International Trade: Implications of Lagging Productivity Growth

Implications of Lagging Productivity Growth Each nation enjoys a comparative advantage in some products relative to its trading partners. Although the lag in productivity growth in the United States in the 1980s has contributed to a loss of comparative advantage in some industries, the United States retains a comparative advantage in many other products and is gaining in still others as the pattern of productivity growth changes. Further, as time goes by the United States is likely to gain a comparative advantage in new products it develops. Since 1985 U.S. manufacturers have begun to close obsolete plants and apply improved technology and management techniques that promise to result in future gains in productivity. Since 1985 productivity growth in U.S. manufacturing has begun to approach 3 percent per year. In addition, U.S. research in new technologies, such as superconductivity, may lead to the development of new products in which the nation will enjoy a comparative advantage. What are the implications for U.S. workers of loss of comparative advantage in particular export markets? Obviously, workers in industries such as steel and electron-ics, where comparative advantage has been eroded, will be harmed more than other workers. However, keep in mind that all nations enjoy a comparative advantage in some goods and services. For example, notice that, in the example from the previous section, the United States will enjoy a comparative advantage in food production relative to Japan when it loses its comparative advantage in steel production. When the opportunity cost of a ton of steel in terms of food in the United States rises above that in Japan, the opportunity cost of a ton of food in terms of steel must fall below that in Japan. The impact of this adjustment process, however, is bitter medicine for U.S. workers in industries where comparative advantage is being eroded. As a result of lagging productivity gains, their wages will necessarily fall relative to wages enjoyed by workers in competing nations. For industries in which comparative advantage has been lost, some workers with specialized skills and other owners of specialized inputs will suffer permanent reductions in income. Some of these workers must find work in other industries because the demand for their services decreases along with the demand for exports of such goods. It's clear that, in recent years, the U.S. steel and electronics industries have undergone such disruptions. Similarly, disruptions have occurred in the textile industry, where lagging productivity growth has caused the United States to lose comparative advantage in international markets. A key to keeping productivity growth high is adequate productive investment in new equipment and plants, and research and development of new products. Business investment in the United States has lagged in recent years, and many economists believe this is the chief cause of the nation's decline in manufacturing productivity. Between 1975 and 1987 annual investment in the United States averaged 17.3 percent of GNP. Over the same period, six other major industrial nations (Canada, France, Italy, Germany, Japan, and the United Kingdom) invested 22.5 percent of their GNP. In Japan, gross investment from 1975 to 1987 averaged nearly 30 percent of GNP. When investment doesn't grow quickly enough, workers have less capital equipment and less modern technology to work with. The reduction in capital per worker decreases productivity and contributes to declining wages. In addition to decreases in investment, increased government regulations to improve working conditions and environmental quality as well as rising energy prices are believed to have contributed to the U.S. productivity decline of the 1970s. We can get a rough idea about the areas in which the United States has a comparative advantage by looking at the balance of trade in recent years. In the 1970s and the 1980s the United States consistently exported more chemicals and aircraft than it imported. It also exported more agricultural products than it imported. During the 1970s and early 1980s the United States was a net exporter of semiconductors, computers, and copiers. However, by 1983, the balance of trade in this area shifted and now it imports more of these items than it exports. Thus, we have probably lost our comparative advantage in major portions of this hightech market. Similarly, in the mid-1970s the United States became a net importer of machine tools, perhaps indicating a loss of comparative advantage for such products. The United States has consistently imported more automobiles, consumer electronic products, steel, and textile products than it has imported throughout the 1970s and 1980s which suggests that we do not have a comparative advantage in the production of these goods.