Is President Obama a Mercantilist?

I think this is right. As I’ve said, I have doubts about relying upon increasing exports as our growth policy for the future, but what the president proposed in his State of the Union address is not what I think of as Mercantilism:

The mercantilist impulse, The Economist: Matthew Ygesias, writing at Slate, is perplexed by Barack Obama’s plan to “boost the economy by hindering trade”. He argues that in his state-of-the-union address, the president evinced “a strikingly retrograde, self-contradictory, and confused agenda of reviving American prosperity through mercantilism”. …

Others also perceived a mercantilist undertone in the president’s speech, and not for no reason. The president called for the creation of a new Trade Enforcement Unit, extolled the virtues of a tariff on Chinese tires, and said the country was on track to fulfill his promise, made in 2010, to double export growth by 2015.

But mercantilism is about more than promoting exports. It also carries an implication of protectionism…. And on this count, setting the trade complaints aside for a moment, the evidence doesn’t fully support the charge. Over the past three years Mr Obama has made a number of moves that effectively facilitate trade, smoothing the way for imports as well as exports. Last year, for example, he ended a ban on Mexican trucks entering the United States—a NAFTA provision that had not been previously implemented. He also signed free-trade agreements with Colombia, Panama and South Korea, which he cited in last night’s speech.

My colleague at Free Exchange is also critical of the president’s rhetoric on trade. He argues that it will bring us to a thankless zero-sum game, at best. The president said that “if the playing field is level, I promise you–America will always win.” … It’s a sympathetic intuition on his part, but I interpreted the president’s comment as a narrower critique of China’s business practices. And that critique is widely shared; you hear it from Republicans, from Democrats, from business, from environmental and human-rights organisations, and so on. Mr Obama has arguably been on the dovish end of the spectrum when it comes to China. Just last month, his adminstration declined to accuse the country of manipulating its currency; Mitt Romney, by contrast, has repeatedly said that it is, and urged the president to take action.

On balance, then, I would say that Mr Obama’s mercantilism is overstated, even if he has rhetorical impulses in that direction. …

Here are what I think of as the “tenets of Mercantilism.” I’ll let you decide the extent to which they accord with the president’s policies:

Mercantilists believed gold and silver are the most desirable forms of wealth. They also believed that the wealth of a nation depended upon the quantity of gold and silver in its possession. To maximize their holding of gold and silver, countries should maintain a positive balance of trade (with every country in the early years, but in later years they thought that an overall positive balance of payments was the goal, not a positive balance with every country you trade with).

They did not see lowering costs of production, or production in general, as creating wealth. This was a time when guilds produced most goods, and they were very inefficient. Thus, there was no notion of say, using division of labor and innovation to reduce costs and gain a competitive advantage over other producers (producers were not thought to add any value to production — this was a big part of their beleif that economics was a zero-sum game — when they looked at their society and history, they didn’t see much in terms of productivity led growth, or much growth at all, the key was to maximize your share of the wealth that existed rather than try to gain wealth through productive innovations). The key to wealth was arbitrage and astute trading, not production. So trade — and merchants who could win the trade battle — were the focus of attention. Nations became strong by winning the zero-sum trade game.

They promoted nationalism. Since everyone cannot have a positive trade balance – they saw trade as a zero-sum game – a country needs to be powerful in order to compete effectively. This led to a desire for a strong military, a strong navy in particular (many advocated war on land and war at sea as ways to increase wealth).

They promoted protectionism in all its guises to maximize exports and minimize imports.

They supported colonization. This was a source of cheap raw materials, and a captive market to sell the finished goods. This essentially creates monopoly power since they did not let other countries trade with their colonies.

They believed in free trade within a country, but monopolies on external trade so as to be as powerful as possible in trade negotiations.

They favored a strong central government to enforce regulation of business (regulation was widespread and used to try to maintain the quality of goods so they would be in high demand on international markets –some regulations, e.g. for textiles, required stacks of books — they controlled just about every aspect of production in their attempt to ensure quality and protect their reputations).

They believed a strong central government would also help with another goal, that of maintaining a large, hard-working, poorly paid labor force (e.g., they had maximum wage laws) . The point of focus was the nation, not the individual, and a productive, cheap labor force helped to keep goods cheap, made producers competitive, and hence helped with the accumulation of gold and silver. They did not tolerate idleness, and forced children into the workforce as soon as they were able (e.g. by age six or the family paid a penalty). If children (or anyone else, e.g. the unemployed) could produce something for export, then put them to work so they can help the country grow strong.

This post originally appeared at Economist’s View and is posted with permission.