Is China a Neo-mercantilist nation? Definition: neo-mecantilism Neo-mercantilism is a policy regime that encourages exports, discourages imports, controls capital movement, and centralizes currency decisions in the hands of a central government. The objective of neo-mercantilist policies is to increase the level of foreign reserves held by the government, allowing more effective monetary policy and fiscal policy. This is generally believe to come at the cost of lower standards of living than an open economy would bring at the same time, but offers the advantages to the government in question of having greater autonomy and control.It is called “neo-” because of the change in emphasis from classical mercantilism on military development, to economic development, and its acceptance of a greater level of market determination of prices internally than was true of classical mercantilism. Its policy recommendations sometimes echo the mercantilism of the early modern period. These are generally protectionist measures in the form of high tariffs and other import restrictions to protect domestic industries combined with government intervention to promote industrial growth, especially manufacturing.At its simplest level, it proposes that economic independence and self-sufficiency are legitimate objectives for a nation to pursue, and systems of protection are justified to allow the nation to develop its industrial and commercial infrastructure to the point where it can compete on equal terms in international trade. In macro-economic terms, it emphasizes a fixed currency and autonomy over monetary policy over capital mobility. http://en. wikipedia. org/wiki/NeomercantilismProtectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow (according to proponents) “fair competition” between imports and goods and service produced domestically. “Protectionism doesn’t protect you”. PostNoon. com. April 27, 2012. Retrieved 26 May 2012 This policy contrasts with free trade, where government barriers to trade are kept to a minimum. In recent years, it has become closely aligned with anti-globalization.The term is mostly used in the context of economics, where protectionism refers to policies or doctrines which protect businesses and workers within a country by restricting or regulating trade with foreign nations. “Xinhua (2012-05-24). “Trade-oriented Economy Boosts Growth, Employment”. CRI English. Retrieved 26 May 2012” A variety of policies have been used to achieve protectionist goals. These include: 1. Tariffs: Typically, tariffs (or taxes) are imposed on imported goods. Tariff rates usually vary according to the type of goods imported.Import tariffs will increase the cost to importers, and increase the price of imported goods in the local markets, thus lowering the quantity of goods imported, to favour local producers. (see Smoot–Hawley Tariff Act) Tariffs may also be imposed on exports, and in an economy with floating exchange rates, export tariffs have similar effects as import tariffs. However, since export tariffs are often perceived as ‘hurting’ local industries, while import tariffs are perceived as ‘helping’ local industries, export tariffs are seldom implemented. 2.Import quotas: To reduce the quantity and therefore increase the market price of imported goods. The economic effects of an import quota is similar to that of a tariff, except that the tax revenue gain from a tariff will instead be distributed to those who receive import licenses. Economists often suggest that import licenses be auctioned to the highest bidder, or that import quotas be replaced by an equivalent tariff. 3. Administrative barriers: Countries are sometimes accused of using their various administrative rules (e. g. regarding food safety, environmental standards, electrical safety, etc. as a way to introduce barriers to imports. 4. Anti-dumping legislation: Supporters of anti-dumping laws argue that they prevent “dumping” of cheaper foreign goods that would cause local firms to close down. However, in practice, anti-dumping laws are usually used to impose trade tariffs on foreign exporters. 5. Direct subsidies: Government subsidies (in the form of lump-sum payments or cheap loans) are sometimes given to local firms that cannot compete well against imports. These subsidies are purported to “protect” local jobs, and to help local firms adjust to the world markets. . Export subsidies: Export subsidies are often used by governments to increase exports. Export subsidies have the opposite effect of export tariffs because exporters get payment, which is a percentage or proportion of the value of exported. Export subsidies increase the amount of trade, and in a country with floating exchange rates, have effects similar to import subsidies. 7. Exchange rate: manipulation: A government may intervene in the foreign exchange market to lower the value of its currency by selling its currency in the foreign exchange market.Doing so will raise the cost of imports and lower the cost of exports, leading to an improvement in its trade balance. However, such a policy is only effective in the short run, as it will most likely lead to inflation in the country, which will in turn raise the cost of exports, and reduce the relative price of imports. 8. International patent systems: There is an argument for viewing national patent systems as a cloak for protectionist trade policies at a national level.Two strands of this argument exist: one when patents held by one country form part of a system of exploitable relative advantage in trade negotiations against another, and a second where adhering to a worldwide system of patents confers “good citizenship” status despite ‘de facto protectionism’. Peter Drahos explains that “States realized that patent systems could be used to cloak protectionist strategies. There were also reputational advantages for states to be seen to be sticking to intellectual property systems.One could attend the various revisions of the Paris and Berne conventions, participate in the cosmopolitan moral dialogue about the need to protect the fruits of authorial labor and inventive genius… knowing all the while that one’s domestic intellectual property system was a handy protectionist weapon. ” . ? Information Feudalism: Who Owns the Knowledge Economy?. London: Earthscan. 2002. p. 36. 9. Employment-based immigration restrictions, such as labor certification requirements or numerical caps on work visas. 