The New Mercantilism

As the United States hurtles into debt oblivion with stagnant unemployment rates, job losses per state at record highs, and consumers fearful of the inevitable wave of inflation due to the Federal Reserve's shameless and illegal obsession with the sweet-sounding "quantitative easing" (debt monetization), Americans are searching for explanations.  Aside from hostilities created by a tumultuously militarized foreign policy, how does America present itself to the international market?  Do we come in peace by encouraging free trade across borders with consumer interests as our priority, or do we come bearing the flag of colonial mercantilism to wage war under the guise of "protecting our own"? 

A close look at the recent WTO-approved U.S. protectionist efforts to raise import taxes on Chinese tires reveals a disquieting reality of perpetual conflict for both U.S.-China relations and American domestic interests.

In British and American Hegemony Compared: Lessons for the Current Era of Decline, David Lake explains, "From the sixteenth to the eighteenth centuries, the international economy was dominated by mercantilism -- a pervasive set of state regulations governing the import and export of goods, services, capital, and people" [1].  This form of economic policy has infiltrated U.S. foreign trade operations throughout the nation's history, but as the world continues to move toward increasing economic globalization, such an archaic, protectionist mentality is proving to be counterproductive at best -- not only for the consumer (everyone), whose voice is never heard, but also for the very thing it was designed to protect: jobs.

Elizabeth Williamson and Tom Barkley's piece, "U.S. Beats China in Tire Fight," which appeared in the Wall Street Journal in December, highlights the all-too-familiar argument that protectionism, or the promotion of implementing or raising import taxes, is necessary in the battle to "protect American jobs."  The title of the article alone is a clear indication that the authors have an impetus to combat free trade -- not government-managed -- initiatives by promoting higher taxes and furthering government control of the market.  Williamson and Barkley applaud the World Trade Organization's "dispute-settlement panel" for ruling in favor of President Obama's push to discriminatorily raise taxes up to 35% on Chinese tires.  The first sentence in the piece reports, "The World Trade Organization handed the U.S. a big victory in a fight with China over tire imports[,]" and later, the article explains why this apparently was a big victory for America:

The ruling was a victory for the United Steelworkers union, which has lodged a series of trade complaints against China. President Leo Gerard applauded the Obama administration for "standing up and defending American jobs."

Williamson and Barkley are attempting to correlate the interests of a powerful union with the interests of the much broader United States.  Bailey, Goldstein, and Weingast provide insight perfectly suited to make sense of this staggeringly fallacious parallel.  In "The Institutional Roots of American Trade Policy: Politics, Coalitions, and International Trade," they explain:

Those who lose from increased trade have a greater incentive to organize than those who benefit from the policy. The outcome is an overrepresentation of protectionist interests and constant pressure on governments to close markets. Although logically consistent, the conventional view suffers from the empirical problem that democracies have and continue to support free-trade policies. [2]

In other words, the elite special interest groups have a greater incentive to organize and rally the government when faced with the "threat" of competition than do consumers, which group includes everyone who benefits from increased trade that inevitably reduces prices and increases quality of production.  Lobby groups, therefore, are skewing the scales in their favor by applying pressure to Washington for the interests of the few and the elite over the interests of the greater American good.

This creates a dangerous cycle of market envy in other sectors of the economy that feel they are being unfairly discriminated against.  An early historical example dates back to the unraveling of the British Corn Laws of 1846, which were enacted to protect the agriculture sector -- wheat farmers in particular -- by limiting entry of foreign competition into England [3].  But as Cheryl Schonhardt-Bailey points out in "Free Trade: The Repeal of the Corn Laws," "[a]s the industrial prosperity and export boom of the early 1830s began to crack, industrialists became increasingly vocal about ‘unfair' protection enjoyed by the agriculturalists" [4]. 

Thus the political carousel of production-side groups rallying to the cause of protectionism, further misrepresenting the interests of the consumers and sending destabilizing ripple effects through the markets.  The real price being paid here is a direct result of this dizzying effect of increased consumer vulnerability.  Increased special interest involvement in government trade policies is directly correlated with increased abuse of consumers.  As more lobbies convince Washington to increase tariffs, government expands because the government seizes more market power that ultimately leads to restricted, inefficient, low-quality production. 

