The issue of trade is particularly germane as countries around the
world try to dig themselves out of the economic crisis -- a crisis that
is truly, perhaps unprecedentedly -- global in nature. The Economist
magazine issued a stark warning on February 5, 2009 to countries that
would respond to the crisis by closing their borders to trade:
[T]he reemergence of a spectre from the darkest period of modern
history argues for a different, indeed strident response. Economic
nationalism -- the urge to keep jobs and capital at home -- is both
turning the economic crisis into a political one and threatening the
world with depression. If it is not buried again forthwith, the
consequences will be dire.
It's a warning that 2004 Nobel Laureate and W. P. Carey School professor of economics Edward Prescott echoed
when he opened the forum's discussion by declaring that economic
integration is the path to riches and peace. Prescott replaced the
word trade with economic integration -- reflecting a much broader,
more complex relationship.
Developing countries (Japan, South Korea, Taiwan, Hong Kong, and
Singapore) that have economically integrated with industrial leaders
like the U.S. have caught up with those leaders in terms of GDP. Those
five Asian countries averaged 31 percent of the U.S.' GDP per capita
level in 1961, but had advanced to 67 percent by 2001. Yet the opposite
is also true. In Latin America, for example, countries are not
catching up economically because they're not economically integrated
with one another, Prescott explained.
Economic integration drives economic growth in developing countries
for four reasons, Prescott said. First, through economic integration
the less-developed country (China, for example), gets access to foreign
know-how -- technological capital -- which it can then adopt to become
more productive. Multinational companies use their technological
know-how in their foreign subsidiaries, so reciprocal multinational
relationships are key -- they lead to a vested interest in both
countries to remaining open, Prescott said.
Second, if development is constrained within a country's own economy
(the country is not economically integrated), then productivity
increases growing out of better technology lead to decreased employment
(as more efficient production requires fewer workers). But, if
development can spill outside the country's own economy, then
productivity increases lead to increased output and increased employment.
Third, economic integration allows a more rapid diffusion of
knowledge -- which is key to productivity growth. A lot of
technological capital has to be absorbed person-to-person, Prescott
said, and that happens more quickly if countries are economically
Finally, economic integration invites competition, which Prescott
calls a powerful motivator for economic development. When the first
six European Union countries integrated, he said, the mere threat of
competition in France from German firms led French firms to become more
The more integration, the better?
W. P. Carey School of Business Dean Robert Mittelstaedt recounted
a conversation he had with a New York City cab driver, who plainly
stated his opinion that the U.S. shouldn't trade with China because we
need to keep jobs in the U.S. Mittelstaedt asked the driver if he
enjoyed paying low prices at Wal-Mart. Of course, was the answer.
Those lower prices are a direct result of trade with China,
Mittelstaedt replied. Though his logic was clearly breaking down, the
cab driver stood his ground that, simply, American policymakers should
do everything they can to keep U.S. jobs in the U.S.
Indeed, the perception that economic integration is only good for
one of the countries is common in the U.S., but Prescott said that more
integration is better for everyone. If economic leadership is a club,
we all gain from having more people in the club. He forecasts that by
2100 the whole world will be rich -- because of economic integration.
Contrary to popular opinion, Prescott argued, the pie grows bigger
as more countries come to the table. The set of industrial leaders is
expanding. Once a country is in that club, it stays in. In other
words, the economic development of China won't hurt the U.S. In the
category of economic superpowers, more is better than less -- the more
technology those leaders develop, the more we all benefit.
But even among the forum participants, significant debate erupted
over the idea that economic integration benefits all -- that it makes
the pie bigger, rather than simply enlarging some countries' slices and
shrinking others'. Perhaps even more significant, some suggested, is
the concern that pursuing economic development and measuring that
development only by GDP may be unsustainable given the earth's finite
It's easier for economists to calculate the gains from trade than
it is to calculate the costs. Adjustment costs associated with economic
integration are underrepresented economically, said Clyde Prestowitz,
Jr., founder and president of the Economic Strategy Institute.
