Is It Too Late For Free Trade and Comparative Advantage To Overcome Mercantilism?

I am struggling mightily to maintain my allegiance to Adam Smith and Milton Friedman and the rest of my homies, and to resist the allure of good old-fashioned mercantilism  (be it voluntary or retaliatory) when it comes to dealing with Asia.  Pieces such as the following just make my blood boil:

Granted, Nortel was enabled in its downfall by the incompetence of its senior management (especially, its feckless CEO, Mike Zafirovski), but still, the sheer scope and energy of the whole hacking enterprise are shocking.  As for the IPad matter, it appears to involve local Chinese firms whose main job is to scout foreign products and companies that are about to enter the Chinese market, and who are paid by local manufacturers and other companies to tip them off so that they can register the foreign companies’ trademarks first, which then gives them leverage to exact tribute from the hapless foreign firm as a condition of its entering that market – an activity that is called trademark “squatting” and is effectively invited by the Chinese government’s adoption of “first to file,” as the foundation of its trade mark laws.  (This problem is far less severe, though extant, in countries, such as the US, that award trademarks on a “first to use” foundation.)  These are just two examples, but there are many, many other mercantilistic policies, such as currency manipulation, tariffs, state subsidization of major companies and industries, etc., that indicate that any lingering hopes that we could all make nice and enjoy the benefits of the “comparative advantage” envisioned by Smith, Hayek, Friedman, and other free-market icons, are out the window, because we are already engaged in a trade war.

The free-traders’ goal has always been to avoid trade wars and their deleterious effects, and Smoot- Hawley and the Great Depression have been held up as examples of what not to do, but it appears we are well beyond all of that:  we are in a trade war, and we are losing, and there appears to be no reasonable alternative to fighting back.  It would be one thing to sit back and enjoy the one positive result that comes out of the Asian version of neomercantilism: the fact that it enables US consumers, and US businesses who buy Asian supplies or parts or who outsource labor to Asia, to buy goods and services on the cheap.  It is quite another to watch as the overall effect of these Asian policies upon US companies and industries that once were worldwide leaders in developing and producing and exporting their products and services, but are now being driven into insignificance by those policies.  It is painful to watch the US’s primary contemporary product, technology (and the intellectual-property rights therein), being transferred oversees, with or without compensation.  At the present pace of deterioration of the most-productive elements of the US economy, many (or most) of our most-productive individuals and companies will have exited the country or gone out of business before the comparative advantage of cheaper pricing of overseas supplies and labor can be of much use to them  – and the US may then be reduced to the status of a mere consumer of (mostly imported) products and services.

2 thoughts on “Is It Too Late For Free Trade and Comparative Advantage To Overcome Mercantilism?

  1. Surely there’s a measure of the laws and practices of the country that gets used in the final calculation of ‘Comparative Advantage’. And when this theft is measured and accounted for, is it safe to say there is little reason to continue operations? I wouldn’t advise a grocer to stay in business in a neighborhood where he was, daily, robbed of his produce. Seems we shouldn’t encourage Apple in this behavior either.

    Further, I wonder if it’s accurate to say this ‘Trademark Squatting’ practice is Asiatic… I’ve never read of it being practiced elsewhere in Asia. Maybe it’s just a case of biting the innovative hand which feeds you? How do you handle a biting dog? One thing you can do is stop feeding it.

    • Regarding the first comment by Mr. Voricelli (Comment responding to “Is It Too Late For Free Trade . . .,” posted on this blog on 2/16/12), the problem with trying to make a calculation of the impact of the“comparative advantage” of free trade is that the calculation would have to account for so many variables that any result would be completely speculative. A quick and easy alternative would be to simply look at where the US stands today, as a result of at least a decade of employing a nominally free-trade approach, in an attempt to counter the newly-aggressive mercantilism of so many other countries: the US, by any number of measures of economic growth and prosperity, has regressed significantly over the latest decade, while many of the mercantilistic nations have leapt forward. While it is possible that the contrast might be even greater had it not been for some of the offsetting advantages of (among other things) underpriced imports, it seems more likely that we would have been better off with a level playing-field – i.e., if we had been pursuing mercantilistic policies or if countries such as South Korea, China, Venezuela, etc., had opted for free-trade, non-mercantilistic policies.

      With regard to Mr. Vorcelli’s second comment, trademark squatting is practiced not only in China but in virtually every country that registers trademarks on a “first-to-file” (rather than “first-to use”) basis, and it is definitely a problem for outsiders in India, South Korea, and many other Asian countries; the US and most other English-speaking countries are the only significant ones that register on a first-to-use basis.

      I think it might be useful to define “mercantilism,” “mercantilistic,” etc., as I am using them. Mercantilism, in essence, is a nation’s use of governmental policy in order to manipulate the course and outcome of the nation’s international trading activities; such policies may include not only tariffs but currency-manipulation, subsidization and nationalization of domestic companies and industries, discriminatory credit policies, intellectual property laws that favor domestic companies, and government regulations favoring domestic companies. It is no surprise that there is a high degree of correlation between the countries that practice some form of mercantilism today and the countries that follow statist, planned-economy practices rather than free-market capitalistic practices with regard to their domestic, national economies. Mercantilism, after all, is merely the internationalist side of statism, and it derives from the same mentality: economic control being deemed more effective than economic freedom – i.e., the government is smarter than the markets and more easily controlled. While China appears today to be the most aggressive pursuer of innovative mercantilism, such practices are also pursued by India, South Korea, Japan, Singapore, Argentina (and many other South American nations), Russia, and many European nations, and not a single country on that list runs a truly free-market, non-statist economy (even though many utilize certain practices that are nominally capitalistic).

      So, the question is, why shouldn’t the US give up and follow the mercantile crowd? As Hayek and the Austrians pointed out long ago, once a nation’s economy has taken on a significant level of central-planning, the only apparent solution to any problem is, more central planning. This raises an interesting dilemma, because the US, after 20 years (or is it 80?) of slow movement in the direction of statism, and 3 years of vastly-accelerated movement in that direction, has given itself a split-personality: it espouses free-market/free-trade practices internationally, but has moved quite a long way in the direction of curtailing the freedom of its markets and converting to a planned-economy domestically. And it is clearer, with each passing day, that what we are doing is not working; on either side of the political aisle, there is agitation for fundamental change that will save us before our economy is surpassed (if not taken over) by another nation or nations.

      So, which of our current practices must go? It appears we have but two possible choices:

      (a) We could give up on free-trade internationally, go all in for the mercantile approach, and blend it with the planned-economy approach that has already pretty-much displaced our free-markets domestically. In other words, we could make Thomas Friedman and many others happy, and turn ourselves into an ersatz China; OR,

      (b) We could keep the free-trade international-approach and ditch the planned-economy approach that has become so dear to the hearts of the American academy, its mass media, and our co-opted banking and healthcare and auto industries. In other words, we could bet the ranch on free trade and free markets. Bear in mind, when I say ditch the planned-economy approach, that means we must tackle head-on and cure our annual deficits, our accumulated and growing national debt, our unfunded retirement and healthcare systems, and our reckless fiscal and monetary policies; if we are not prepared to do so, why prolong the agony – let’s have an honest trade war. Granted, most of our opponents already know the game better than we do, and some of them are already plenty strong, but is the alternative?

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