While the banner of good intentions or "job protection" is raised by the special interest groups when championing such mercantilist trade policies as increased taxes on Chinese tires, rarely are the results of these "good intentions" placed under close scrutiny.  Questions tend to arise, like "What about all the industries heavily invested in tire purchases?"  "How would this affect their employment rates?"  "What about all the jobs lost or never created because of the increase in the price of tires due to the shift of the tax burden?"  "Do tire corporations have the right to raise the price of tires for all Americans simply because they can't survive without their big brother taking care of the big, mean, competition-driven bullies when the latter come to town?"  "And what about domestic competition?"  "Perhaps the U.S. should tax other successful American companies who are 'too successful' if they outperform others in the same sector, causing a decrease in employment and productivity.  On what principle(s) are these preferentially selected actions justified?"

It doesn't take a Newtonian physicist to understand that when you raise taxes, the burden is shifted onto the back of the consumer.  It would be incredibly disingenuous for the government to think it can protect jobs by raising taxes on foreign producers.  But this is exactly the problem -- the government's innate failure to consider long-term effects due to its fetish for short-term political gain.  According to China Daily regarding the tariffs proposed by the Obama administration, Vic Delorio, executive vice president of GITI Tire Ltd, a member of the American Coalition for Free Trade in Tires, issued a response to the verdict by stating, "This decision will cost many more American jobs than it will create.  It will also increase costs for, and take away choices from, American consumers."

Furthermore, what kind of economic blowback will U.S. domestic markets absorb as a result of this blatant assault on Chinese tires?  Williams' and Barkley's piece admits that the call for increased tariffs has provoked greater tension between the two trade giants in recent years.  China not only brought the issue before the WTO but also responded in kind by announcing a wave of taxes on U.S. nylon, chicken, and various other exports.  Again Newtonian physics prevails by proving that these "good intentions" to safeguard American jobs will only boomerang. 

A final argument worth debunking is that of comparative advantage, or China's ability to produce at much lower costs given China's massive labor force and vague labor laws.  After all, doesn't the U.S. need protectionist policies when companies can't compete because they encounter such a disadvantage against China?  If companies can't compete, then they're inefficient and exist only because government provides them with unnatural advantages.  Cheaper tires means a vast number of other producers save money, experience growth in jobs, and increase specialization.  Not to mention the entire silent consumer majority saves money by spending less on tires, which naturally invites spending on other consumer goods creating a recycling effect back into the economy.

Lake posits the following notion regarding the dire historical consequences of resorting to a mercantilist approach to trade:

During their ascendancies, both Britain and the United States played leading roles in opening the international economy. And in both cases, brief successes were soon followed by increasing challenges to global liberalism. The parallels are clear. The historical analogy suggests a period of increasing economic conflict, a slide down the "slippery slope of protection," and a return to the beggar-thy-neighbor policies of the inter-war period. [5]

The quote commonly attributed to Mark Twain -- "History never repeats itself, but it often rhymes" -- is a powerful reminder that America needs to regain consciousness and lead the world, once again, away from the dark side of protectionism and into the light of free and open commerce.  If Americans choose to let special interest groups and Washington continue to flagrantly abuse consumers, the beacon of light on the hill will fade into another rhyme in the history books.  In the wise words of the recently appointed chairman of the Domestic Monetary Policy Subcommittee of the House Financial Services Committee, Texas Congressman Ron Paul, "Let the rest of the world hurt their citizens with tariffs; if we simply reduce tariffs and taxes at home, we will attract capital and see our economy flourish."

[1] Lake, David A. "British and American Hegemony Compared: Lessons for the Current Era of Decline." International political economy: perspectives on global power and wealth. Frieden, Jeffry A., David A. Lake, and J. Lawrence Broz. 5th ed. New York: W. W. Norton & Co., 2010. 140, 143.

[2] Bailey, Michael, Judith Goldstein, and Barry R. Weingast. "The Institutional Roots of American Trade Policy: Politics, Coalitions, and International Trade." International political economy: perspectives on global power and wealth. Frieden, Jeffry A., David A. Lake, and J. Lawrence Broz. 5th ed. New York: W. W. Norton & Co., 2010. 422.

[3] Schonhardt-Bailey, Cheryl. "Free Trade: The Repeal of the Corn Laws." International political economy: perspectives on global power and wealth. Frieden, Jeffry A., David A. Lake, and J. Lawrence Broz. 5th ed. New York: W. W. Norton & Co., 2010. 88.

[4] Schonhardt-Bailey. 2010. 89.

[5] Lake. 2010. 143.
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