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  • Obama’s Mercantilist Approach to Trade

    The Obama Administration’s 2010 Trade Agenda, unveiled March 1, is a radical departure from traditional American economic policy and values. It abandons not just the 65 years of trade liberalization on which American and world economic prosperity has been built since the end of World War II, but attempts to turn the economic clock back to the 17th Century and the mercantilist theories that predate Adam Smith.

    Mercantilists viewed the world’s economic production in static terms. Mercantile theory exalted exports and a positive trade balance. Prosperity was defined by the acquisition of wealth in the form of bullion. Think Ebenezer Scrooge hoarding his pile of coins. Better yet, think China and its two trillion dollars of reserves built from trade surpluses. Bizarrely, this seems to be the model embraced by the Obama Administration.

    We first heard Obama’s mercantilist approach in the State of the Union address. He called for greater exports, a “doubling” over five years. He proposed a National Export Initiative “to help farmers and small businesses increase their exports.” That’s policy code for export subsidies. He called for greater enforcement of trade agreements. That’s policy code for protectionism. He even identified China as a country for the U.S. to emulate in revamping our economy. No matter that Chinese incomes are only about one-tenth of average incomes in the United States. No matter that the Chinese who produce the goods we enjoy can’t buy them for themselves because of their government’s desire to build a massive trade surplus.

    The logic of export promotion actually requires the reduction of consumption at home. Reducing the ability of Americans to buy and consume goods and services may seem like an odd policy platform for a democratically-elected leader like Mr. Obama, but this is what he explicitly endorses in his 2010 Trade Agenda, which calls on the United States “to slow the rate of consumption growth.”

    The 2010 Trade Agenda is a recipe for economic failure and stagnation. Much of the focus is on enforcing rules to restrict other countries’ access to the U.S. market. It’s a begger-thy-neighbor approach in which we would sell more to other countries while restricting their ability to sell to us. Such a model is unsustainable internationally: not every country can run a trade surplus. Even worse, it would destroy America’s own economic dynamism. An export promotion strategy may bring quick benefits to a particular firm or business sector, but the price is paid by American taxpayers, consumers, and the businesses and sectors that don’t enjoy government protection or subsidies. For the U.S. economy as a whole, the result is lower productivity, fewer jobs, and slower growth.

    One of the most basic lessons of economics, indeed the foundational lesson of economics, is that specialization and voluntary trade produce benefits for all parties to the exchange. It doesn’t matter whether you’re buying or selling. President Obama seems to have missed that lesson.

    Trade policy needs to be about promoting freer trade, both exports and imports. Americans benefit from selling their produce abroad, but they also benefit by buying goods produced abroad. Even on the job front, millions of Americans are employed in transportation and retail activities that involve bringing imported goods to American consumers. An export-focused trade policy such as proposed by the President in the 2010 Trade Agenda, puts their jobs at risk in the service of politically connected special interests.

    The 2010 Trade Agenda may be written as if it is championing America against other countries. In reality, it is championing some Americans (those who want government help in the form of tariffs, quotas, or subsidies) against other Americans (those who would like to purchase the best products at the cheapest prices no matter where they are made). In other words, it is politics as usual in a government controlled economy, picking winners and losers based on political influence rather than entrepreneurial ability or effort. That has not traditionally been the American way.

    America came into being as a nation at about the same time as western civilization developed its modern understanding of the ways of creating the wealth of nations. Indeed, the American experiment has been one of economic activity blossoming in an environment that guaranteed maximum and expanding liberty for individuals to pursue whatever activity they desired, buying and selling freely, maximizing gains from trade in a continental American free market.

    In the 20th Century, the American model took hold throughout the world, to the benefit of all humankind. That model is being challenged in the 21st Century, and the challenge, surprisingly, is coming in the United States itself. Whether we hold true to our founding principles of individualism and economic liberty, or acquiesce to the lure of collectivism and state control, will define what it means to be an American in the decades ahead. The President’s Trade Agenda is a step in the wrong direction.

    Posted in International [slideshow_deploy]

    12 Responses to Obama’s Mercantilist Approach to Trade

    1. Laura says:

      The American economic dynamism is an interesting term, but it is so descriptive of the wealth of imagination, and wealth producing vigor that is in inherent in the term, "America". It is proliferative, creative, abundant, infinitely productive and HOPEFUL.. Does anyone see anything "hopeful" by the current Administration's views on economic development, foreign policy, domestic agenda, anything?

    2. C.Wood says:

      Two thumbs up. You couldn't have said it better. We obviously have a President who has never started or ran a business.

    3. Eric says:

      Every day I read about a policy this administration put out I think, "it can't get any worse than this?" Unfortunately, it ALWAYS gets worse. Does this guy do anything to actually PROMOTE America and traditional American values? No, he doesn't.

      We are in a world of hurt boys and girls. Even if we can replace this despicable Dem congress with rock-ribbed conservatives I think the damage is too far gone. The left is so totally entrenched in our institutions and they are foaming at the mouth to take us down. Sadly, we are almost there.

      Thanks for NOTHING Obama voters!

    4. James H. Murphy, Nor says:

      This article has history wrong!

      This defense of free trade is a case of the subjugation of real world experience to ivory tower theory. The bad things attributed to trade protection have never been the real world experience of Americans. To the contrary Americans owe their prosperity to trade protection and had a better economy when tariff protection was in place. By a better economy I mean higher wages, growing real wages, higher productivity and lower prices than the rest of the world. Things free trade has ended. US real world experience with tariff protection did not prove to be “a recipe for economic failure and stagnation” but rather took us from a producer of raw materials and agricultural products in 1828 to an industrial power by the end of the century? Between the Civil War and the end of the century we overtook free trade Great Britain while imposing tariffs ranging from 40 to 50 percent.

