summaries

LỀOOUCTION

Most asus, despiteall the evidence> cHngtoavision ers in the late [970S. The World Economic Forum, which hosts the famous Davos conferences, beganQf#ubHcdiscoi in which great issues are decided

by।Hofound debates long deep thinkers. We like issuing itsιual World Competitiveness Report in to imagine that the authors we read in intellectual 1980, and the rankings in that report soon became a

But what does national economic competitiveness batesabout intemational trade areastudy in consi1- mean? For the great majority of those who use the

Thediscussion os competitiveness is acase in point. This is the view expressed, for example« in Lester Thurow's i 992 book, Head(o Head, which repeal~The idea that the economic success of a country

17© 1996 OXFORD UNIVERSITY PRESSAND THE OXFORD REVIEW OF ECONOMIC POLICY LIMITED

may have differences of opinion, they start from a shared base of knowledge and understanding.

magazines, the talking heads we see on television, maļor criterion by which national performance was are really enj^ged in suchdebates4hatwhilethey judged. By the 1990s the concept of competitive֊

When it 8mes to international esnomics，how- ever, nothing could be further from the truth. De-

depends on its international 8mpetitivenes$ took hold among business, political, and intelectual lead-

ness was no longer even controversial among infl∪⅜ ential people. Of course 8mpetitiveness was the key; the only question was how to achieve it.

sionģmisconceptions, in which the،experts١you see, hear, and read are usually misinformed about the most basic £acts and concepts——and in which even those who are fairly sound on the economics do not understand the nature of the debate.

tem itmeans exactly what it seems to mean: it isthe view that nations 8mpete for world markets in the same way that corporations do, that a nation which failstomatchothernations in productivity or techno- logy will face the same kind of cHsis as a company that cannot match the costs or products。fits rivals.

RAUL R. KRUGMAN M0s⅝achusetts Instihite of Technology

IORDREVIEWOF ECONOMIC POLICY.VOL.12, N0.3

MAKING SENSE OF THE COMPETITIVENESS DEBATE

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intellectual levels—that there is no shared basis ofedly asserts that advanced nations are in a、win-

To introduce the subject, let me describe four stock for the upward trend in European unemployment characters. All of them imagine themselves to be rates.

at all with the term ‘competitiveness'. To him, itpeople Who m٠ think that competitiveness is

itseemstomeam Eitherthey suppose that'8mps, never hedofcomparatιve advantage or, ifhe has.

tries to corporations; anyone who says that tradebe telling them that they have not foiled to under- stand the simple economics, but rather have traπ- policy is about creatingjobs; anyone who talks about scended it.

In this article ] want to offer a sort of guide to the try to putan intellectual gbssontheirviewsby citing the works of Strategists, but a Mercantilist usesrealities of this discussion—in particular, to the

18

what econo⅛ is all about, economists imagine seems obvious that countries compete with each thalthe.wordmust mean something other than what other in the same way that corporations do. He has

sophisticated about international economics» but in fact their grasp ofthesubjectvar⅛es enormously Jn order of increasing sophistication, they are:

،high-value> sectors; all of these people reveal themselves to be Mercantilists. A sew of them may

the Mercantilist theClassicist the Strategist the Realist

tivenesst isapoctic way essaying productivity>and he thinks it means the same thing as 'competitive has nỂng to d٠ with any actual conflict between advantage*. He believes that the purpose of trade is countries; or they suppose that people who talk to generate exports| which create jobs; if he has any about ∞mpetitiveness must understand the basics sympathy for free trade, it is because we can make aMhaMeínmindsomesophistieateddepamgíYom a deal to accept other countries' exports if they staildaid^omicmodels। involving impe⅛tcom⅛ accept ours. petition। eκtemaleconomies⅜ or both.

