Carbonize Mercantilism!


 

Abstract: Some American economists whine about Chinese trade, but China is actually making fun of the USA being hoisted on its own petard. The best way out of it all is more enforcement of intellectual property, and a worldwide carbon tax, sparing naught…

And of course, deep down below, it’s all about the world (and American) plutocracy, anyway and China is being played, like every other state. The worldwide carbon tax will allow for some more worldwide Colbertism, just what the doctor ought to order.

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Paul Krugman sees 2010 as "the year of China, but not in a good way".

Our "New Trade Theory" expert, Nobel Prize winner mostly for that, and whom I have accused of rabid globalization in the past, has changed quite a bit: "Chinese mercantilism is a growing problem, and the victims of that mercantilism have little to lose from a trade confrontation… China has become a major financial and trade power. But it doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory."

Mercantilism is a theory that holds that the prosperity of a nation depends upon fighting other nations economically rather than anything else (see Annex 1 for the definition and related concepts, including the fact that China practices more Colbertism than Mercantilism, and the fact that Colbertism is not intrinsically bad, and just what the USA needs at this point).

Basically China engages in this "predatory policy" by, um, clinging to Uncle Sam’s cotails… How embarrassing, my dear Krugman.

Well, it is ironical that the USA, which has practiced a mercantilist policy of making the US dollar as weak as possible, would complain that China is doing the same with its own currency. How dares it? Is China stealing the USA by parroting the USA? It is even more funny than that: China has pegged its currency to the Dollar, so as the USA tried its usual mercantilist trick of debasing the Dollar, the Chinese currency went down with, well, the Dollar!

Before giving lessons to China, the USA ought to give lessons to itself. Debasing the currency does not work. It is not just a question of looking at what happened to say, Argentina.

After a sorry episode, in the 1930s, with way too strong a Franc, when everybody else left the peg with gold before her, France had decided to never been caught in that trap again. But the French politicians had slightly misunderstood the problem. The problem with the gold standard, the same that imperial Rome already experienced, is that it did not bring enough money to the economy. The other problem too was that, as all other powers debased spectacularly their currencies, after the USA introduced 50% tariffs on all goods, French trade collapsed. (This, of course, was a minor problem relative to the one of the explicit alliance between the USA, Great Britain, and Hitler, fully visible as early as 1934, and which made the French deeply distrustful of America.)

Now France was fully familiar with mercantilism, having practiced it for centuries, until the new economists known as the physiocrats came on the scene, and advised King Louis XV. The physiocrats later taught Adam Smith. They threw mercantilism through the window, arguing that more trade was better for everybody. But still the mercantilism current of thought argued back, and has always been present in the French economic debates. France has a tremendous economic history, complete with huge ecological problems in the Middle Ages, and strong measures to correct them, and deliberate massive stimulus programs, as practiced by King Henri IV by 1600 CE.

So, fresh on her sorry experience of the 1930s, France debased the Franc relative to the Deutsch Mark in the 1960s and 1970s. Alas, France discovered that did not work either. Priced out of the cheapest products, the Germans concentrated on higher added value items, and the German economy persistently outperformed the French one. So, having observed her obvious mistake, next, France switched to a Franc that would be as hard as the Mark, under Banque de France chief Trichet. The rest is history, namely the Euro, and Trichet now heads the European Central Bank based in the fort of the Franks, Frankfurt.

Meanwhile the sneaky USA had connived, over the objections of Keynes, and behind his back, to make the US Dollar into the world ("reserve") currency. Keynes headed the Bretton Woods commission in charge of monetary problems. This little reminder for all those that American imperialism and dirty tricks to play with the planet as it was its personal basket ball, were not invented by G. W. Bush.

That world currency status of the Dollar allowed Secretary of the Treasury Connelly to grandly declare to the Europeans:"The Dollar is our currency, but it is your problem." The Europeans decided to solve said problem by being serious, and going the high technology route. European high taxes on energy and carbon, doubled with incentives to sell renewable energy for profit, are part of that high technology plan.

Anyway, so what are we going to do about China? One should notice that China is not alone, but is allied with the world plutocratic class. (A whiff of what happened with Hitler.)

Of course we could try to talk and seduce the Chinese out of mercantilism, forgetting for a moment that the immense fortunes of the owners of Wall Mart, for example, depends heavily upon Chinese mercantilism.

European powers practiced mercantilism intensely for three centuries, during which they engaged in a number of ferocious wars with each other. War is a natural extension of mercantilism. So the seduction dance to the aggressively minded may not work this time either: China and its western plutocrats may make the same mistake Hitler and his Western plutocrats made, namely interpret negotiation as weakness, and democracy with lethargy. When Paul Krugman worries about American job losses to China, he does worry about European job losses to the USA.

Another approach to pound a bit more sense in the mercantile ones, is to enforce worldwide intellectual property with more severity. Indeed, mercantilism orient an economy towards cheap product and impoverished workers (since it is trying to out-produce by cheapening). This is naturally an ambiance little supportive of intellectual creativity, always an expensive art.

