Chinese Mercantilism Continues Through Trade War

Adam Smith is not quite rolling around in his grave… yet.

In 1779, Adam Smith wrote one of the most influential works on modern economics ever recorded, An Inquiry Into the Nature and Causes of the Wealth of Nations, or The Wealth of Nations as you may know it.  One of the main premises of the book was to distinguish the superiority of free trade/free markets vs the mercantile economies of western Europe at the time.  Basically, Adam Smith—a Scotsman—told the good ol’ king that he was hurting society as a whole and that free trade would not only help the wealth of the nation, but that of its people as well. Furthermore, he posits that a nation cannot continue under such conditions.

China’s policies, (until seemingly today, June 10th, 2019) are primarily mercantile in nature.  At first blush, the United States’ current president seems to operate in a mercantile fashion, but there’s more to the trade war than meets the eye.

Trump Tariffs and Fair Trade Wars

President Trump has been outspoken about promoting fair trade globally.  The current tariff structure seems to be more of a “blunt instrument” to wake up our trade partners to the global economic issues.

Part of the reason for “Trump’s Trade War,” as I’ll call it, is to ensure that comparative advantage works.  Comparative advantage cannot work if there are no products that one country can produce at lower cost than another.  A second tenant of Adam Smith’s book is the division of labor, which is another way to look at comparative advantage.  If China produces consumer goods more cheaply than we do, but the United States is better at developing new products (which seems to be the case, currently), we have fair trade in comparative advantage, right? Not exactly.  China’s government allows for copyright theft, which kills the comparative advantage.  If Apple develops the iPhone and manufactures it in China, but China allows Chinese companies to steal the technology and software—and also manufacture and export the products—what’s the advantage?

Presently, China has dropped its trade surplus by about 10%, which shows a mutual interest in continued trade with the United States, according to CNBC.  The article also posits that a rebalancing of trade with China will prove to be beneficial for the markets.

Modern Mercantilism in China

It should be noted, however, that China’s seeming acquiescence has not stopped their mercantile policies.  Chinese mercantilism continues to apply through government-controlled companies to undercut prices to ruin competition, held foreign currency assets to undervalue the currency, and companies like Alibaba legally stealing copyrighted material.

Undervaluing currency makes exporting more attractive to local companies, which has been China’s strategy for decades now. Although if recent news is to be taken into consideration, China will have to look for new export destinations for a substantial amount of its products.

We’ll see sometime after the G-20 summit in Japan if China really wants to play ball with the United States, although they will continue to operate modern Chinese mercantilism until their populace decides to make a change.

 

Kyle Gordon