|٠๙ competition for world markets. (Thurow*s mutuallyagreedfactsand mutually understood c٠n٠ book not only was a massive best∙seller but was ceptHan you make sense of what is otherwise a f٠vinglycite<lbyn٠ lessafìgurethan President büng discussion. Clinton.) It is dso the view expressed in the Euro-

widely disserent levels of understanding among Strategic ideas as a drunk uses a lamppost-as a ^ople who have managed to convince themselves source ofsupport, not٠filluminat1٥n۶ and others that they know something about interna- tionai trade. Only if you understand that the people Mercantilists need not be protectionists. Indeed\ the you hear or read are operating at very disserent relatively liberal trading system we actually have

٦*eU&at٠hi٥ isapoormemphor. In fact। it isa view ٠ ofthe world sb much in conflict with what even the 스 mdgt b，sic bterhỂnal trade theory tells us that ٠ ecohomists have by and large simply fiailed to

Ho 1nfluσntial people have used the word ،com- peth1ve∏esst to mean that countries compete just likg84p∙nies,pmSe6sionaie8nomistsknowvery ٠

pean Commission's 1993 White Paper, Growth» Competitiveness, ⅜∕60enζ whose introduc■ ။٠ FOUR CHARACTERS (।٠ท ٠ฟ ၊।ฟเ₽٠।แ।٠ท ^٠ท1 newly industri- alizinge8nømieg was the most important reason

1ptchend that this 1S whà the seemingly sophis- (0 The Mercantilist ticιtedpeopl⅛whotalkaboutιpetitivenesshave ỉnrnind.Tữtf>eextentAatỀey even notice that most The Mercantilist is someone who has no problems

The im^rtantthingto understand about the subject And the slip side of this misunderstanding is that ofcompetitiveness isthatthevastmajorityofpeople those relatively few believers in the importance of who use the term—politicians, business leaders. Ipetitiveness who do know that their view con^ journalists| best-scllrngauthorson e∞nomics-are flicts with simple trade thoory are unintentionally Mercantilists. Anyone who writes about trade as a given aid and comfort by economists who seem to global struggieorwar; anyone who compares coun*

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reality, there are industries in which economies ofwas achieved not via an understandingoftheecon0L mist*s case sor free Uade∣ but via the application of scale implythatonlyafew» ^rhapshighly profitable a doctrine of enlightened mercantilism, in which firms dominate the market; there are industries thai coỂesare willing to lower their trade barriers— seem persistently to pay higher wages than others. to offer 'concessions'—only in return for access to even when the qualifications of the workers are

(U) The Classicist

Ecoιistst ٠f course। do not think atout interna- activist government that these market impersec־

Consider the following statement of the classical Although the Strategist draws on the work of the position.

Thepu1p0seøft^eisimports,notexports.Exports theory٠٠surprisingly few ofthe new trade theorists

doing because it is moreemcientthan producing our which this theory can∣∣ustify government activism ίη

(tv) The Realist

(HI) The Strategist

The Strategist's objection to the classical position can be summarized with two words: Siticon Valley, arguments £”intervention. What distinguishesthe

Realist from theStrategist are two beliefs، First, theIn the basic classical model, competition is per-

while markets are indeed imperfect| the potentialefficiency in any given industry is a datum, deter- mined by factors outside the economists brief, tn gainsfrom trying to expioit those imperfections are٠

19

wages, 0「that seem likely to generate strong sρill- overs.

practice. In short٠ most of the new trade theorists are Realists.

di⅛nce in outlook between a Classicist and a Mercωtiliwisenonnous~much greater tìian either the Classicistorthe Mercantilist is likely [¢realize.

