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Clyde Prestowitz: "We live in a world that is ... half free trade and half mercantilist"
Howard Richman, 9/20/2011

Writing in Foreign Policy magazine on September 15, Clyde Prestowitz (The Protectionist Humbug) calls for an end to the nonsense that opposing mercantilism is protectionist. He begins eloquently:

Just as the call for patriotism is often the last refuge of scoundrels, so the charge of "rising protectionism" is often the last desperate cry of globalists who don't understand that it is raw mercantilism that is turning their free trade dream into a nightmare.

He characterizes the world as half free trade and half mercantilist:

We do not live in a world of free trade and free financial markets. Rather we live in a world that is divided. It is half free trade and half mercantilist. China, the world's second largest economy, strictly manages the its yuan to be dramatically under-valued versus the dollar. It also manages the types and conditions of both domestic and foreign investment and often makes access to its markets conditional on the transfer of technology, investment, and jobs. Because China's yuan is not allowed to appreciate, capital flows to Brazil where the real is soaring and thereby making Brazilian production for both foreign and domestic markets uncompetitive. In effect, China is exporting unemployment to Brazil. Nor is China alone. Many others have also adopted the strategic, export led, neo-mercantilist growth strategies pioneered by Japan after World War II.

 There are five overall trade policies:

1. Free Trade - the strategy of not putting up any barriers to imports
2. Protectionism - the strategy of protecting selected politically-powerful industries
3. Mercantilism - the strategy of maximizing exports and minimizing imports in order to beggar one's neighbors.
4. Balanced Trade - the strategy of insisting upon balanced trade in order to oppose mercantilism
5. No trade

In a world in which only Free Trade and Protectionism exist, countries that practice Free Trade are better off. Those that practice Protectionism sacrifice their other industries in order to favor the politically connected ones. But in a world in which Mercantilism is rampant, Free Trade is equivalent to unilateral economic disarmament. Those that practice Free Trade get gains in current consumption at the expense of declines in power, economic growth and future consumption.

Unfortunately, Prestowitz doesn't appear to have thought through the consequences of his position. He does not advocate Balanced Trade in this commentary. Nor does he call for a WTO-legal scaled tariff to balance trade. A scaled tariff is applied to countries in proportion to our trade deficit with that country. Those countries that buy as much from us as we buy from them, such as Brazil, would be rewarded with no tariffs. While those countries that keep out our products, such as China, would be forced to change, or they would lose market share in our markets. Instead our practice of Free Trade in the face of rampant Mercantilism rewards China and forces Brazil to copy China.