Mercantilism Redux?

No matter what one’s prognostication is on the direction of Australia’s economy in the coming months and years, what we can all agree on is the global economy is witnessing tectonic shifts in economic power.

From this burningpants correspondent’s perspective though, the most interesting changes will be in the political sphere, as nation states realign their policies to adapt – in potentially counterproductive moves.

Although much debate has centered on what caused the initial crisis, we can safely state that, in the US at least, the current problem is the lack of consumer demand that has emerged as a byproduct of consumers undergoing a process of self-administered austerity and deleveraging.

To date, the response of policy makers in the US has been, frankly, impotent. The fiscal responses to the downturn have been largely non-existent, leaving only the monetary arm to shoulder the burden via massive increases in the money supply. Traditional Keynesian approaches of boosting demand via government expansion aren’t likely to gain much support in the US.

As is often the case, policymakers start playing a populist card.

One approach that appears to be slowly rearing its ugly head is the push for protectionism.  Over the past week, rigorous debate has ensued in the US Senate regarding the introduction of a new bill – the “Currency Exchange Rate Oversight Reform Act”. The act would seek to impose duties on products from countries who effectively seek to subsidise their exports by undervaluing their currencies.

The bill is largely targeted at China, where that nation’s insistence on not floating the RMB has caused much frustration in the US and closer to home in certain sectors of the economy.

The shift to protectionism has gained support from many and from some surprising quarters, including free trade advocate, economist Paul Krugman, where he states: “Support for free trade should be based on analysis, not slogans. And if you’re in a situation where the analysis says normal rules don’t apply, then they don’t apply.”

Although there has been much debate about the merits of free trade (a debate we won’t enter into), what is concerning is, to what extent these events signal the beginnings of not only a new trade war, but potentially the move toward a more mercantile trend amongst Australia’s largest trading partners?

Mercantilism essentially is a doctrine that advances the government control and intervention in foreign trade and is of paramount importance in securing prosperity for a country via a positive balance of trade.

Assuming that two of our largest trading partners (of course, China could already be labeled as mercantilist) enter into a trade war, what will be the impact on Australia’s mining-fuelled prosperity?

Here we enter the strange realm where economics crosses path with geopolitics. Would Australia’s alliances put in jeopardy the close trading ties being developed with China?

Considering the momentous economic and political events (who guessed the Arab Spring?) we have witnessed in the past year, who can really argue with certainty that Australia won’t be placed in a difficult diplomatic situation?

Local pressures too might see a movement towards a more mercantile Australia. The Australian Manufacturing Workers Union recently produced a paper with the poignant words: “Australian manufacturing is currently facing its most acute crisis since the Great Depression”.

Their solution? To see China float their currency, and major tax incentives for local industries. Unless the former is met, there should be no free trade agreement with China. Although the union movement is not a strong as it once was, their thoughts still hold much sway over the current Government.

So, will politics triumph over traditional economic arguments favouring free trade? We will be watching world developments with much interest.