The Resurgence of Mercantilism
On the left and the right, there's been a resurgence of a long-ago discredited economy theory.
I do not get Donald Trump’s (or anyone else’s like Bernie Sanders) argument for protectionism/mercantilism. I do not understand why trade between nations is viewed a fundamentally different than trade between states in the U.S. or even between individuals and firms. To quote Don Boudreaux, I have been running a trade deficit with my grocery store ever since I started shopping for groceries. I always buy from them, but they in turn never buy anything from me. Clearly using the “logic” of these neo-mercantilists I must clearly be worse off with this arrangement. In fact, I would be so much better off if I would stop going to the grocery store and instead produce all the stuff I buy at the grocery store myself. Let me see, I’ll need some cows, some pigs. I’ll have to grow wheat and corn, I’ll need quite a bit more land too….oh yes, this will make me so much more better off. And I can spend all of my time doing this, so I’d better quit my job too.
Some might say, but it is different when it is another country. I’m still waiting for a good explanation of that one. How is it different? They aren’t Americans? So? Why should that matter? That Americans might lose their job? Okay. So what you are saying is that we should keep these people employed at a job that could be done with less cost. How is that different than welfare? It is no less a transfer of some of my income to those workers than if it were a literal cash transfer. Is that it? Are Trump and the neo-mercantilists espousing nothing more than workfare? Keeping people employed at a job that is actually more costly? That is a recipe for economic prosperity? I don’t think so.
What these neo-mercantilist are missing is that we are far, far better off today because of specialization. Specialization allows workers to be more productive than if they were a jack-of-all-trades (and master of none). Competition drives the payments to the factors of production up to their marginal revenue product. And that is determined in part by the workers productivity. Further, international trade encourages additional specialization. If one country’s workers are good at doing X and another country’s workers good at Y, each country specializing in X (or Y) and then trading can make both countries better off. That is what we do every day in the economy here inside the U.S. This what we do in each state and between each state. Why should it be different between countries?
Or to flip it around. Why is it not a big deal if Montana is running a trade deficit with say, California? Why is that not a problem? And if trade barriers are good between countries, why not erect them between states? Why not change the laws so that we can have trade barriers between states. Each state will see its employment levels explode right?
My guess is we all know that such a policy wouldn’t work out. Having less trade in general is not a recipe for having more trade. Donald Trump and the neo-mercantilists favor trade barriers. Barriers. That is they are literally arguing for less trade not more. Less trade is not a route to prosperity and thinking like that puts you in the same category as Randy Marsh in terms of understanding the economy.
Yes, we buy more stuff from Mexico than they buy from us. To Donald Trump and the neo-mercantilists this is bad. My guess is they see that we are spending more money than were are receiving as a bad thing. But we have to go back to the relationship between me and my grocery store. Yes, I am running a trade deficit with my local Albertsons (and Trader Joe’s too) but I am strictly better off because of this. I can walk into those stores and buy lots of stuff at low prices. And that is what Donald Trump and the neo-mercantilists appear to be missing. We are getting goods and services from these countries. We are getting goods and services we want otherwise we wouldn’t buy them. Free trade agreements also lower the prices of these goods and services we want. But somehow this is all bad.