ฬ٠ทฝ ฟ٥ ๒ anything like that way. The classical model of trade is essentially that initially stated by Ricards and formally nailed down by John Stuart

ment to she¢ trad¢ is very much conditional—he or she is for ‘free and fair* trade, not free trade pure and simple.

tiens may create. Strategists want the government to stand behind domestic firms wherever there seems to be a winner∣takes-all competition for

sect ٠يי hatisو there are nomonopolies or oligopolies; Realist has looked at the practical prospects sor wagesareequalizd across industries;and national strategictradepoiicy,^d found them unimpressive:

This is standard economics—indeed. Mill put it almostex∙ctlythatway. Yet it is almost the opposite of what Mercantilist§ believe.

are a cost—something we must produce because our import suppliers are crass enough t٥ demand payment. Or to put it differently, an export is an indirect way to produce an import, which is worth

Mill, and still remains the main subject ٠sinterna- firturemonopolyprofits; they wantactive promotion tiond economics as Kis taught in unjveßities. The of industries that seem to pay exceptionaliy high

other countries' markets. Both NAFTA and the tģnintoaccountςωdthereareỉndusưiesinwhich Uroguay Rowd were soldpliticallynot on U١e basis technological prowess seems to be generated by the af8onomists'estimatescfthegainsfYDmtrade,but mutual spill∣oversofknowkdge from national pro। Ề the claim that the extra exerts thereby gener- ducers∣and in which exports| therefore> may create atedwouldaddhundredsofthousandsofjobs.None separative advantage rather than the other way Aelcss« even the enlightenedMeιtilisfsattach∣ around.

These failures of the classical model were the dominant subject of theoretical and empirical re٠ seιhon1ntιtiona∣tradeduringthel980s. The Strategist, however, is not a mere researcher; he or she is eagertogoout and exploit the possibiiities for

themselves are Strategists. Instead, however ex٠ cited they may have been about the intellectual contribution of the new trade theory, they have become increasingly sceptical about the extent to

economic theorists who, during the 1980s, put to⅛ gether what came to be known as the ⅛new trade

The Realist is someone who understands both why the classical analysis of international trade refutes crude mercantilistviews,andhowthe qualifications to classical trade theory create new, more subtle

imports for ourselves.

OXF٠RĎRE١nEW٠FEC٥N٠MIC POLICY.VOL. 12. NO.3

suspects that Strategists who think that they can

they have never understood it in the first place.

me work my way there in stages.

between them. That is, we will see how classical idea of comparative advantage, you are naively

view of the issue၊

It cannot be emphasized too much that the vast majority of⅛ose who talk abt national economic seem stunningly ins1ghtfol| ifyou read the reportsof

the innumerable ၊missions and conferences oncompetitiveness—politicians| tradeofficiais, editors

20

of leading magazines, and professors of political competitiveness, the articles published on the sub- science (and an occasional rogue economist)—are ject in leιed magazines and upscale newspapers. Mercantilists. Perhaps some of the readers of you wi≡lagain and again see propositions such as the this article are Mercantilists। too.To test whether followrng:

follow or don't accept what | was trying to say- then you areaMercantilistConverse]y,ifyou think

industry to make sense of what is happening to the economy as a whole. If foreigners become rela-

He said: Isn٠tthe story ofthe automobile industry basically what is happeningtothe wholeeconomy?

you are٠ consider the fallowing rough reproduc~ tion osa discussion I had with an individual who routinely makes the lists of America's top ten intellectuals.

My plan here is to illustrate the basis for these that everyone who talks toowinglyabominteitional different positions by considering the transitions trade must, at the very least, understand the basic

ฟc٠verfoг⅛cπĸlely belligerent ideasofMeιt- of course we will lose jobs in that industry. But that jlists. Asaresuiζ the Realistends up sounding quite doesn't mean that we lose jobs in the economy as a a lot like the Classicist: he knows that the classical whole। orthat foreign productivity growth hurts us٠' modelisnotthe⅛lestoσ>buthisalotofthestory, 'Why do you keep on talking about'%particular and he believes that most of those who criticize industry"? Isn't the economy just the SUE of what conventional views of ứadedo so not bause they happens in each industry? Haven't autos gone the have transcended the ciassical model but because wayoftextiles,andwon^tcomputersbenext7, ٠N٥١

he believes, essentially small change. Second, the Foreigners started to pr⅛ce cars betterdcheap>er Realist is cynical about the likelihood that subtle than ours, and as a result we lost hundreds of argumỂ for intervention can be translated into thousands of jobs.' 1 replied: 'You can't use that produģe policies in the real world. lnp^kukhe kind of story about what happens in an individual

