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 Richmans' Trade and Taxes Blog

Economists still failing to understand the effects of mercantilism
Howard Richman, 7/31/2010

When John Maynard Keynes explained to economists why mercantilism works and how it destroys the prosperity of its victims, most economists ignored him. Although the recent success of Chinese mercantilism is forcing economists to revisit the issue, most still oppose any action by the United States against it.

Take for example a 2010 working paper (Undervaluation through foreign reserve accumulation: Static losses, dynamic gains) by U. of Maryland economist Anton Korinek and World Bank senior advisor Luis Serven. The authors correctly conclude that the accumulation of foreign currencies by the mercantilist countries produces short-term (static) losses and long-term gains. But at the end of the paper, they conclude, without citing any evidence whatsoever, that there is no harm to the victim countries.

Here is their second-to-last paragraph in which they argue that the victim countries (developed countries) actually benefit from mercantilism and that the only fellow developing countries are harmed:

In a multi-country setting, things are more complicated. Developed countries that are free of growth externalities still benefit from other countries' reserve accumulation, but countries that exhibit learning-by-investing effects impose negative beggar-thy-neighbour externalities on each other when they engage in reserve accumulation.

What nonsense! No country is free of "growth externalities." Developed countries, like developing countries, grow by producing for markets that are external to them and by competing with foreign products in their own markets. As my father, son, and I demonstrated in our 2008 book Trading Away Our Future, the effects of mercantilism upon manufacturing investment and employment in the United States have been profoundly negative.

The truth is that those developed countries whose currencies are accumulated experience exactly the reciprocal to the effects in the accumulating country. While the mercantilists experience short-term losses of consumption and long-term gains of industry, their victims experience short-term gains of consumption and long-term losses of industry.

My father, son and I have presented a tariff plan, the scaled tariff, that would prevent the mercantilist countries from further victimizing us. The tariff would indeed impose static (short-term) costs upon our consumers. But the investment in American manufacturing industries that would result would renew our long-term economic growth.

Comment by Tom Cobb, 11/15/2010:

Wouldn't the simplest of tariff programs be a substantial oil tax?  All Chinese goods get her via ocean freight, so the affect of an oil tax would be the same as a tariff, but would provide the government the cover of being instituted for different purposes.  And those different purposes would be genuine.  For sure, we should want to home-grow our own clean energy infrastructure, but China has already taken a huge lead in the manufacture of wind and solar systems by way of cheap/slave labor, subsidies, and devalued currency.  An oil tariff set equal to whatever it takes to make it economical to manufacture the same here would be a great starting point.

Further,  an oil tax would be harder for opponents to raise the traditional 'tariffs are a tax on the poor' arguments, because they can be offset with countervailing reductions in income taxes.  And these offsets

could target the poor.

Over time, tax revenues from an oil levy would decline as oil consumption declined, so income taxes might 

have to be brought back in amounts commensurate to the revenue losses, but the boost to the economy would be huge.  Spending on productive infrastructure - and energy production is about as productive as it gets - are has the highest multiplier effect.

Response to this comment by Joseph Hitselberger, 8/28/2011:
It's an interesting alternative, but the U.S. also gets oil from nations (Canada) who play a little more fair and do not manipulate their currencies as much as China and others.    Further, I feel a scaled tariff would very likely get international support and can be adapted by other countries as well.  Many countries are suffering from the same sorts of problems as the U.S.  Trade deficits causing unemployment and governmental deficits is not unique to the U.S.  An added benefit is that the scaled tariff increases trade among nations who play fair.  Sure, it decreases trade with China and a few others, but these countries have throwing monkey wrenches into the world's economy for a long time.  Time for equal and balanced trade!

Comment by Joseph Hitselberger, 8/28/2011:

Very Good.  Not having seen your work, separately I came up with the "proportional tariff," which would be proportional to the U.S. trade deficit with a given country. I like to stress a little bit more of the trade deficit's causal relation to the federal budget deficit and unemployment.  If you search on groups in facebook, search on "Americans for the Replacement of Lawyers in Congress by Economists."  A "scaled tariff" or a "proportional tariff" can be negotiated and adopted internationally because many countries are in the same boat as the U.S., experiencing high trade deficits and the accompanying national government deficits.