By Dennis John, August 2020
In 2016, the Leave campaign for the Brexit referendum aimed to win it through a few central policies. One of these was the idea of leaving the European Union Customs Union (EUCU), which significantly inhibited the arrival of non-EU imports into the UK. With no requirement to impose any sort of tariff on imports like the Common European External Tariff, the UK is now free to make unilateral trade agreements with whoever it chooses to. Unilateral free trade is the removal of protectionist policies by a country, independent to what other countries decide to do themselves.
Recent evidence would suggest that unilateral free trade is beneficial to a country’s economic development. The liberalisation of India in 1991 is one reason to believe that mercantilism is not the way forward for a country to achieve economic growth. Before 1991, Indian policy tended to be protectionist, and was strongly focused on import substitution industrialization. However, Indian economic growth started to stagnate at 3.5% in the 1980s, a figure which was relatively low for a developing country which had a lot of untapped spare capacity. This led to the economic liberalisation of India in 1991, spearheaded by the Finance Minister Manmohan Singh. A significant part of the policy change was through the cancelling of many of the import tariffs that were present in the country beforehand, opening up the country to opportunities for trade. The removal of tariffs has resulted in a decreased price of imports. As a result, imports are more readily available for Indian consumers and at a cheaper price, meaning they have a better choice of good. This increases the standard of living of Indian residents. Furthermore, protectionism results in the protection of inefficient domestic producers, as they are protected against competition from foreign producers. This results in disincentivising domestic producers from innovating or producing better products. Despite this, protectionism is still a key policy in many poor countries across the world.
At the same time, mercantilism and the lack of unilateral free trade can be beneficial as well. If a country is in a deep trade deficit, then protectionist policies will act to increase the costs of exports and decrease the price of exports in comparison, making domestic products more attractive to buy. This will increase net exports in the country, improving the trade balance in an economy.
However, there is a reason why mercantilism is no longer fashionable for modern-day economists. A survey stated that 96% of economists believe that free trade is the most beneficial method of attaining economic growth. Modern economists realised that mercantilism failed to account for the benefits of free trade, which included comparative advantage and economies of scale.
The economist David Ricardo was the first person to discuss the idea of comparative advantage, which, rather than absolute advantage, is the pivotal reason behind international trade. Comparative advantage is an idea which enhances specialisation, as firms, regions and countries alike can decide to specialise in the good or service in which they hold the comparative advantage over others. It can be defined as the efficiency of each country producing a good relative to its efficiency at producing other goods. This results in increased efficiency and productivity, as well as an increase in the quality and innovation in products that are being produced. As a result, this increases the standard of living, which is in the economic interests of a nation. In fact, comparative advantage means that international trade is inevitable, and always undoubtedly beneficial to the living standards of the residents, even if the free trade is not reciprocated by other countries.
Economies of scale is the second major economic reason to unequivocally support unilateral free trade. Economies of scale allows production to occur on an increased scale (more output), while occurring at a lower cost (cheaper price). When regions specialise in a particular industry, the production process becomes far more efficient. As a result, they gain economies of scale, and through trade, can pass on the benefits of the economies of scale. However, it is very unlikely that politicians like Donald Trump do not understand the concept of economies of scale, but rather, they choose the option with the optimal expected outcome for purely themselves.
The more likely reason for the prominence in modern-day fashion of mercantilism and protectionism is policy myopia, with one particular example of this being the US-China Trade War. In my opinion, the general public often tends to have a misplaced belief that mercantilism increases their incomes, without considering retaliation by other countries, and not considering important economic concepts like comparative advantage. As a result, many politicians have centred their election campaigns around these sorts of policies. The unprecedented win for Donald Trump in the 2016 general election can be attributed to the flaws of representative democracies (namely gerrymandering), but at the same time, what should have been a landslide win for Hillary Clinton wasn’t the case, even in terms of the number of votes for the candidates. Rather, Trump’s success can be ascribed to the mercantilist policies that were central to his campaign. He cleverly targeted the Mid-West, from where many people had lost their manufacturing jobs due to China producing the same goods at much lower prices. As a result, those enraged by that particular fact would have been, unbeknownst to the truth, exceedingly encouraged that Trump was interested in imposing tariffs ranging from 25 to 35 percent on imports from the East Asian superpower.
To add on to this point, mercantilism can be considered as an example of a zero-sum game, in which a few members of society profit at the expense of others. From the previous analysis of comparative advantage, it is clear to see that mercantilism only results in the losses of global growth and global standards of living. However, at the same time, this game was played often from the sixteenth to the eighteenth century in Western Europe. There is a very decent chance that Donald Trump is playing the same game himself. Monopolisation in a market is one of the best things a firm can do, as a high market share allows them to take control of the market, helping them to determine equilibrium prices, and helping firms to maximise their own profits. Domestic firms are well aware of this. The introduction of foreign companies provides competition to these monopolising firms, who would then be forced into investing into their products and making them more innovative, as well as selling at lower prices. This would considerably reduce the net revenue of those domestic firms. In fear of losing this valuable market share, domestic firms pay off politicians in order for them to become outspoken advocates for mercantilism. In fact, China, in particular, have been targeted due to the reputation of China’s manufacturing resources. Chinese labour is far more significantly cheaper than American labour, meaning that the costs of production of Chinese firms would most likely be far lower of American firms producing the same goods or services. In turn, if a Chinese firm wanted to enter the U.S. market, all that would be required of them would be to start selling goods at a lower price. Considering the relative price competitiveness of Chinese firms compared to those based in the United States, it would almost be certain that American firms would only lose the battle from this point onward.
In conclusion, it is very clear to see that unilateral free trade does serve a nation’s economic interests. In my opinion, mercantilism is just a shadow of its former self, living on due to politicians and firms playing games in which they themselves are the big winners. However, the frequent misconception within the general public that imposing tariffs on other economies increases their incomes must be changed before mercantilism would ever die out. And due to increasing awareness about this very reason, mercantilism is certainly, albeit slowly, dying out. But at the same time, mercantilism lives on in the majority of the countries that house the bottom billion, for the same reason they are poor: bad governance as a result of corrupt individuals. And for sure, it is always important to realise that governments across the world, in particular politicians, will be in no immediate hurry to inform their residents about mercantilism for the actual policy that it, in honest truth, is.
References (using Harvard citations):
1) Vote Leave. 2016. Why Vote Leave. [online] Available at: http://www.voteleavetakecontrol.org/why_vote_leave.html
2) Data.worldbank.org. 2020. GDP Growth (Annual %) - India | Data. [online] Available at: <https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=IN>
3) Collier, P., 2008. The Bottom Billion. Oxford: Oxford University Press, pp.159-168.
4) Brown, M., Alexander, R., Blackwell, K., Gilson, T., Schober, C., Robison, J. and Robison, J., 2020. Trump Is A Mercantilist, And Mercantilism Will Weaken America | The Stream. [online] The Stream. Available at: <https://stream.org/trump-mercantilist-mercantilism-will-weaken-america/>
5) Sheldon, I., 2020. Trump's Exports-Good, Imports-Bad Trade Policy, Debunked By An Economist. [online] The Conversation. Available at: <https://theconversation.com/trumps-exports-good-imports-bad-trade-policy-debunked-by-an-economist-94625>
Comments