of course not—that١s the whole point of the idea of comparative advantage. You always have a com■

of would-be sophisticates who do not, one of two things happens. Either he goes native, and forgets what he used to know; or hedevelopsanew|almost awed respect for the sophistication of the simplest trade ๓ฝ6।ร٠ In partjcular>the basic two∣good, one। f∙ctor model of international trade that Ricardo sketched out and John Stuart Mill filled in begins to

trade theory refutes mercantilism; how new trade mistaken. In fhct, almost nobody does. theory offers the possibilιt)rofstrategic^ade policy; and, Ωnally, ٠ a realistic appreciation of Խէհ the When someone who does understand comparative K>mtcs and the politics of Ые leads one back advantage spends any length oftimediscussing and to something more like a classical than a strategic debating international ưade with the great majority

Obviously, І myself am a Realist—the paragraph parative advantage in something.' ،Well, that's not above about why the major new trade theorists are what Lester Thurow says٠٠ not Strategists was a self∣portrait. But rather than go straight intoadefenceofthe Realist position41et If you side with the other speaker-if you can't

∙ the growth ofnew economies in Asia necessarily comes at the expense of the West;

∙ if our foreign rivals become more productive than we are across the board, we will have nothing that we can produce competitively, and ourstandardoflivingwillcohapse;

।။। FROM MERCANTILISM T٠ CLASSICISM

improve on the policy recommendations of Classi∣ cists ٦ฟ။٠ Ỉn practice> simply provideabitofmtellec- tιvely more productive in a particular industry, then

P. R. Krugman

now believe, is that international trade isa٩uintes٠ factor model there is too much going on to keep

seems like going back to school.

H8ckofthe interdependencies among the variables cuse it gives would-be expens on world trade for

specialization and production, and the size of the IV. FROM CLASSICAL TO STRATEGIC TRADE

back to wages, in which output growth will seed Once one has 1ม่ฝ to talk seriously about trade with back to demand.

How can such a simple model offer a world-view

are nottalkingaboutthe kind ofmathsthat physicists The new trade theory has been the subject of many

21

numerical examples. But seven generationsofecono> from the introduction to my own ]990 book, Re- mists, someofthe1τi very good writersandteachers| thinking International Trade՝.

world market are all simultaneously and mutually deUnmed; in which productivity growth willfbed

the ess⅛tialinsigħt of general equilibrium ၊lysis: ،Everything in the economyaf⅞⅛cts everything else mat least two ways.٠Well, not quite; but it is utterly One may therefore argue that the success of the cnw⅛J when discussing intemational trade to keep doctrine of competitiveness owes much to the ex-

Thurow says.‘

mentators, no matter how many facts they know? The 1wer,I suspect, is that general equilibrium is a very difficult thing to understand unless you are willing∞dable t٠ think about it mathematicaily.We

use—the Ricardo-*Millιrιodel requires no more than high school algebra, and can even beexplained with

bis much more subtle and complex than that held theless,thereismoretoliseand even to international by the vast majority of even highly intelligent com- trade than comparative advantage; and since about

one unders^ds even the simplest textbook model oscomRtive advantage| oneatrdy hasapicture of a world in which wages, prices, the pattern of

terms of a world market of Axed size, in which one called ‘comparative advantage', some suggestion c0Mgy's inceasedoutput can only com¢ by crowd- that the economy is more than the sum of its parts, ingøutpråct1onrødjobs in other countries⅛ But is he need only reply ‘Well, that's not what Lester

tow-wage ၊tries must always 8me at the ex- penseof jobs elsewhere; or he thinks implicitly in

of interest» and not to hold constantthing$ that will not going back to school. The rhetoric of competi- not stay constant. For example, the amateur pundit tiveness has, in effect, made the Mercantilist po$i- oniøternatiônalt^adetypicallythinksofwagesasa tion seem not only respectable but sophisticated, given, and so imagines that productivity gro,wth in Like the famed intellectual 1 was talking to, if an

willing to accept the idea that a simplified math- ematical model can shed light on the way the world economy works, and to spend a little while under~ standing the mechanics of that model.

