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Topic 2 “Mercantilism” – China: Mercantilistically Astute but Socially Impaired

October 19, 2010

Excerpt:

Today’s topic “Mercantilism,” is the 2nd part of a discussion series exploring the international, political, trade, economic, and technology policies causing U.S.’s trade imbalance with China and impeding U.S.’s “claimed” initiatives of energy independence and reduced reliance of fossil fuels.

Now that a somewhat level playing field between nations has been established, it is necessary to develop a basic understanding of the building blocks of international trading. Forgive me for digressing but before we discuss today’s topic “Mercantilism,” a comment received by a close friend Dr. Jim Underwood, Professor of Mgt. at Dallas Baptist University, Consultant, and Author, is noteworthy:
 
“While China has been moving toward the explosive benefits of a free market, the US has been moving toward a government managed (socialistic) market. It must be remembered that China will do what it has to do to gain global superiority. To think that our government can somehow deal with this problem is a bit of folly.

Our intel folks, if they could, would tell you a much different story. At the end of the day, China only understands power. While they are using our consumer dollars to build their economy, they are simultaneously building the most powerful military force in the world (that’s the public side of what they are doing).

In much the same way that Japan’s 7 Keiretsu expanded to every industry (including raw materials), the Chinese are doing the same thing. Note what they are doing in Africa and South America.

The solution: Free the American economy. Restore the economic engine that has served us so well. The Chinese now own America (all of our debt), and the only way to work our way out of that hole is to return to the free market principles that created this great country.

The Chinese themselves have told us that our move toward a government controlled economy will be disastrous. (Ironic, isn’t it?)

Finally, the Chinese could give a flip about green, or energy conservation. It’s impossible to pressure the 500 lb gorilla if brute force is the only thing they understand.”

Now back to “Mercantilism.” According to Wikipedia (http://tinyurl.com/barry-stevens83), mercantilism
is an economic theory, thought to be a form of economic nationalism, that holds that the prosperity of a nation is dependent upon its supply of capital, and that the global volume of international trade is “unchangeable”. Economic assets (or capital) are represented by bullion (gold, silver, and trade value) held by the state, which is best increased through a positive balance of trade with other nations (exports minus imports).

The theory assumes that wealth and monetary assets are identical. Mercantilism suggests that the ruling government should advance these goals by playing a protectionist role in the economy by encouraging exports and discouraging imports, notably through the use of subsidies and tariffs respectively. Basically It is a theory that says a nation’s power is based on its wealth. The theory dominated Western European economic policies from the 16th to the late-18th century.

Broadly speaking, the converse of mercantilism is “free trade”.

Mercantilist points, wordiq.com (http://tinyurl.com/barry-stevens82):
• Nations are in a direct zero-sum competition with each other for wealth
• Gold and silver bullion are synonymous with wealth

The main objective of these precepts, which would define international relations for centuries, is that a country needs a positive balance of trade to gain more precious resources. Each nation has to export more goods and services than it imports, except for nations that can produce a lot of their own precious metals. From a mercantilist perspective, England established colonies in the western hemisphere to have an independent source of timber, rather than depending on purchases from the Baltic area; this was important in ship-building, and thus in maintaining naval power. Mercantilism fueled colonialism under the belief that a large empire was the key to wealth.

A key tenet of mercantilism is that exporting raw or unfinished materials disadvantages a nation, as greater wealth results from performing value-added manufacturing work within that nation. Thus England, for instance, banned the export of unfinished cloth to the Netherlands.

Reliance on foreign trade is also harmful. Thus England passed the Navigation Acts, requiring that ships entering English ports either be English or be carrying goods from their country of origin. This prevented the Dutch from most trade with England (as they produced few goods of their own).

Mercantilism also fueled the intense violence of the 17th and 18th centuries in Europe. Since the level of world trade was viewed as fixed, it followed that the only way to increase a nation’s trade was to take it from another. A number of wars (for example, the Anglo-Dutch Wars and the Franco-Dutch Wars) can be linked directly to mercantilist theories.

One key complaint of American revolutionaries in the late 18th century related to the British use of tariffs. Mercantilist theory implies that if one wants as much gold as possible in one’s empire, one’s colonies cannot trade gold for international goods. Thus, trade restrictions limited commerce with outside powers, forcing colonists to buy finished goods only from their ruling power, and keeping prices higher than Adam Smith would have viewed as efficient. The presence of a small Caribbean island (St Eustace) owned by the Dutch, who had supported the idea of free trade since the days of Hugo Grotius (1583 – 1645), played a major role in the revolution that followed. The island was open to all and had no tariffs whatsoever. After the Declaration of Independence, its governor decided to salute the USS Andrea Doria, a warship under the flag of the Continental Congress. This was the first recognition of the United States as an independent country.
 
Elements of mercantilist theory have remained in economic discourse throughout the years. There is a limited amount of gold in the world and, more importantly today, a limited amount of oil. A key motivator of Japan’s World War II expansionism, for example, was the need to acquire control of natural resources, primarily petroleum, as well as others including minerals, timber, and rubber, which the Japanese islands lacked in bulk. Latin America’s Cold-War Populism, and import substitution economic schemes, along with past and present Marxist theories, rest on the belief that the colonial economic structures still remain in place, with raw-goods exporters at odds with what equates to finished-goods exporters. (McDonald’s products, for example, are in their own way finished goods.)

Mercantilist theory also influences the notion that trade surpluses are automatically good and that trade deficits are automatically bad. Some economists argue that Japanese trade policy in the 1970s and 1980s was in large part based on mercantilist concepts and that these policies form one of the causes of Japanese economic stagnation in the 1990s. Hence, one result of the growing deficit of the USA was that the American financial markets offered good investments and growth, whereas the Japanese market languished and financial returns were meager if not negative. Japanese banks also offered interest to depositors of less than one quarter of one percent. This reality contradicted mercantilist theory that a trade surplus and appreciating currency are automatically good.

So how does this relate to the current landscape, In “Chinese Mercantilism Hindering U.S. Economy,” that appeared in “Economy in Crisis – America’s Economic Report,” September 3, 2010 (http://tinyurl.com/barry-stevens84), Joshua Sanders reported “China will stop at nothing to ensure that the rest of the world partakes in no protectionist measures, but they are perfectly happy to implement many of their own. China continually blocks access to its market, manipulates its currency, subsidizes entire industries and uses their state-owned companies to tilt the world’s markets in their favor.”

In closing, as stated in “The Economist,”  an export-oriented development strategy, and particularly one which uses currency manipulation to create a competitive advantage, has seemed to bear fruit for a number of countries. But it’s not clear how much better that strategy might have worked than simple floating exchange rates, and the strategy also depends on willing foreign markets. What exactly does that tell us about mercantilism more broadly? That if we fiddle around with generally harmful policies for long enough, they may occasionally (though we can’t be sure) generate a serendipitous result?  The Economist, Jul 14th 2009 (http://tinyurl.com/barry-stevens85).

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