Paul Schiff Berman, dean of the College of Law, pointed out that we
may need to think of trade within a broader regulatory framework that
focuses on how China and the United States can best pursue their mutual
need for an economic model that is stable, sustainable, and promotes
Merle Hinrichs, chairman and CEO of Global Sources, articulated some
of the costs -- and benefits -- from both the American and Chinese
business and consumer perspectives. Among the benefits China receives
from economic integration are capital investment and knowledge transfer
(of everything from technology to management). Among the costs, from
China's perspective, are dependencies on trade-related jobs and adverse
From the American perspective, Hinrichs cited substantial consumer
product choice and highly competitive consumer product prices (which
contribute to slower inflation growth) as benefits of economic
integration with China. Costs include a substantial trade deficit,
dependencies on foreign capital, dependencies on imports, and job
losses, which, especially in today's economy, have come to the fore as
the primary reason behind calls for the U.S. to back off economic
integration with China.
Sticking points: Terms of integration
Defining the pros and cons of economic integration is likely not the
most difficult task, Prestowitz suggested. Economic integration is
obviously important -- that's easy to say. But part of the issue is the
'how' of integration -- that's the key question in globalization,
especially in the U.S./China relationship.
Mittelstaedt suggested that the problems we face with trade today
are similar to those faced throughout history; trading partners say, I
want what you have but I'm not sure I want to trade with you on an even
That's certainly been part of the history of trade in the U.S. The
United States integrated economically on its own terms, said
Prestowitz. During the 19th and first half of the 20th centuries, the
U.S. pursued catch-up policies that included highly protective
measures. President Lincoln, for example, increased tariffs 60 percent.
Teddy Roosevelt said, Thank God I'm not a free trader.
Protectionist policies were designed to help the United States catch
up, developmentally, with then-leader Great Britain. At the same time,
Britain, which led the Industrial Revolution, felt free to pursue
laissez faire (hands off) trade policies. But in the late 19th
century, countries like the United States -- following policies much
like the Asian developing countries follow today -- caught up with and
eventually surpassed the UK. (In 1888, per capita GDP in the U.S. was
85 percent of the UK's. By 1908, U.S.' per capita GDP had risen to 103
percent of the UK's.)
By 1946 the U.S. was the dominant player in global trade -- the most
productive in every industry and the technological leader. The U.S.
was, in other words, the new Britain. As the new leader, the U.S.
followed a path similar to the UK's -- adopting a much more laissez
faire trade policy and developing a trade not aid mantra designed to
get war-torn countries back on their feet through exports to the U.S.
Domestically, the U.S. focused on developing consumption to lead growth
and stimulate exports from other countries.
For the last 60 years, this has been the U.S. strategy -- not
entirely laissez faire, but a fairly open market approach to trade and
investment, with a priority focus on domestic consumption as the global
growth driver, Prestowitz said.
The history of Chinese economic integration
Like the U.S. in the early 20th century, China is now moving up the
value ladder -- from low-value, labor-intensive manufacturing to
higher value, higher technology manufacturing (and, eventually,
services). Since 1978, when the country moved to a decentralized,
market-oriented arrangement, it has been in a period of rapid economic
catch-up, what Prescott called a growth miracle.
In 2001, China became a member of the World Trade Organization
(WTO), after which someone turned the switch and the flow of FDI
[foreign direct investment] accelerated rapidly, as Hinrichs put it.
Foreign-invested enterprises dominated state-owned enterprises in
China's export markets.
That meant foreign companies entering China with their technological
knowledge and management know-how. Today, China has developed its own
stock of those types of capital; now Chinese companies are themselves
looking to locate in foreign countries and even buy foreign brands,
Like Japan, which is now considered an industrial leader, China and
other developing Asian countries are pursuing catch-up strategies
marked by suppressed consumption, which generates high rates of savings
and the capital the countries need to invest in economic development.
In Singapore, for example, the savings rate is 55 percent (compared to
1-3 percent in the U.S.). The country then channels those savings into
particular industries to increase productivity and increase living
standards, said Prestowitz.
The big question today is whether or not China will join the club
of industrial leaders. To be considered an industrial leader, Prescott
said, a country must have a per capita GDP that is at least 50 percent
of the top country's per capita GDP. Today, China is certainly catching
up, but isn't there yet -- in 2008 per capita GDP in China was 22
percent of per capita GDP in the U.S. (up from 13 percent just 7 years
Prescott said that China will join the club in 2025 if the country's economy grows at 7 percent per year until then and
becomes more economically integrated with the advanced industrialized
countries. Once in the club, China will be a member for life, Prescott
said. It's an expanding set -- countries that get in, stay in.