10. Political campaigns advocating domestic consumption (e. . the “Buy American” campaign in the United States, which could be seen as an extra-legal promotion of protectionism. ) 11. Preferential governmental spending, such as the Buy American Act, federal legislation which called upon the United States government to prefer U. S. -made products in its purchases. In the modern trade arena many other initiatives besides tariffs have been called protectionist. For example, some commentators see developed countries efforts in imposing their own labor or environmental standards as protectionism.Also, the imposition of restrictive certification procedures on imports are seen in this light. Further, others point out that free trade agreements often have protectionist provisions such as intellectual property, copyright, and patent restrictions that benefit large corporations. These provisions restrict trade in music, movies, pharmaceuticals, software, and other manufactured items to high cost producers with quotas from low cost producers set to zero “Protectionism doesn’t protect you” and “The Conservative Nanny State” http://en. wikipedia. rg/wiki/Protectionist#cite_note-4 Ascertain whether China indeed has those aspects in its economic policy, making it a truely neo-mercantilist nation: Perceived or Real. Possible implications: whether such a claim is Real or Perceived It is certainly possible to see China’s economic policies as neo-mercantilist, though people in China might not agree. Mercantilism was the economic doctrine that held that a country must export more than it imported in order to be economically strong. Mercantilist countries tried to promote exports and reduce imports. From the perspective of many Americans, China engages in such policies today.Many Americans believe that China artificially weakens its currency so that it will be easier for Chinese firms to export. China is also said to put informal barriers in the way of imports and to heavily subsidize exports. All of these actions can be seen as neo-mercantilism. I have said before this and I must emphasize it again. The fundamental premise of all U. S trade/globalization talks and discussions is that the participants are all playing the same game of liberal, neo-classical, free market, resource endowment and comparative advantage based free trade.This is a totally false premise that immediately gets the discussions off in irrelevant directions. The global economy is, in fact, sharply divided between those who are playing the free trade game and those who are playing some form of mercantilism. Of course, there is a spectrum of attitudes and policies, but roughly speaking the Anglo/American countries, North America, and parts of Europe are playing free trade. Most of Asia, much of South America, the Middle East, Germany and parts of Europe are playing neo-mercantilism. It’s like watching tennis players trying to play a game with football players.It doesn’t work, and insisting on playing by the rules doesn’t help, because both sets of teams are playing by the rules — of their game. In any case, there are a lot fewer clear cut rules than most people think. For example, probably the biggest single factor in the off-shoring of large chunks of U. S. based production and millions of jobs abroad has been the packages of financial investment incentives offered by China and others to global companies to encourage them to relocate production. More jobs have been lost to these packages than to currency manipulation.But you can’t complain about rules violations because there are no rules to cover these investment incentives. At the federal level, American doesn’t offer such incentives but there is not WTO or IMF or other rule against it. Nor is the United States proposing any rules in this area. Take the case of currency manipulation. China is surely manipulating its currency, but so have and do many other countries. Japan, South Korea, Taiwan, Singapore, and others all used currency manipulation is a major element of their export led miracle growth strategies.Some of these countries still to engage in currency manipulation and recently others such as Brazil and Switzerland have gotten into the game. Germany enjoys an undervalued currency because of its incorporation in the Euro. So here is a case where rule violation has been so prevalent that the violation is, in a way, the rule. So if something is to be done about it, that something will have to be a lot more powerful than a call for everyone to “play by the same rules. ” We first need to get everyone playing the same game, and that is more likely to turn out to be football than tennis. hat options do others have to deal with such a perceived or real protectionist tendency? Possible implications: whether such a claim is Real or Perceived References http://en. wikipedia. org/wiki/Neomercantilism ? O’Brien, Patrick Karl & Clesse, Armand. (editors) Two Hegemonies: Britain 1846-1914 and the United States 1941-2001. Aldershot: Ashgate. (2002). ? Helmut Schoeck & James W. Wiggins (editors), Central Planning and Neomercantilism. Pdf document  with scanned pages at the Ludwig von Mises Institute, Auburn, Alabama, USA Harold James (2009-06-30).The End of Globalization. Harvard University Press / google books. p. page 12. Early criticism In The Wealth of Nations, Adam Smith criticised the implicit political corruption of mercantilism in limiting the benefits of trade to the elite classes, and asserted that free trade should benefit all interested parties. Smith considered mercantilism a system where one country increases its power by getting excess gold on foreign transactions and it is a system created by merchants in order to get monopolies and easy profits.Some people believe that, because Britain adopted his call for free trade policies, it fell behind the United States and Germany by 1880, having gained its dominance under the mercantilism of Cromwell and Elizabeth I (when according to Adam Smith, England was much less mercantilist than Spain and Portugal, who decayed much due to their colonial mercantilist policies, their gold reserves all naturally flowed to Britain, who at the time had a much more efficient production system, even though Portugal and Spain had colonies with much richer natural resources than Britain).The success of the United States and Germany drove the reintroduction of protectionist regulations in the rest of Europe. Between 1870–1910 United States achieved a global industrial dominance thanks to innovations in its production system (such as interchangeable parts), culminating with Ford’s Assembly line. These innovations strongly increased the international competitiveness of American products. Philosophy Neomercantilism is founded on the use of control of capital movement