January 26, 2011

THERE'S SOME STUFF AN ADVANCED ECONOMY JUST WON'T DO:

Comparative Advantage and American Jobs: U.S. workers win when industries are free to invest where they are the most productive. (MATTHEW J. SLAUGHTER , 1/26/11, WSJ)

A competitive America does not mean competitive success for every American industry. Many voices argue that manufacturing is somehow special, and it is indeed important. But so, too, are many knowledge-intensive industries such as education and software. In 2010, America ran a trade surplus in services of nearly $150 billion.

The key insight of the principle of comparative advantage, which drives much of globalization and its economic benefits, is that hard-working Americans are not going to excel at everything. That's okay, just as it's okay that Phil Mickelson is better off on the golf course and not painting his own house.

Comparative advantage allows each country to concentrate its energies on the particular goods and services that it is relatively productive at compared to the rest of the world. The countries then export those abroad, and in exchange import other goods and services produced relatively more efficiently abroad.

Imports do not represent failure. They raise standards of living. Do American workers have a comparative advantage in emerging clean technologies like plug-in hybrids or solar energy? No one knows just yet. But for America to be a truly competitive country, questions like these are best left to the market.

• A globally competitive America must invest abroad as well as export there. Exports certainly matter, but U.S. companies in many lines of business (such as retail and banking) must establish on-the-ground foreign affiliates to access foreign customers. Many technology- and capital-intensive U.S. manufacturers need to invest abroad too, because their intricate goods—aircraft engines, elevators, earth movers—typically require extensive after-sales maintenance and support, which are provided by foreign affiliates.

Research has demonstrated that U.S. companies' investment abroad tends to support their hiring and exports back home.

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Posted by Orrin Judd at January 26, 2011 6:51 AM
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