Magazine article The Public Interest

The New Mercantilism

Magazine article The Public Interest

The New Mercantilism

Article excerpt

IN ONE OF HIS many insightful observations, John Maynard Keynes noted that "practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." He noted further that the power of ideas can be immense "both when they are right and when they are wrong," concluding that "it is ideas, not vested interests, which are dangerous for good or evil."

One of these currently captivating ideas is that aggressive government actions--including "strategic trade policy," "industrial policy," and "technology policy"--will bring about increased American "competitiveness" overseas. It can be argued that Keynes' insight is wide of the mark in this instance because the principal sources of these ideas are not defunct, but alive, articulate, and influential. They include such academic economists as Paul Krugman at MIT,(1) John Zysman at Berkeley, Lester Thurow at MIT, and Laura Tyson, formerly at Berkeley and currently chairman of the Council of Economic Advisors, and numerous well-known commentators and popularizers, including Clyde Prestowitz, James Fallows, Chalmers Johnson, Pat Choate, and Karel van Wolferen. However, Keynes' original insight can be defended by a reasonable counterargument: antecedents of these current ideas can be traced to several defunct mercantilists of bygone centuries, including Jean Baptiste Colbert, Thomas Mun, Antonio Serra, Friedrich List, and Alexander Hamilton, who advocated state action to promote specific exports, to restrict specific imports, and to accumulate gold bullion, trade surpluses and, it was believed, enhanced state power. The current renditions by the new mercantilists are more elegant and sophisticated, but their origins are unmistakable.

"Industrial policy" and "strategic trade policy" differ from one another, in some respects. Industrial policy focuses on the development of key domestic industries and technologies, with international trade accorded a secondary role. Strategic trade policy focuses on international trade, on promoting specific exports and limiting specific imports. Strategic trade policy includes, as well, the use of threats and the imposition of penalties to pry open foreign markets. A recent example is the U.S. threat to impose high countervailing tariffs on Japanese imports--by reactivating the "Super 301" provision of the trade legislation of 1988--unless U.S. exports of automobiles and auto parts reach certain specified shares of Japan's domestic market for these products.

Nevertheless, despite the differences between strategic trade policies and industrial policies, they share a fundamental premise: government should select certain industries, technologies, and firms whose advancement is of "critical" importance for the economy as a whole, and accord the selected ones some form of preferential treatment--whether through subsidies, tax advantages, import restrictions, special efforts to promote exports, or direct government financing for "precommercial development" of putatively critical technologies.(2) To some, "critical" means high technology industries in general (Tyson); to others, it means this as well as certain specific sectors, such as semiconductors (Fallows), or telecommunications, or automobiles, or machine tools, or even rice. In the interest of simplicity, and at a modest cost in precision, I will refer to both sets of policies as "preferential industrial and trade policies," or PITP.

The appeal of PITP to many "practical men" (as well as some impractical ones) is understandable because there are reasonable theoretical arguments as well as empirical evidence and experience to support it. What is usually overlooked by those who accept the arguments for PITP, however, is the existence of strong counterarguments, as well as indications that the usually cited evidence in support of PITP is at best ambiguous, and probably wrong. While the Japanese experience is usually cited in support of PITP, there is a simpler and more compelling explanation for Japan's success. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.