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Mercantilism's Success may be Moving World Toward Fascism
Howard Richman, 1/18/2013

In a January 10 commentary, Harvard political economy professor Dani Rodrik (In truth, mercantilism never went away) argues that mercantilism's success may be moving the world toward state capitalism (fascism). Indeed, if state-capitalist mercantilism competes with liberal-capitalist free trade, then fascism is the more prosperous system.

Rodrik correctly summarizes the success of modern mercantilism, writing:

[During] the last six decades: a succession of Asian countries managed to grow by leaps and bounds by applying different variants of mercantilism. Governments in rich countries for the most part looked the other way while Japan, South Korea, Taiwan, and China protected their home markets, appropriated "intellectual property", subsidised their producers, and managed their currencies.

He incorrectly argues that the West was right to ignore Asian mercantilism during these decades:

Liberalism and mercantilism can coexist happily in the world economy. Liberals should be happy to have their consumption subsidised by mercantilists.

Although the victims of mercantilism do get increased consumption in the short run, they pay for that increased consumption with their industries and financial assets. In the long-run they get stagnant economies and financial crises.

Although Rodrik recognizes that the liberal capitalist economies are now in decline, he appears to be unaware that the decline is predicted by the modern mercantilist theory of Jacob Viner, Heng-Fu Zou, and myself with my father and son. In a nutshell, the mercantilist country sacrifices short-run consumption in order to get even more consumption and more power in the long run. In contrast, its victims get more consumption in the short run, followed by less consumption and power in the long-run.

This scenario has already played out in at least three different trade deficit countries:

1. Spain. Spain's fellow European countries, especially Britain and France, stole Spain's industries and power through mercantilism in the fifteenth and sixteenth centuries.
2. Great Britain. Britain eschewed mercantilism in the nineteenth century only to have its industries stolen by American and French mercantilism in the 1920s.
3. United States. After World War II, the United States eschewed mercantilism, only to have its industries and power stolen by Asian mercantilism from 1996 to the present.

So what is Harvard Professor Rodrik’s solution? He doesn't have one. He plans to watch the debate between liberal capitalism and state capitalism from his ivory tower:

As a result, the new economic environment is likely to produce more tension than accommodation between countries pursuing liberal and mercantilist paths. It may also reignite long-dormant debates about the type of capitalism that produces the greatest prosperity.

Rodrik is missing the fact that there are four trade policy choices, not just two:

1. Protectionism - the strategy of protecting selected politically-powerful industries.
2. Free Trade - the strategy of not putting up any barriers to imports.
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.

Protectionists simply keep out imports. Mercantilists not only keep out imports, but they also promote exports. Then they prevent trade from balancing by buying foreign financial assets, including gold. 

In a world that is free of mercantilism, countries that practice free trade are better off than those that practice protectionism, because countries that practice protectionism hurt their consumers and sacrifice their other industries in order to favor the politically connected ones.

But when mercantilism is rampant, liberal capitalist countries can defeat it simply by adopting a tariff system that just taxes mercantilists, not those who engage in free trade. Great Britain's “imperial preference” system, got Great Britain right out of the Great Depression in 1933. The countries of the British Commonwealth put tariffs on the mercantilists, including the United States and France, but not upon each other.

Today, the liberal capitalist countries could implement a WTO-legal Scaled Tariff which places trade-balancing tariffs only upon those countries with which each trade deficit country has a trade deficit. The tariffs would be scaled individually to the size of the trade deficit with each trade surplus country, and would diminish as trade approaches balance, giving the mercantilists an incentive to let in imports.

Liberal capitalism does not have to lose out to state capitalism. It can win if it requires balanced trade.

Comment by Jesse, 1/32/2013:

A quote from the commentary:

"We have now reached the end of this happy coexistence. The liberal model has become tarnished, owing to the rise in inequality and the plight of the middle class in the West, together with the financial crisis that deregulation spawned. Medium-term growth prospects for the American and European economies range from moderate to bleak. Unemployment will remain a major headache and preoccupation for policymakers. So mercantilist pressures will likely intensify in the advanced countries."