Market Competition and the Failure of Competitiveness Enhancement Policies in the United States

By Milberg, William | Journal of Economic Issues, June 1994 | Go to article overview

Market Competition and the Failure of Competitiveness Enhancement Policies in the United States


Milberg, William, Journal of Economic Issues


U.S. efforts to enhance the international competitiveness of its industries have largely been a failure. U.S. export market shares in most manufacturing industries have fallen steadily over the past 20 years as have the average earnings of U.S. workers. Competitive-enhancement policies have failed because of a narrow view of market competition on the part of policymakers. This has been particularly evident in the area of international trade policy, where protection and subsidies are provided to the private sector with no guarantee of effort to strengthen competitiveness. In this paper I present a two-pronged strategy for using trade policy to enhance international competitiveness. First, commercial policy should include a quid pro quo in which continued protection is contingent on the implementation of an adjustment plan aimed at meeting competitiveness targets and workplace reorganization goals. Second, fundamental issues affecting the cost of production, such as workers' rights, environmental standards, and human rights, should be removed from the process of international competition through negotiation.

Why Competitiveness Matters

According to the prevailing paradigm for explaining the determination of the commodity composition and direction of international trade--the principle of comparative advantage--every country that enters international trade will not only be certain to have a market for its output, but will also enjoy a zero balance on its trade account. In the world of comparative advantage, entry into international trade does not disrupt the full-employment situation assumed to hold in each country but simply leads to a more efficient allocation of resources and thus a rise in total world output.

Two key assumptions of this model--full employment and zero international capital mobility--are completely at odds with current reality. As a result, the model's depiction of the positive and normative implications of international trade is also in marked contrast with the observed dynamics of global trade. Trade imbalances are not only common, but persistent. Not only has the United States run a significant current account deficit for ten consecutive years, but Canada has run a deficit for seven straight years, the United Kingdom for six and France and Italy for five. On the other side of the ledger, Japan, Taiwan, and the Netherlands have run surpluses for ten consecutive years, and Germany for nine [Gray 1993]. So much for the "strong equilibrating forces" assumed in mainstream theory.

Unemployment rates in OECD countries have remained at levels that, 20 years ago, might have led to predictions of mass social revolt. This is hardly a picture approximating full employment. And the unemployment situation has, of course, been even worse in non-OECD countries.

The data on international capital flows are well known, but it is worth considering the magnitude of change that has taken place in the postwar period. U.S. direct investment abroad rose from $2.9 billion in 1960 to $27.1 billion in 1990. Foreign investment in the United States grew at an even more rapid pace, from $364 million in 1960 to $48 billion in 1990 [Department of Commerce 1993, 70-71]. The figures on portfolio investment growth are equally impressive. While there may not be a single widely accepted model of exchange rate determination, it would be hard to argue that capital flows do not play an important role, independent of any trade balance equilibration mechanism.

Since the theory of comparative advantage assumes away issues of excess capacity, international capital mobility, slow adjustment, technological innovation, and persistent trade deficits, it is an inadequate representation of global production and exchange. Our doubts about the general validity of the notion of comparative advantage raise the obvious question: what does determine the direction and commodity composition of international trade?

In the observed world of international trade, as opposed to its textbook representation, companies compete domestically and globally for market share. …

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