people who do not understand comparative advan- tage, one appreciates anew the astonishing beauty and sophistication of classical trade theory. None

1980 much of the empirical and analytical effort of internationa!economιsts has been devoted todeρar- tures from the classical approach.

instinctive Mercantilist should be confronted with 1epuzzlingeconømist'sremarl< abut something

manifestos and surveys. Rather than try to restate what it was all about, let me simply quote myself.

sentiilỉy 'general equilibrium' subject. Bythis I do everythingstraíght. not mean that Wade must be addressed in terms of an ^lys1sdιat assumes that mỂets are perfectly The prevalence of Mercantilists is thus easy to 8mpotitive, or even that they are in equilibrium. I understand. Most people dislike maths in general| refer rather to what somebody once described as and paιticuiarly hate the idea of doing anythingthat

I have often wondered why it is so hard to explain <hat propositions like these are silly. The answer, 1 Otherwise, even in a two-good, two-country, one-

towards Third World levels; ∙ intensified com^tition between nationswil∏ead

toasimultaneous decline ineveryonesmcomes.

• as modern technofogydim∣ses globally|thereal can attest that the insights one gets from Ricardo mcomesofadvid nationswill bedriven down and Mill cannot be explained unless the listener is

OXFORD RE∖ΛEWOF ECONOMIC POĽICY.VOL 12. Ν٠٠3

mandates that aircraft production be concentrated some∣Ifonchβdtoprovidea8nseteexampleofwhatιhenew

suJļjectiosameGfthosamolnfïuencesthatbearontrade forhistory: Because Seattle(orDewoitorSilicon Vailey) in wheat, tradιtioι1d theory has by no means been dis٠ was where an industry initially got established, increas-

In the new theory an importantelementofarbitrariness is

amibute ofthecity٠s location that fullyexplamsthis، The point is, instead, that the logic of increasing retums objection?

22

Begin with the most basic question: Why is there inter- nģnص ฟ¢? The ЫїіопаІ theory answers: Because

like wheat; new ฟ٥ theoσ sees it as Zing largely in goods like aircraft| Since & good part of world ưade is in goods like wheaζ ฟ since even bade in aircraft is

What determines the international pattern of specializa- tion? In traditional theory the answer emerges from the explanation of trade itself: Countries produce goods that would have been relatively cheapin the absence oftrade، Comparative advantage may arise from a varies of sources, but in any case the attributes of a country detemine what it produces.

The new theøry acknowledges that differences between countries are one reason for trade, but it adds another: CounEes may Hade because there are inherent advan٠ t٥g«s٠Q6p٥ci&lization♦ Theιotniesofscale inaircrañ gmuR٠c٠ugam3。laígethatthewoddmaHEcanac8m٠ mo⅛ at best only a few eff1c1ent⅛scaJe producers and thus only a sew centres of production. Even if Japan and the United Sates were identical, it is likely that oniy one country would be producing (say) wide-bodied jet air∙ craft, and asaresult there must be trade in order to allow the centres of production to serve the world market. Of ιrse∣Ae United States &س Japan are not identical, but the new theory says that much trade, especially between similarcountries| represents s^cializationtctakeadvaπ∣ tage of increasing retums rather than to capitalize on inheg differences between the countries.

and as a result ■ the absence of tede wheat would be much cheder in CanMa. The diftirences between 8un٠ tries that Ie trade may Ho in esources, technology, or wen in tastes» but in any case, traditional theory takes it as axiomatic that coỂỈes aide in order to take advan- tage of their differences.

tπιde theory is about» itmight be this: conventional trade where, and Seattle just happens to be where the roulette tteory views world trade as tak!ngplaceentirelyrng∞ds wheelcametoastop.Inmanyofthenevvmodelsoftrade,