The sustainability of global economic integration
The idea that an ever-greater number of countries would join the
economic leadership club, characterized by relatively high levels of
per capita GDP and -- often -- consumption, worried many forum
participants. In other words, if China's per capita GDP comes to rival
the U.S.', and per capita consumption follows, what are the
Prestowitz suggested the ramifications can be seen easily in today's
global economic crisis. A significant part of the current economic
crisis is that the terms of economic integration over the last decade
have proved unsustainable, he said.
If the goal is an American lifestyle for everyone, is that
sustainable? asked intellectual property attorney Karen Dickinson.
Going forward, if China's idea is to reach America's lifestyle, the
earth won't support it, and that will lead to resource warfare, said
Gary Tooker, former Motorola chairman.
Others questioned the idea that economic integration leads to peace
-- Prestowitz referred to The Great Illusion, first published in 1909
by British economist Norman Angell, who argued that war is futile
because of common economic interests. (Of course, just five years later
World War I began.)
Thomas Friedman suggests a similar idea, what he calls the Golden
Arches Theory of Conflict Prevention. No two countries that both have
McDonald's have ever gone to war, Friedman asserts. The Golden Arches
Theory of Conflict Prevention stipulates that when a country reaches a
certain level of economic development, when it has a middle class big
enough to support a McDonald's, it becomes a McDonald's country, and
people in McDonald's countries don't like to fight wars; they like to
wait in line for burgers, wrote Friedman in the New York Times in
Prestowitz, for one, rejected that idea. The terms of economic
integration in the early 1900s led the world toward war rather than
peace. Part of the problem, Prestowitz suggested, is that if new
countries join the economic club, catching up to the leaders, then some
leaders inevitably lost ground. The leaders don't like that, and that
causes to conflict. The key question for the global economy is: We
want integration, but on what terms, and how?
Adjusting to a new world economic order
W. P. Carey economics professor Jose Mendez granted
that economic integration involves changes and stresses. But we don't
want those stresses to thwart the technological progress associated
with economic integration, he said.
How do we strike the proper balance between accessing the mutual
benefits of trade while also dealing with concerns about labor markets,
environmental standards, consumer protection standards, and the like?
A prevailing fear seems to be that the U.S. is destined to follow
the path of the UK: a fall from greatness after a period of economic
supremacy. But Arthur Blakemore,
chairman of the economics department at the W. P. Carey School,
rejected the notion that the UK failed because of its laissez faire
trade policies. The UK stopped being the economic leader because it
stopped developing new technologies, he said. And technological
development is the key driver of economic growth.
Certainly catch-up economies like China have an advantage because
they start from a lower point on the economic development scale and
grow at faster rates than the developed leaders. But once those
catch-up economies become leaders, they will no longer grow as fast as
they had, Blakemore said.
Leaders grow because they develop technology that generates
productivity improvements. Leaders have to continue developing those
new technologies or they will cease growing. But the question is not,
Will one country continue to grow while the others cease growing,
Blakemore said, but rather, Are we going to keep growing together or
cease growing together?
- Economic integration is the path to riches and peace, according to Edward Prescott.
one point of view, the more integration, the better. Rather than making
some countries' pie slices smaller to enlarge another countries',
economic integration enlarges the pie for everyone.
costs associated with economic integration are underrepresented
economically, however. Moreover, economic development pursued through
increased consumption may not be sustainable and therefore the
long-term goal must be to create a more integrated economic development
- Defining the pros and cons of economic
integration is likely not the most difficult task. Part of the issue is
the how of integration: what Clyde Prestowitz called the key
question in globalization, especially in the U.S./China relationship.
United States integrated economically on its own terms. In the late
19th century, following policies much like the Asian developing
countries follow today, the U.S. caught up with and eventually
surpassed then-leader Great Britain. As the new leader, the U.S.
followed a path similar to the UK's -- adopting a much more laissez
faire trade policy.
- China will join the club of
industrial leaders in 2025 if the country's economy grows at 7 percent
per year until then and becomes more economically integrated with the
advanced industrialized countries.
- Of course, economic
integration involves changes and stresses. But, said Jose Mendez, We
don't want those stresses to thwart the technological progress
associated with economic integration.
- A prevailing
fear seems to be that the U.S. is destined to follow the path of the UK
-- a fall from greatness after a period of economic supremacy. But
according to Arthur Blakemore, the UK stopped being the economic
leader because it stopped developing new technologies. Leaders have to
continue developing those new technologies or they will cease growing.