Triumph of the mercantilists

Triumph of the mercantilists

The post World War II global trading system has always favored the mercantilist nations, but the GATT (General Agreement on Tariffs and Trade) and its World Trade Organization (WTO) successor were always more or less controlled by free trading countries and had as their Director a passionate devotee of free trade.

Now, with the elevation of  Brazil’s Roberto Azevedo to the Director’s position, the mercantilist foxes have taken charge as well as advantage of the WTO chicken house.

Of course, this is not a personal commentary on Azevedo himself. For all I know, he may, in his heart of hearts, be as passionately devoted to free trade as any of his predecessors. Only time will tell. But he got to the top as a leading spokesman, negotiator, and policy maker for Brazil, a country especially noted for its subsidies to and protection of target industries. He also got to the top largely with the support of China and other emerging market countries with the mercantilist inclination that springs naturally in the souls of countries bent on development and the creation of new comparative advantages. The alternative was former Mexican Minister and North American Free Trade Agreement negotiator Herminio Blanco who both personally and as the representative of Mexico is without doubt  an apostle of free trade. He had the support of the United States and the EU, the major free trade economies. That he was not chosen suggests that, at least for the moment, it is fair to say the mercantilists are in charge.

This, however, may turn out to be a good thing by bringing to the fore a fundamental cleavage that has long bedeviled the WTO but that heretofore has not been addressed because of the inadequacies of international economic theory and the polite convention that has assumed the cleavage away.

The GATT and the WTO were founded on the notion, first articulated by David Ricardo in 1817, of naturally occurring comparative advantage. Each country has a resource endowment that enables it to produce some things better than it produces others. It should concentrate on producing those things it does best and trade for the rest. For example, Brazil has a tropical climate favorable for raising sugar cane. So it should concentrate on producing sugar and trade that for airplanes made in America or Europe. Under this doctrine, there are no special supports for particular industries and no managed exchange rates. The main barriers to trade are border measures such as tariffs and quotas. Thus the main object of trade negotiations is the reduction and removal of the tariffs and quotas. Once they are gone, it is thought that trade will be free and that it will optimize global welfare.

The idea that comparative advantage can be created or acquired through use of protection, subsidy, management of currency values, and regulatory policy is ignored or rejected and is not part of the comparative advantage doctrine.

Of course, every developing country, beginning with the United States after 1815, has used protection, subsidy, and other mercantilist measures to "catch up " to and surpass the economic leaders on the way to becoming developed countries. This has been particularly true in the post-World War II period after Japan demonstrated its mercantilist economic "miracle" in the early 1960s and the rest of the developing world began to heed Lee Kuan Yew’s advice to "look east" for guidance on how to achieve fast economic growth. 

Yet the polite convention or fiction has held that all GATT/WTO members are free market free traders who reject mercantilist doctrine and methods. This fiction arises from three sources. One is the U.S. geo-political priority which leads Washington to be patient with mercantilists who are U.S. geo-political allies. Another is the belief that the mercantilists will relatively quickly evolve into free trades. Yet another is the view of most professional economists that the mercantilists are only hurting themselves by providing underpriced goods and services to global consumers.

As a consequence, very few effective steps have been taken in the GATT/WTO system over the years to curtail or stop mercantilism. Of course, there have been many negotiations on subsidies, intellectual property, etc., but they have resulted only in half measures and the major issues of strategic currency management, investment incentives aimed at luring the off-shoring of production and R&D facilities, and cartels have remained largely off the agenda. A consequence has been the evolution of chronic, destabilizing imbalances in flows of trade and finance that have led to or exacerbated continuing crises. Now that the mercantilists are in charge perhaps we can dispense with the polite fiction and start confronting the hard, cold reality of the global economic system.