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Obama’s Mercantilist Approach to Trade

Posted By Terry Miller On March 3, 2010 @ 3:00 pm In International | Comments Disabled

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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.


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