A Mechanism for Combating Mercantilism and Producing Balanced Trade

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Table of Contents

Introduction
Is Mercantilism a self-destructive Strategy?
Comparative Advantage Argument
Consumption Argument
Market Forces Balance Trade Argument
Mechanism for Balancing Trade
Conclusion
Reference List

Introduction

This report discusses whether or not the present form of mercantilism is self-destructive and hence self-correcting strategy. The writer argues mercantilism, under classical theory was seen as a destructive policy. Other forms such as monetary mercantilism self sustaining and beneficial.

The report further discusses the mechanism that a trade deficit country could effectively fulfill to provide a fair trade. The writer infers the mechanism differs in various aspects; however, scaled Tariff remains dissenting among them.

Is Mercantilism a self-destructive Strategy?

Many authors of classical economics of the 18th and 19th centuries have debated that mercantilism is a self-destructive strategy to any country. The debate has made some countries such as the United States believe the assertion.

For this reason, the United States has relied on the classical opinion in persuading other economies such as the Chinese government to amend its mercantile strategy, in view of suiting its own interests.

The assertion by the United States which was based on classical theory contradicts the views of Keynes. In his article, The General Theory of Employment Interest and Money, Keynes disputes inferring the classical economists, in which the United States bases its justifications.

Keynes opines that mercantilism is not a self-destructive element; it works and fixes a favorable balance of trade (Keynes, 1980). This is only if it is not massive. He asserts that mercantile only fails when unfavorable balance produces unceasing depression (Keynes, 1980, p.338).

On the same note, Krugman and Obstfeld (2000) in their International Economics textbook had argued that mercantilism is not feasible. However, after a decade of extensive research, he later concurred and changed his viewpoint, Krugman (2010). He argued that the US failure to tame China’s “greedy trade policy” fixes a “world in which mercantilism works.”

The classical argument against mercantilism has three elements. These are the comparative advantage proposed by David Ricardo, the reduced consumption devised by Adam Smith, and the market forces balance trade by David Hume.

Comparative Advantage Argument

Basing on comparative advantage, the merits of international trade is obvious. According to this argument, Ricardo poses that a nation focuses on what it produces and exchange on a comparative advantage with similar products of another country on a comparative advantage (Ricardo, 1911).

Similarly, each country trades an assortment of goods it produces with competence in exchange for an assortment of goods the other country produces using similar methods of production. To explain this element, Ricardo summarized free trade as an ideal structure of a free trade, where each country naturally dedicates its capital and labor because employments complement each other (1911).

This quest of individual value is commendably linked to the universal benefit of the whole. By invigorating industry, rewarding creativity and by using efficacious powers presented by nature, it spreads labor more successfully and economically.

Whereas, by increasing the general mass production, it diffuses vast advantages by one common bond of significance, the general society of nations throughout the cultured world (Ricardo, 1911, p.81).

Consumption Argument

Adam Smith is credited for inferring the age of mercantilism that dominated the economic policies of the European powers during the 16- 18th centuries. According to the European policy, Smith asserts that the aim was inclined towards amassing more gold (Smith, 1869). To achieve this goal, mercantile nations restricted their imports and increased their exports.

This constrained the growth and expansion of trade. Smith’s main argument was that mercantilism damages the economy of the country embracing it. This was because it destroys the consumers while benefiting producers. Viner (1948) argues that the modern mercantile theory draws that a country that practice mercantilist sacrifices consumption for a short-run gains, in view of getting consumption in the long-run.

Professor Jacob Viner, the late University of Chicago lecturer, established the identical goals of mercantilism. He stated that mercantilism enlarges a country’s power (Viner, 1948).

This is achieved through amassing of foreign assets and heightens the long-term consumption by delaying or slowing current in consumption expecting future consumption. Mercantilism, in justifying these accomplishments, utilizes tariffs and other barriers on foreign products, whereas time buying foreign assets (Viner, 1948).

Market Forces Balance Trade Argument

According to Humes argument, the imbalanced or unfair trade does not persist under a gold standard. If superfluous trading country is to gain gold from its trade-deficit trading members, the surge in the monetary supply in a superfluous country would drive prices and wages high (Hume, 1742).

However, other economists claim that Hume did not consider the modern version of mercantilism in which the authority of the mercantilist country keep stock of the currency of the deficit country and utilizes it to purchase monetary resources or assets in the deficit country.

According to Gomory (2010), these are acts which are suitably called mercantilist. This is because the regimes are in view of affecting the surplus of exports over imports. They also circumnavigate the conventional market tweak at all costs.

A present-day version of Hume’s arguments holds the capital inflows that a business trade deficits merit the country that receives the capital. When one country has a higher return on capital it means higher interest rates, capital tends to flow into it. This capital will produce a secure investment.

The ensuing economic growth will make up for the short-term trade deficits and balance trade in the long run. Whereas private capital flows in locations it believes higher returns will be inevitable, public capital is not.

Mercantilist countries purchase foreign financial asserts even in situations when capital interests rates on return are outstanding in their own country than abroad. They further exploit their own population in accessing credit facilities this is to amass capital and make loans abroad.

