Prestowitz

Mercantilism is a state of mind

At today’s opening meeting of the German Marshall Fund’s Trilateral (EU, U.S., Japan) conference in Tokyo, the question of the future of the Euro turned into a discussion of German mercantilism. Top leaders and analysts from Europe, the United States, and Japan all seemed to agree that Germany is in the process of killing the ...

Sean Gallup/Getty Images
Sean Gallup/Getty Images

At today’s opening meeting of the German Marshall Fund’s Trilateral (EU, U.S., Japan) conference in Tokyo, the question of the future of the Euro turned into a discussion of German mercantilism.

Top leaders and analysts from Europe, the United States, and Japan all seemed to agree that Germany is in the process of killing the EU as we have come to know it. The consensus view seems to be that Germany is not only enforcing an unsustainable austerity on the rest of Europe (especially the southern periphery states of Portugal, Spain, Italy, and Greece) but that it is also unwilling to expand its own consumption and reduce its trade surplus as a way of stimulating growth in the rest of the EU. Indeed, rather than buy more from its EU trading partners, it is said to be insisting that they expand their exports to non-EU destinations, or, in other words, that they become Germans too.

The term mercantilist was regularly applied to Germany in today’s discussion with no denial from the Germans present or from any of the other participants. I found this interesting because Germany is always considered much more dedicated to free markets and less socialist than say the French, or Swedes, and certainly than the Italians. Yet, while mercantilism is not socialism, neither is it the laissez-faire that we associate with Anglo-American free market capitalism. Mercantilists don’t really embrace free trade. For them, the market is a tool rather than an end in itself. If the market can assist in achieving their primary goal of trade surpluses and large reserve holdings, fine, but if not, mercantilists do not hesitate to reshape the market. Germany is considered mercantilist because it does accumulate chronic current account surpluses, and embraces an export led economic growth model.

But mercantilism typically entails protection of the domestic market and/or subsidization of domestic producers. Penetration of mercantilist markets by foreign producers is typically much less than foreign penetration of more open, laissez faire markets. So the question today was: what are the barriers to foreign producers in the German market? It doesn’t have much in the way of tariffs, or quotas, or other formal trade barriers nor does it provide much in the way of export and production subsidies. So, in what does German mercantilism consist?

There seem to be two major and related factors. The first is the embrace of a philosophy of export led growth and of doing whatever is necessary to assure continuing trade surpluses. Thus, the German government coordinates constant discussions between labor, government, and industry to arrive at agreements on wages, investment, productivity gains, and prices that will assure continued competitiveness to producers based in Germany. Brutal austerity will be imposed on the German economy to keep it competitive. Moreover, this constant coordination and emphasis on competitiveness engenders a "Buy German" mentality that tends to hold down the share of the German market held by imports.  Of course, it is also true that enmeshing the German euro in a common currency with the euros of France, Italy, Spain, etc. also tends to keep the euro undervalued with regard to Germany. But in general we can say that German mercantilism is essentially a state of mind more than a collection of specific trade barriers or policies.  And this state of mind is fundamentally opposed to what countries generally think of as "free trade."

More important is the fact that this situation is not characteristic only of Germany. It is also true of Japan, Korea, China, Taiwan, Singapore, the Netherlands, Malaysia, Vietnam, and Brazil to name just a few. In other words,  the bulk of the global economy is more oriented toward mercantilism than it is toward free trade. That being the case, it suggests that continued calls for more Free Trade Agreements like the U.S.-South Korean FTA, or the Trans Pacific Partnership are unlikely to produce deals that will relieve current imbalances and tensions. Indeed, that may not even be their purpose at all. More on this later.

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