and discouraging of domestic consumption as a means of increasing foreign reserves and promoting capital development.This involves protectionism on a host of levels: both protection of domestic producers, discouraging of consumer imports, structural barriers to prevent entry of foreign companies into domestic markets, manipulation of the currency value against foreign currencies and limitations on foreign ownership of domestic corporations. While all nations engage in these activities to one degree or another, neo-mercantilism makes them the focus of economic policy. The purpose is to develop export markets to developed countries, and selectively acquire strategic capital, while keeping ownership of the asset base in domestic ands. This use of protectionism is criticized on grounds that go back to Adam Smith’s The Wealth of Nations, which was aimed directly at classical mercantilist policies, and whose arguments are applied to neo-mercantilism. Namely that protectionism is effective as a means of fostering economic independence and national stability; and questioning the conclusion that it allows for sustainable development of the nation’s industrial base in the most efficient manner.Instead market economics has for over two centuries argued that increasing competition within the nation which will more effectively promote capital development and efficient allocation of resources. “Free traders” argue that by closing an economy, resources will be spent duplicating products that could more effectively be bought from abroad, and that there will be less development of exports which offer a comparative advantage.Market economists also argue that protection denies a nation’s own consumers the opportunity to buy at cheaper market prices when quotas or tariffs are imposed on imports. The subsidy of goods has also been advocated under neo-mercantilism. The fair trade movement claims that the protection of stability in emerging economies by guaranteeing a minimum purchase of goods at prices above those available in the current world markets, can contribute to restoring economic and social balance as well as promote social justice.Proponents of the fair trade movement argue that this may help to avoid the instability generated by the influence of global corporations on developed and developing nations. Neomercantilists claim that “Free Trade” results in a negative philosophy that a nation that is not competitive deserves to decline and perish, just like an under-performing corporation should. They argue that “free trade” does not work well whenever dumping is practiced or the international rules do not take into account the differences between wages, costs environmental regulations, and benets from nation to nation.For instance, there is a major difference in the cost of labour between a “First World” and “Third World” country for two equally skilled (or unskilled) sets of workers. When this economic reality is exploited by “First World” manufacturers, the benefits accrue to “First World” shareholders and consumers (and slightly improved work condition of exploited Third World workers) at the expense of privileged “First World” workers and their status in the middle class”. An unquestioningly open policy in such circumstances may effectively devalue “first world” human capital investments in favor of financial capital investments. Consider for example, a person deciding whether to invest in training as an engineer or in a portfolio of financial assets. Offshoring dramatically increases the effective supply of engineers, and as a result, their price will tend to decline (or grow at a slower rate).This decline will be increased by the lower cost of living in non-first world countries that would allow an engineer there to live much better on a lower nominal salary than their first world counterpart. (see purchasing power parity). This obviously is resulting in a huge immigration of skilled professionals from first-world countries to the third world, seeking a better quality of life. Faced with such prospects, rational economic agents will tend to avoid investing in human capital in areas that are vulnerable to such government-induced devaluation.Instead, they will shift training toward areas that are protected by regulation (for example : careers in law, medicine, government) or social tradition (tenured academia), or socio-cultural factors (sales) or local physical requirements (nursing, medicine, construction). Alternatively, rational economic agents in “first world” economies may choose to invest in financial assets instead of human capital — further eroding the long term ability of the “first world” country to produce and grow.As predicted by Adam Smith, this effect would reduce the inequality between First World and Third World countries, increasing overall fairness. Additionally, since cost of goods sold tends to be a larger component of total revenue than profits for most industries, production within a country may keep a larger portion of the total wealth within the local economy in comparison to dividends of profits and reduced prices on consumer goods. Furthermore, infrastructure investments may be reduced when production is shifted offshore.Over the longer term, such reduced local investments may reduce longer term productivity and economic growth. Neomercantilist economies on the other hand are often characterized by higher long term growth rates (that tend to flatten when neomercantilist policies are halted). This claim unfortunately is not verified among developed nations, where Australia is both the main proponent of international free trade and among the first world countries, the one with the higher sustained growth during the last fifteen years.Also, as of February 2009, Australia is also the only developed country who is not officially in recession. The language of neomercantilist policies repeats the claims of earlier centuries that protective measures benefit the nation as a whole and that governmental intervention secures the “wealth of the nation” for future generations. In doing so, neomercantilist admit that the interests of large corporations might as often be represented and protected as pushed aside for the national interest.As a neomercantilist nation’s industrial production capacity and improving research and development grow as a threat to the hegemon’s (who usually unilaterally practices free-trade as Britain in the 19th century and the USA in the late 20th century) domestic markets, so protectionism is the usual response, initially through political and, when necessary, military means (see World War I).