In a nutshell, though financial mercantilism decreases short-term consumption, it encourages long-term consumption and supremacy in the mercantilist country. Nevertheless, it has an opposite impact on trading partners, granting them short-term gains in consumptions pooled with long-term losses in consumptions and power.

Mechanism for Balancing Trade

Buffet Import Certificate Plan

This plan embraces the import license, known as Import Certificates (ICs. Buffet’s proposal, perhaps, borrowed this idea from “cap-and-trade’ plans that had significantly decreased pollution, although his plan was aimed at capping imports to the volume of exports, thus balancing free trade.

Under this plan, Buffet suggested that whenever US producers exported American products, they would accrue ICs which they would profitably sell to potential importers.

The Buffet Plan guarantees a path towards a balanced trade as it only allows imports that sum the same value as exports into a country. Similarly, the plan has an additional benefit of granting export subsidies from the sale of Import Certificates to the trade deficit country’s exporting industries.

According to Gomory (2010), balancing trade and rewarding productivity serves as two elements needed to support a country recover industries that it loses because of manipulation of manufacturing comparative advantages.

Targeted Import Certificate

Targeted IC plan was developed by Richman et al (2008). This is where the ICs are auctioned by the government and are extremely specific to that country. The targeted ICs are designed to balance trade for a period of five years with countries that practice mercantilism, as explained by surplus, foreign exchange preserve by their governments.

Target ICs embraces various elements. One of the elements is an auction in the open market. This occurs where the Treasury Department auction ICs monthly.

Secondly, each of the target IC allows a certain value of imports. This suggests the possession of the targeted IC either by electronic or physical medium guarantees the holder to import a given value of goods or services from the targeted country (Richman et al, 2008). Each targeted IC could be issued only once.

Targeted ICs restrict trade reprisal. For example, if a mercantilist country responds with counter reprisals, it would lessen exports to the country issuing the ICs. The targeted ICs are useful because they help stimulate exporting industries by increasing exports.

Scaled Tariff

Scaled Tariff was proposed by Morici (Ideal Taxes Association, 2012), a University of Maryland Business professor. He viewed the tariff as significant in regulating rate, when it rises or goes down basing on the actions that cause a trade deficit. In his findings, he proposed a dollar-yuan conversion tax.

This would be applied to all Chinese imports into the US at magnitude that would be adjusted to the proportion of Chinese currency market interventions. The scaled Tariff largely balances trade. This is because it applies to any country with which a trade-deficit country has a substantial trade deficit.

Ideal Taxes Association (2012) notes that Scaled tariff provides a tremendous amount of government revenue from tariffs. The government revenue is gradually replaced by an increase in revenue of producers of tradable goods as investments in new production tend to move towards trade balance.

Similarly, the scaled Tariffs have a lower administrative costs compared to other plans, hence; most countries calculate the trade statistics used to evaluate the duty rate. Scaled tariff is consistent and legal under international laws; it allows import of duties that are over the duties inscribed in the WTO schedule for a member.

Conclusion

The argument based on classical theory that mercantilism is a self-destructive policy was anchored on classical form of mercantilism. However, other forms such as; monetary mercantilism is a successful and self-sustaining.

This is because monetary mercantilism decreases the temporal consumption in a mercantilist country whereas surging a long-term power and consumption. It has a contrasting impact on trading members in that, it grants them a temporal benefits in consumption and long-term declines in power and consumption.

Reference List

Buffett, W. E., and Loomis, C.J. (2003). America’s growing trade deficit is selling the nation out from under us. Here’s a way to fix the problem – and we need to do it now. Web.

Gomory, R. E. (2010). A time for action: Jobs prosperity and national goals. Web.

Hume, D. (1742). Part II, Essay V, Of the Balance of Trade. Web.

Ideal Taxes Association (2012). Richmans’ Trade and Taxes Blog. Web.

Keynes, J. M. (1980). The Collected Writings of John Maynard Keynes, Economics Articles and Correspondence: Activities 1940-1944: Shaping the postwar world. Volume 25. London: McMillan.

Krugman, P. (2010). Killer trade deficits. Web.

Krugman, P., and Obstfeld, M. (2000). International Economics: Theory and Policy. 5th Edition, Glenview, IL: Little, Brown.

Papadimitriou, D. B., Hannsgen, G., and Zezza, G. (2008). The Buffett Plan for reducing the trade deficit. The Levy Economics Institute at Bard College, Working Paper No. 538.

Ricardo, D. (1911). The Principles of Political Economy and Taxation. London: J.M. Dent & Sons.

Richman, R. L., Richman, H.B., and Richman, J.T. (2008). How to Fix Our Government-driven Trade Deficits and Faulty Tax System before It’s Too Late. Pittsburgh PA: Ideal Taxes Association.

Smith, A. (1869). An Inquiry into the Nature and Causes of the Wealth of Nations. New York: Clarendon press.

Viner, J. (1948). Power versus plenty as objectives of foreign policy in the seventeenth and eighteenth centuries. World Politics, Vol 1 (1)

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