Finally, what is the optimal trade policy? Traditional theory is the usual basis for advocating free trade, one of themostsưonglyheld positions in the economics proses⅛ si٥n (although actually even in traditional theory a sec- ønd-best case can be made for protection as a corrective for domestic market failures\ The new trade theory sugf gestsamorecomplex view. The potential gains Gem trade are even larger in a world of increasing returns, and thus, in a way, the case for free trade isa1l the stronger. On the other hand, the aircraft example clearly suggests that an individual country acting alone may have reasons not to adopt Gee trade. New trade models show that ids possible (not certain) that such tools as export subsidies» tempo・ гагу tariffs, and so on, may shift world specialization in a way favourabletothe protecting nation. (Kmgman> 1990, PP>1⅛3)

What are the effects of protection? In traditional trade models a tariff or impon quota raises the price of a good for beth domestic producers and domestic consumers.

the actual location of production is to some degree indeterminate. Yet what the example of Seattle suggests, ฟ what is explicit ỉn s٠me٠fthe models, isacrucialrole

countries protect domestic aircraft industries। and the result will be afiagmented worldmarket in which losses arise nut only from failure to specialize in accord with comparative advantage but also from ineficient scale production. On the otherhand, an individual country that protects its aircraft Industry might conceivably increase the scaleofthat industry sufficientlytoreapanet benefit, possibly even lower prices to domestic consumers.

posd ٠f completely. Yet the new theory introduis a ing retums keep the industry there, whole set of new possibilities and concerns.

This certainly sounds as if the new trade theory not onlyrepresentsamajorchange from classical views٠ butoffersconsiderablescope for government inter- vention. And many people, ranging Gom Clyde Prestowitz(1992)to LauraD*AndreaTyson(i992)| have in fact taken this theory as a green light to advocate more or less aggressive, neo-mercarti∏st

countries are different. Canada exports wheat to Japan reduces imports, ami generally| except in some well־ because Cιnadahassoιnuch more arable land۶er٠،u>/ra٠ understood cases, is abad thing In new trade theory the

result could be either much worse ormuch better. Letali

added to this story| Why are aircraft manufactured in Seattle? It is hard to argue that there is some unique policies، So why are noneofthe people whocreated

the new trade theory Strategists? What is the

P. R. Krugman

dieomtical. It rests on three main observations. memories), a standardized product with much

for 64Ks, only some of those into the market for

pretty much alike, each imperfectly competitive

domination of the market for DRAMs would even-

Sθft⅛ ,..

industηr.

23

sectors) and as a supposed demonstration of the superiority 0fJapanese industrial policy over Ameri⅛ can laissez∣faire. Indeed, even in the early 1990s James Fallows (1994) used the example of silicon

The (Hultyofconverting the theoretical possibil* imagined. And DRAMs themselves havetind out ity of sưategỉc trade policy into practical policy not to be the narrowing circle everyone had ex- F&anmendationsiswell illustrated by theshghtly psted: the Japanese producers have faced new 8mica1story of punditry on the semi8nductor 8mpetition,mainly&omdevelopingAsiannations

butalsofkomre-enteringUSproducers. In short, the 8nventional wisdom on the nature of the market

During the 1980s the manufacture ofchips t∞k on imperfections in semiconductors appears, at this a sort of iconic status, both as the supposedly point, to have been almost completely wrong, canonicalexamρleofhigh∙technology industry (al~ And the semiconductor industry is, as modellers though it is very different from other high-tech of industrial policy can attest, a comparatively

the presumed spill-over between DRAMs and other chips was illusory, or anyway much weaker than

easy market to study: its technobgy and product are relatively well-defined, as compared with such amorphous and complex industries as tele∙ communications.

chips to argue for the bankmptcy of conventional economic analyst. And semiconductors is def〉 nitely an industry that departs in important ways

