U.S. employee. The tax could be revenue neutral, with a very low rate for high value-added companies and vice versa.

The Goal of such a Strategy

Steadily growing economy>Reasonable distribution of economic gains>Balanced Trade=Steadily growing economy 

• In a globalizing world our country needs a real economic strategy: we should start now.