Death of Mercantilism

By Business Beyond the Reef / Egon Winkler

The headline is premature as Mark Twain would say, but we can wish it were true. Dan Ikenson and Scott Lincicome have a paper up at the Cato Institute entitled Beyond Exports: A Better Case for Free Trade, in which they argue that it is time for our leaders to stop beating the export drum when confronted by protectionists. They need to stress the very real virtues and benefits of imports for our society. You know the point: look at all the imported products and services you use in daily life – and think what life would be like without them. Less choice, higher prices, lower standard of living … Plus lost jobs in companies and industries that use imports (which are almost all of them). Do you really want all that? 

But the political understanding of trade in America is all one-sided. Our supposed “free trade” politicians only make the export argument for freer trade, while our “protectionist” politicians can only see competition as a bad thing. They are equally wrong and both should be ignored. The fact that is lost in our national debate on trade is that both imports and exports can help or hurt our economy. And, on balance, they help it.

Exports mean that our companies, and their employees, gain bigger markets with greater potential for earning a living. If they succeed with exports, though, that raises prices in the United States due to the increased foreign demand for our products. Similarly, imports pose competition for our domestic companies (and their workers). Some respond by getting better, others fall by the wayside. Creative destruction in action. And those imports mean lower prices for American consumers due to increased supply. See, good and bad, but politicians can’t seem to grok this. In their worldview, trade has to be either good or bad, not both. Reality sucks if you are a politician, because it is not simple, or black and white.

Not all countries are mercantilist, which may come as a surprise. Most of the big ones are mercantilist still, as are many of the developing countries, though mostly the ones that aren’t going anywhere. But many countries have learned that mercantilism is not compatible with long-term economic development and growth. A few examples include Singapore, Hong Kong, increasingly Chile, some of the smaller European countries. I am not saying there is no protectionism in these places, but they are finding that an economy open to trade and investment in all directions is the surest path to growth and improvement.

I recall searching conversations with my friend Egon Winkler, then head of Austria’s equivalent to our Foreign Commercial Service. The U.S. Commercial Service was created by Congress as an avowedly mercantilist institution, unashamedly pushing U.S. exports worldwide – while having nothing to do with imports – or much to do with investment. Austria’s counterpart had no such strictures, even as part of a largely mercantilist European Union. The Austrians were free to help people import into Austria as well as to export. I asked Egon about his service’s philosophy. He told me that if you start trade in one direction and it works, then inevitably trade and investment will develop in the opposite direction. What you get is bigger pie for everybody. Trade is NOT a zero-sum game.