Mercantilism – The Bane of Free Trade

When Robert J. Samuelson wrote in Newsweek about the similarities of Vladimir Putin, China’s currency, the US-Peru trade agreement, and Hugo Chavez, he was not joking. All of the items stated above mark the adoption of policies that are intended to advance their own economic and political interest at the expense of other countries.

Mercantilism is an economic philosophy that favoured large surpluses in economic trade (more exports than imports). Trade was a stepping stone to military and political power as exports earned gold and silver (or currencies like the US$) which then can used to finance large armies and navies. A strong military arm would then be used to secure trade in more markets and would also be used as a trump card in negotiations (a hostile navy at your coastline always gives you extra leverage and bargaining power).

In history, one can find traces of mercantilism in the Opium Wars fought between China under the Qing Dynasty and the British Empire. High demand of tea, silk, and porcelain in Britain and a low demand of for British Commodities in China caused a large trade deficit between China and Britain. The British East India Company countered this deficit by illegally exporting Opium into mainland China. The trade embargo in 1839 triggered the first and second Opium War in which Chinese Empire was defeated by the more modern Western forces.  

Mercantilism suggests that the government should play a protectist role in the economy by encouraging exports and discouraging imports especially through the use of tariffs. In the 21st century, the undervalued renminbi is the prime example. China’s artificially cheap currency puts the entire world (even India and Brazil) at a disadvantage (it is cheaper to buy Chinese goods with foreign currency). In 2007, the current account will register a $400 billion surplus according to economist Nicholas Lardy of the Peterson Institute.

Ironically, it seems it is now China’s turn to use mercantilism against the Western world.

Source: The Economist, Newsweek

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