NCPA - National Center for Policy Analysis

Mercantilism Lives On

November 5, 2003

The only reason anyone cares about China's trade is because they operate within a mercantilist framework. The mercantilists preached that countries should always strive to have a trade surplus and avoid trade deficits at all cost. That is partly because they viewed the flow of gold as central to economic well-being. Deficits led to an outflow of gold, which was bad, while surpluses led to an inflow of gold, which was good, according to Bruce Bartlett.

Unfortunately, mercantilism lives on at the U.S. Commerce Department, where deficits are viewed as nothing but pure evil, stealing American jobs and wealth. Commerce Secretary Don Evans has attacked China for contributing heavily to the U.S. trade deficit. Implicitly, he assumes that if we could make China's costs of production higher, we would somehow benefit because production would shift back here. A new report from the Federal Reserve Bank of Chicago explains why this won't happen:

  • Utilizing China's cheap labor actually increases the competitiveness of U.S. businesses; they often export unfinished goods made here to plants they own in China and export them back here or somewhere else.
  • When sold here, much of the gain accrues to those in the retail sector and to consumers, while U.S. investors reap the return to capital.
  • Consequently, the vast bulk of the total gains from final sales accrue to Americans even though most of the work is done in China.

Unfortunately, China is too easy a target for unscrupulous politicians in the United States who are pushing for tariffs on Chinese goods. Sadly, some of these politicians work in the Bush Administration. Those who know better, like Council of Economic Advisers Chairman Greg Mankiw, must try harder to make their voices heard, says Bartlett.

Source: Bruce Bartlett, "Mercantilism Lives On," National Center for Policy Analysis, November 5, 2003.


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