V. FROM STRATEGIC TRADE POLICY TO CYNICAL REALISM

as drcmft; but if you are asked, say, to provide a tually give a sew Japanese Arms both a monopoly qiuỂạtíve assessment of the likely effects of an position in that market and technological dominance e3cppt∣ subsidy,you quickly realize that there isabig of the industry as a whole. d(٠1।ce between knowβ1galotoffacts and really k≡σ⅛Hngba∏1afketworks. And worseye‰ifyou But it has not turned out that way at all. America's ฟ٠٠٠ฬ happen really to figure out aircraft, you will semiconductor 8mpanies have retained and even itHverylittleofthatknowldge generalizes to increased their technological edge in sophisticated ¢0।٠ers٠ which are in turn utterly different from special-purpose chips| despite losingthe mass-pro। telecommunications, which do not at all resemble du๗íฑemory market toJaρan-so itturns out that

iqduspy is imperfect in its own way. It may not be The conclusion, then, was that Japan's apparent ।।ฟ 10iκ)und sophisticated about an industry such

larger sales volume than more differentiated First, ٩vhile it may seem easy in theoretical।ทฝ«1ร chips; and (ii) the market for DRAMs was a t&s*He%8h@itionsfbrpstmtegictradepolicy,it steadily narrowing circle—only some ofthose who i٠Meft1elyharàt٠&anš٠8te01ose conditions into had produced 16K DRAMs made it into the market pca⅛like for real:jbdustries. The reason is t№t He all perfectly competitive industries are 256Ks, and so on.

A Realist appreciates the sophistication ofclassical from the classical assumptions: there are strong tradetheoσ^talso acknowledges its incomplete- economies of scale, b>oth at the level ofthe individual nẹssị he is willing to take seriously the ideas of the producer and, if real estate prices in Silicon Valley newtradetheonsts(esp9uallyifħe is one of them are any indication, at the level of the industry. Ma1Mtf), 4∣M∣tιθ e∣inetfie possibilities for ρroduc- tiyeς⅜rtares from fτe^He⅜ None the less, he Buttosoilateauålpolicy,onemusthave more d٥e٠¿c٠ábtheintervef#ioríistpf٠pensitiesofthe than a general sense of th： existence of market

S⅛dAt, because he r"ard$ acting on the theo- imperfections: one must be much more specific. reticA|ppß$ibilitiesf<)r^ivismtobevktuallycertain Circa 1989, the conventional wisdom on semicon- to do ino« harm than good. ductors was based on two propositions: (i) the key

to the industry—its，technology driver'—was the Tħi∣∣1⅜ement is essentially empirical ratherthan manufacture of DRAMs (dynamic random access

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^Hcies almost always Uκπ1out to be very small|

0r$ES billion. That may sound like a lot—but it is word in its index. So why are there so many councils only।fortieth of ] per cent of America,s GDP٠ on competitiveness. White Papers on com^titive־ And this is a wildly optimistic scenario; n٠ real ness, and so on? Why have most people who think

issue devoted to the subject?

makers are very unlikely to understand any of this. debate over competitiveness is simply a matter of

24

able to make it appear to be more than a very marginal issue for overall economic success.

Strategic trade policy is likely to be anywhere close about international Uadecometouse ،competitive। to tnιs cfl⅛ctιvc. The fact is that nobody who has ness٠ as perhaps the central concept of their world- ฟ1๗ strategic ฟ¢ policy quantitatively has been view? Why, indeed, does thisjouil have a whole

What this means is that the Strategist who goes to politicians with clever ideas for sưatộgic trade

Again| itcannot be emphasized too much ⅛talmost time-honoured fallacies about international trade everyone who matters is a Mercantilist. І have being dressed up in new and pretentious rhetoric, myselfuiedtomakethenumerical argumentabove to business leaders and pundits who regard them- But it is.

