Dangerous Business

Chapter One Modern Mercantilism In 1989, Alan M. Webber, then the managing editor of the Harvard Business Review, returned from a trip to Japan and wrote to his readers: The world is changing, and Japan is different. On both sides of the Pacific, the old, entrenched interests are hard at work denying these conclusions, pretending that business as usual will do, and silencing the observers and analysts who call attention to the new situation. Japan's motives are not hard to fathom; after all, every day the country gains in wealth, economic power, and global momentum. The longer Japan successfully confounds U.S. leaders into thinking that all the old rules still apply, the longer the transfer of wealth and power can continue unimpeded. It is not Japan's job to inform us of our blind stupidity. What Webber found in Japan was a nation actively pursuing a mercantile trade policy, the approach to global commerce where the government and industry work together to build national wealth through increased exports while maintaining an economic moat around their country to stop direct foreign investment, sharply limit imports, and build up huge financial reserves. Adam Smith would have immediately recognized this Japanese policy as mercantilism; however, even after more than a quarter century of engagement, U.S. leaders still do not. If we fast-forward in time about twenty years, what Webber found in Japan in 1989 is happening all over Asia and in parts of South America today. And, as then, U.S. leaders and opinion elites do not recognize that they are witnessing a new rise of mercantilism, particularly in China. Rather, they view China's economic and trade activities as a steady march from socialism to market-oriented capitalism like that of the United States, though a bit more exotic. China is actively creating a hybrid economy that the Chinese define as a "socialist market system" (SMS). While to many outsiders that system appears to be market-oriented and largely controlled by the private sector, it is neither. China is well along in creating an economy where the government owns and controls the strategic industries while secondary and service industries are left to private ownership, which the government also controls. The giant enterprise called China, which accrued a historic global trade surplus of $262 billion in 2007, is pursuing export-driven, beggar-thy-neighbor trade policies that are so blatantly nationalistic they are undermining the World Trade Organization and putting the entire global trading system at risk. To understand China's approach to global economics, we must examine its basic elements. MercantilismIn the sixteenth through eighteenth centuries, the dominant economic theory in Europe, mercantilism, held that national prosperity depended on a nation's supply of capital, which at the time was gold. The fastest way to acquire capital was to run a trade surplus with other nations by exporting more goods than were imported. To facilitate this economic dynamic, governments subsidized production and exports, at the same time imposing barriers on foreign imports. The idea was simple: to make exports so inexpensive that foreign consumers would prefer them over domestically made goods and conversely make imports so expensive that local consumers would prefer domestic goods over foreign-made ones. England, under the intellectual influence of the economists Adam Smith and David Ricardo, gradually abandoned mercantilist policies in the nineteenth century and replaced them with an ideology of free trade and comparative advantage. The United States continued to pursue a mercantilist economic agenda until the early 1930s, when Roosevelt's secretary of state, Cordell Hull, began a move to a free- trade regime, which also promoted FDR's foreign policy objeChoate, Pat is the author of 'Dangerous Business' with ISBN 9780307266842 and ISBN 0307266842.