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Striking Claims From Gomory And Baumol

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It came out in March, but this paper from Ralph Gomory and William Baumol makes some striking claims about the US-China trade relationship:

In a world in which countries can learn and change their productivities, many things can happen that were really not possible in Ricardo’s time. We have used the Ricardo Model to reflect this new world. In a world in which productivities are often not fixed by nature but are often acquired we have shown the following possibilities:

  1. That the economic development of a trading partner can be harmful to the home country. Although the effect of that development starts good, it ends badly.
  2. That there is a dominant and dominated relation possible between two countries, a relation that is good for the dominant one and bad for the dominated one.
  3. That a country can attain a dominant position only by having an undeveloped trading partner. This can occur naturally if the trading partner is simply there in an underdeveloped state, or the underdevelopment can be brought about by mercantilist actions that destroy industries.
  4. There is inherent conflict not only between a nation in a dominant position but between that dominant partner and the interests of a two-county world.
  5. While a country cannot gain a dominant position by building up its industries, it can avoid a dominated position and assure a good outcome by developing a particular subset of its own industries and not allowing them to be destroyed.

If I had read this back in March, my response would have been to say that the model is interesting but it’s not in fact the case that American manufacturing productivity is declining. On the contrary, despite declining employment productivity is going up. But since that time I’ve read Susan Houseman and Michael Mandel’s essay “Not All Productivity Gains Are The Same.” I think you can summarize their point this way. Suppose I have a factory where we make airplanes. We’re not going to be making airplanes from scratch. Instead we make airplanes out of airplane parts. And while it used to be the case that we bought our airplane parts from an American factory, now we get them from a Chinese factory and the American factory has closed down. Because my airplane factory’s inputs have gotten cheaper, my factory now registers as more productive. And if the Chinese airplane parts factory gets more productive over time, then my factory’s productivity increases over time as well. But while these productivity gains are perfectly real — neither the airplanes nor the reduced production costs are an accounting trick — this isn’t really the same situation as the one that would obtain if my factory had actually gotten better at building airplanes.

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