Reforming the New Mercantilism

Strategists these days are muttering that a “great rebalancing” is underway in economic relations between nations.  The piper has shown up to collect his wages for the enormous trade surpluses and deficits that major countries have developed over the past few decades.  We have been living through a resurgence of the Mercantilist economic theory popular in Europe during the 16^th to 18^th century age of exploration, when the world was neatly divided into advanced producers of finished goods and colonies which must accept what they are provided.  The object was, like dragons, to collect the biggest possible hoard of gold bullion.  But this is no longer a world of colonial powers forcing the purchase of high-priced tea on reluctant Bostonians.  Reliance mostly on exports to drive a national economy, the defining characteristic of Mercantile Theory, assumes you can hold wages low in your own country and keep import tariffs high in order to pull in from elsewhere the money to keep you running.  Your business profits require your own continuing national austerity in order to sell affordable products to others. 

China has learned that its reliance on exports must now take account of its own domestic consumption needs, as Chinese workers whose low wages have supported cheap exports demand more goods and more pay to buy them with at home. China’s trade surplus, at 10 percent of GDP in 2007, has quietly shrunk to 2.5 percent in 2013.  The U.S. has steadily begun seeking ways to reduce its trade surpluses, both by refusing European austerity to combat recession, and as a natural consequence of American workers with less cash to purchase the foreign imports now grown costlier, and as a secretive process to facilitate more exports of American products through new trade treaties both with Europe and with Asia.  The only country that hasn’t yet got the message seems to be Germany.

Germany has been puttering along the last few years fiercely defending its own austerity policies and demanding the same austerity from its EU partners.  Its focus remains on exports, and its prescription to countries like Greece or Spain is that they should just tighten their belts and export more olive oil.  The Washington Post reports that German trade surpluses amount to over 7 percent of GDP so far in 2013, and the 2012 German current account surplus was larger than that of China.  The Post reports that a new U.S. Treasury report criticizes Germany for the way its anemic growth in domestic consumption harms its EU partners.  While its exports are booming, Germany maintains its domestic pressures to curb demand, and that in turn damages the inter-related economies of other European countries.  Southern European countries maintain their 25 percent and up unemployment rates, and Ireland’s unemployment has grown from 5 percent to over 13 percent.  Merkel sets her jaw and calls any change absurd.  As Europe’s German-enforced austerity deflates the whole of their economy, every one eats less, including Germans, while German banks and corporations build bullion hoards as though bullion was edible.  It’s not.

Recognizing that about bullion was in a way Adam Smith’s greatest contribution in his Wealth of Nations. It ended the old Mercantilism by teaching that economics is not just a manual of procedures for accumulating bullion. It is, at its best, a description of how people satisfy each other’s material needs by cooperative activity.  Smith turned the focus to the economy as the collective activities of people, but that got lost through the easy manipulation of his market concept.  Banks and corporations acquire bullion (or derivatives or mortgages) in order to sit on them like dragons and to brag about it in their annual reports.  People produce and sell goods and services in order to be able to eat and to feed their families.  It is the increasing dominance of corporations in shaping our policies that has caused our shift of focus away from that back to the new Mercantilism.

Perhaps China can lead the way on this subject.  As a very ancient culture that has seen a lot, China seems to recognize that the fundamental goal of government is to satisfy the needs of people.  Its historical focus has always been inward on maintaining its own stability.  Driving up exports while the people pinch pennies does not accomplish that.  Corporations produce profits, but it is people who riot in the streets.  China has recognized that and is moving away from its single minded emphasis on exports.  Its own historical culture may make Germany a slow learner, but the U.S. should also know through its historical experience that “we the people” is what economic policy is about.  We have entered a period where major moves are afoot to create free trade treaties with both the EU and with Asian nations.  The early signs are that they are secretive and dominated mainly by corporate interests.  That may, if not held in check, result in agreements with built in deflators of U.S.  jobs and wages, in favor of accumulating the profits of international corporations.  We don’t want to import the German disease in the name of reform.  We need more early visibility and discussion of what is being negotiated and possibly more early congressional inspection of it.  It might be a good time to ask your congressional representatives what they know about the negotiations.  Trade policy is too important a topic to be left to corporate lobbyists.