      A few of the advocates of American trade protection include Alexander Hamilton, all the presidents on Mount Rushmore (George Washington, Thomas Jefferson, Abraham Lincoln, and Teddy Roosevelt), every Republican presidential candidate from Abraham Lincoln in 1860 to Alf Landon in 1936 ran on a platform endorsing high protective tariffs.

      All the Founding Fathers were protectionists who believed that protection of American workers and industries from cheap foreign imports was essential to our prosperity, our independence, and our sovereignty. The first act passed by our first Congress established tariffs on foreign goods.

      Tariffs passed during Washington’s administration were higher than today but not very large. It was Andrew Jackson who made tariffs protect. He gave us the highest tariffs we have ever had. Higher than the Smoot-Hawley tariffs more that a hundred years later. Jackson’s high tariffs upset the then Vice-President John C. Calhoun who set off a Constitutional crisis by urging nullification of the tariff within South Carolina. They compromised and cut the tariff from about 62 percent to about 40 percent.

      Tariffs went up and down but generally drifted lower in the following years ending at about 20 percent just before the Civil War After the first few months of the Civil War Congress decided to protect industry from foreign competition in war time and passed the Morrill and War tariffs which jacked tariffs up to just under 50 percent. After the war tariffs oscillated but stayed high (40-50 percent) until the first decade of the twentieth century. In the first part of the twentieth century it was thought that the way to respond to industrial monopolies was to expose them to foreign competition. Tariffs were lowered to below 20 percent. That was soon abandoned in favor of anti trust legislation. By the 1920s tariffs were back in the range of 40 percent where they were when Mr. Smoot and Mr. Hawley introduced their new tariffs that raised tariffs to just below 60 percent.

      Smoot-Hawley tariffs went into effect in June 1931 (three years after peak economic activity in June 1929) but did not last long. In 1934 Roosevelt started lowering them. When the Great Depression got worse in 1937 tariffs were long back to pre Smoot-Hawley levels. Tariffs continued to decline to current low levels.

      According to free traders a trade protected economy without foreign competition should have high prices, shoddy products, and producers should have no incentive to innovate. Society should slide into mediocrity and poverty. That was never the US experience with trade protection. Contrary to free traders, the economy was growing with higher wages, lower prices, and much innovation.

      Mr. Miller needs come out of his ivory tower and look at the reality around him. While we were a trade protected economy we overtook free trade Great Britain. The negative impact of free trade on the British people was a major reason they adopted socialism. Free trade is having the same negative effect on the American people. Real wages of Americans peaked in 1973 and are down about since as free trade has taken away good manufacturing jobs and replaced them with Mac jobs.

      Free trade got us to where we are today. Protection got us to the high from which we have descended.

      • Mike says:

        This article seems to ignore the huge current account balance carried by the US. Effectively the US industrialized to create returning financial capital for the banking industry. Huge trade deficits have led to bubble economics and the resulting lost jobs of bubble economics.

        The any trade is good trade mentality, ignores real world economics.

    5. Joyce Sickels Spring says:

      Hello everyone..It's never to late, I think Obama should be impeached with all of his Communist Czars and followers! We the people can get our country back, we just have to do something about it! I think we should all file a lawsuit against the President for all of the lies he told people to get elected, where's the birth certificate??? There are so many things, lets get our country back!

    6. Tim Az says:

      Every policy this POTUS has is detrimental to the American way. Yet their are still people who refuse to be honest with themselves given all the undeniable facts since this president and his administration assumed office. Mao-Bama only has one goal to bring America to catastrophic failure and rebuild it into his socialist utopia that begets communism. To continue this extreme denial is to hand America over to the socialists without even a whimper.

    7. Dave D, Cincinnati says:

      Extremely well said and I agree with 99% of your position. There is, however, a valid debate when the freemarket ( aka the US….at least for now ) competes on a world stage with heavily subsidized foreign players who enjoy the advantage of pegged currencies and/or employment versus profit motive.

      This is the challenge facing the manufacturing base in America and it is foolish to think there is any hope that the world players will change their ways. This leaves tariffs and duties as the only viable recourse short of letting these industries die off completely. I for one would like to think the America still produces something and in many cases we can compete if given the chance with even the slightest efforts to level the playing field.

    8. Antonio M Nieto says:

      I want to thank Mr Terry Miller for this article on economic freedom and its significance for undertanding the real meaning of the issue in other deeper values related to individual freedom and the western civilization as we know it. We in Europe run the risk to copycat Obama.

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    10. Russell Hellein says:

      We tried free market policies for a generation now. The result, wage (and overall compensation) for most grew slower than the past, a trend that is accelerating. The last decade 2000-2009, is likely the first in US histoy were real median wages fell, its certainly the worse since record keeping began. Mobility between income groups declined – that is it was harder to move from a low income group in the 2000's than it had been in the seventies (according to FED researchers).

      Free markets have been great for the top one percent and business, a disaster for everyone else. Not surprisingly groups who sympathise with elites and business are high on it. But the public as a whole is increasingly not. And that will drive decisions on it. People care how much money they bring home, not economic theory. Or that billionaires and corporations are doing grand.

    11. PPP Lusofonia says:

      So you thought mercantilism was dead?

      Mercantilism has been alive and well in the US, it hardly needed to be revived.

      Just look at the USAID regulations on tied aid to developing countries.

      Even the development consultants are obliged to travel on American airlines.

      Everyone knows that it is more blessed to export than to import.

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