Free Trade Versus Mercantilism

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Much has been written about the need to keep trade "free," but in reality there is a surprising amount of trade not based on that idea at all. A great deal of present trade is based on a centuries-old approach to economics: mercantilism.

From the Library of Economics and Liberty:

Mercantilism is economic nationalism for the purpose of building a wealthy and powerful state. Adam Smith coined the term “mercantile system” to describe the system of political economy that sought to enrich the country by restraining imports and encouraging exports. This system dominated Western European economic thought and policies from the sixteenth to the late eighteenth centuries.

The goal of these policies was, supposedly, to achieve a “favorable” balance of trade that would bring gold and silver into the country and also to maintain domestic employment. In contrast to the agricultural system of the physiocrats or the laissez-faire of the nineteenth and early twentieth centuries, the mercantile system served the interests of merchants and producers such as the British East India Company, whose activities were protected or encouraged by the state.

Most economists today will argue that mercantilism is dead... or should be. But the truth is that many nations in the 20th and 21st centuries have used some form of mercantilism to gain economic advantages... including the U.S. A lot of what is mercantilism brings on the image of "sweatshops" where people worked long hours for little pay under horrible conditions. That was certainly a facet of the way mercantilism was implemented. But it is not necessarily an intrinsic part of that approach.

After WWII, Japan turned to mercantilism to rebuild... and it was spectacularly successful. Taiwan and Korea have implemented similarly successful efforts to build the wealth of their nations. Now China has turned all previous efforts in this vein into pathetically amateurish attempts. And, yes, economists continue to say how bad it is for those countries and how they are subsidizing us and how it only helps us.

But when you step back and look at what has happened in the past few decades, you begin to see the rusting of America's economic engine in favor of a system that manipulates financial instruments. That worked for awhile, but the house of cards has come crashing down with very little upon which to fall back. Our trade and tax policies have aided the mercantilists while crushing our own manufacturing.

[click image for larger view - U.S. BLS]

But the refrain from the economists is that we are moving toward a post-industrial, post-manufacturing economy into an intellectually based one. Sure, except look at which countries are producing the most Ph.Ds. Fully one-third of U.S. doctorates are to foreign students [which I guess you can argue is part of our intellectually based economy... while they are attending our universities]. But they go back to nations that actually need expertise in making things.

Look at which country has abysmal high school graduation rates.

Look at which country believes its future can be secured by government loans.

Go ahead; look!

We like to pretend that there is free trade, but that hardly exists. Some cry out for "fair trade," but they can't really define what that is. Trade should be based on self-interest, but we tend to look at self-interest only in the sense of the "immediate transactions" rather than the long-term impact on our system.

We have ceded our manufacturing competitiveness on the hollow premise of becoming the intellectual supplier to the world. The problem is we simply don't have the "intellectual workforce" to make that happen for more than a small segment of our population.

Now we are simply another debtor nation with a growing welfare demographic. And China, our creditor, has other plans.

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