Ιbeeιpleofsemiconductoι*sshowS5then,thatit selves as well*infoπned about international trade, is extιely hard to gain enough undeKling of They invariably objecttothe idea that only the wage an im^rfectlyιpetitive industry to sormuiate an premium representsanet gain, wωting to counta⅛l effective legie policy. But modellers of such ofthepeopleemployed in producinggoods fbrthe indusMes have also leamdιething else: even if Japanese marketas a net addition to employment youthinkyoudounderstandanindustryweHegugh ๗ indeed wanting to invoke multiplier effects as to devise anacttv1stpoiicy9or are willingfortheģ weΠ. In short, they do not undersid even the most ofargu|ttoa5sumethatyourmodel is really gcx×i basic adding-up constraints. enou٠1, estimates ofthe gains from strategic tmde

This is not an easy point to explain without going policîesískiddinghimselfHemay imagine that they throughtliedetailsofthe extensive mฝe။ỉიgefforts value the contentofhts ideas. Infact,theyvaluehim in this area; interested readersmightwanttol∞k at because what he says seems to confirm to them Krugιan(l SmiÜ1(1994)sorasampling ofarti∣ theirMercantilistviews>wdabsoIvesthem from the cles٠ However, the main point may be conveyed by need to understand even classical, let alone 'new', ιιde⅜ a hypothetical scenario. US officials ưade theory. Or, to put it more bad!y٠ Mercamt।־ have argued that a true opening of the Japanese ists value Strategists not because they want to be marinightbd to $20billion annually in Üional sophisticated but because they wito seel soρhis∣ US exports, many of them hi^∣technotogy prod- ticatd| without actually havingtogiveup theircrnde uct&; ฟ they have argued that such expons are but satisfying views. The Realist understands this, desirable because these are high-wage sectors, and thus ends up sounding very much like aClassi- W٠lk ail ofthis can be quantified. Value⅛added per cist in denouncing Mercantilists. woricerinhiøH0chnologyindustriesisabout$80^(XX); thus$20billionwouldmean250,000suchjobs.The wagepro1nιι in high-tech has been estimated by VI. THE IDEA OF COMPETITIVENESS Tyson (1992) at 15 per cφt↑ or about $6,000 p" worker. So under sevourable assumptions the net Economists, in general, do not use the word ،com। gates in wages to the USA if Japan were to give it petitiveness١٠ Not one of the textbooks in interna* cveryỂi٠gitwant٥d would be 50>000tιmes250,000 tional economics ل have on my shelves contains the

As І said at the beginning of this piece, most of us Giventhiscconomicbackgroun^itisverydιfficult would like to believe that great public debates are to formulate strategic bade policies, and the evi٠ driven by serious intellectual concerns. We would dence we have suggests that> even if you could, it therefore like to believe that if tamed intellectuals WOU Id not be worthmuch to the economy—one then and poweģl politicians talk about，competitive・ arrives at the final reason why new trade theorists ness', they must have something meaningful in are generally Realists rather than Sưategists: policy־ mind. It seems far too cynical to suggest that the

Ρ٠ R· Krugman

REFERENCES

25

Commission ٠ftheE।peanC٠mmunit।es(1993)٠٠GroỂ,Competitiveness٠Empì٠yment: The Challenges andWays Forward into the2!st Century', Bulletin of the European Communities, June.

FMow‰i(i994)iLookingattheSunzTheRiseofrheNewEastAsianEconomicandPoiiacaiSystemi New York, NY٠Panthe٠n1

Krugman, P. R. (1990),氏已而加必叫加切力々"。״。/ Tradey Cambridge, MA, MIT Press. — Sm1^M٠A٠ M.(fids)(↑994)9EmpiHcalSħιdiesofS(rategicTradePolicyiChiCΑgoΛi, UniversityofChicago

Press. Pre٠itz,C.(1992)٠،Bey٠ndUissezFaire։,F٥re/gwf٠/ìợ,87١67֊87.

١f١\Economic Battleamong Japan. Europe٠anđAmerica٠١٦w١٠xk١၊ ع।1»حس٠1٦١€ح٠اا〇11١١اس€ا।١لم٠لم١ةولآ،၊لآآ M٥၊٠

Tyson, L. D٠٨. (1992), Who's Bashing Whom? Trade Conflict in H9"ec^κo∕ogy Industries^ Washington. DC, Institute for International E∞nomicsr