The problem of China is that it employs around 600 million people in cities, and has to deal with about as much impoverished peasants who want to move to the cities to find better work. So China has to find more work for dozens of millions, hence its fanatical growth policy. China is addicted to growth through exports, because the (most of them American) plutocrats come to China and take care of everything: China has just to furnish local contacts, cheap workers, and cheap currency. What China needs to do is to reorient its growth towards a bit more self sufficiency, a bit more Maoism, and get more Chinese to self develop China.

To encourage the Chinese economy to grow internally, a long term approach is to use a WORLDWIDE CARBON TAX. It will in particular strike imports, and force importers to pay for the carbon mess which is poisoning the biosphere. This can be done in a way fully compatible with republican and fair trade principles. Actually a carbon tax is exactly about fair trade.

France was supposed to introduce a carbon tax, January 1, 2010, today, but just three days before that date, the French Constitutional Court found that the tax, as proposed made too many exemptions, violating the EQUALITY PRINCIPLE of the French republic. The French Constitutional Court blocked the enactment of the Carbon Tax law (notice in passing the enormous power of French courts).

The French government is scrambling to modify the Carbon Tax law, according to the Court’s findings, and should re-present it to parliament January 20, 2010. The global point is this though: a worldwide carbon tax, if enacted according to the finding of the French Constitutional Court, would be perfectly valid as far as the World Trade Organization is concerned.

China will not be able to move out of carbon as fast as the USA and the EU can. Indeed it is heavily invested in coal, cheap and dirty, and China needs lots of cheap energy, right away. The graphs, if nothing else, show that the augmentation of the need of China for energy is much greater than that of the EU and the USA.

Hence to go carbon free, China will have to make much more of an effort, even relatively speaking, than Europe or the USA, or Japan. Thus, forcing China to reduce its carbon output will force China to develop more internally rather than flooding the world with cheap exports (American style).

Come to think of it, a worldwide carbon tax would force the USA to develop itself more, too, instead of escaping into exportism. More generally, a carbon tax would force countries to self develop, and would have many of the advantages of protectionism, without the inconvenience and the aggressive underlying theme.

I would not call the worldwide implementation of a carbon tax retaliation, but rebalancing. Which it would be. Planet first, mercantilism last.

***

Patrice Ayme

https://patriceayme.wordpress.com/

***

Annex 1: DEFINTION OF MERCANTILISM: Mercantilism is a theory that holds the prosperity of a nation to be dependent upon its capital, and that the global volume of international trade is "unchangeable" (a so called zero sum game).

Economic assets or capital, are represented by bullion (gold, silver, and trade value) held by the state, and are best increased through a positive balance of trade with other nations (exports minus imports). Strict mercantilism assumes that wealth and monetary assets are identical. Mercantilism advocates to advance these goals by protecting the national economy. Notably by encouraging exports and discouraging imports, through the use of tariffs, subsidies and other barriers to fair trade.

Plutocratic propaganda often views French mercantilism as closely associated with Jean-Baptiste Colbert, finance minister for 22 years in the 17th century. This is misleading.

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French finance and economy minister Jean-Baptiste Colbert .

Sometimes French mercantilism is called "Colbertism", by deliberately confusing, or confused, Anglo-Saxon economists of the plutocracy loving type. This confusion is of some import, because Chinese policy may have more to do with Colbertism than Mercantilism, and some American economists are very biased about this. Actually the USA is an extremely mercantilist country masquerading as a free trade fanatic.

Under Colbert, the French government became deeply involved in the economy in all its aspects, in order to develop it more. Industries were organized by more than 150 edicts, and by technologies transfers guided by the government, and production was regulated by the state through a series of over a thousand directives outlining how different products should be produced. To encourage industry, foreign artisans and craftsmen were imported (something the USA has done always). Colbert also worked to decrease internal barriers to trade, reducing internal tariffs, making taxation more equitable, with indirect taxes that even the great lords could not avoid, and building an extensive network of roads and canals.

Colbert’s policies were very successful, and France’s industrial output and economy grew considerably during this period, as France regained her natural position as the dominant European power (after the ruinous seven religious wars of the end of the 16 C, and the just as ruinous war against the Spanish empire in the Netherlands, and worldwide, from roughly 1515 to 1637; unfortunately Louis XIV squandered some of this renewed, Colbert directed, economic might in wars, not all of his own making.)

To this day, though, Colbertism is controversial in France, and often derided as "dirigisme" (i.e, directing the private economy more than appropriate).

***

Annex 2: Here is a fuller extract of Krugman, New York Times, January 1, 2010, explaining extremely well what China is doing, currency wise: "China has become a major financial and trade power. But it doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory.

Here’s how it works: Unlike the dollar, the euro or the yen, whose values fluctuate freely, China’s currency is pegged by official policy at about 6.8 yuan to the dollar. At this exchange rate, Chinese manufacturing has a large cost advantage over its rivals, leading to huge trade surpluses.

Under normal circumstances, the inflow of dollars from those surpluses would push up the value of China’s currency, unless it was offset by private investors heading the other way. And private investors are trying to get into China, not out of it. But China’s government restricts capital inflows, even as it buys up dollars and parks them abroad, adding to a $2 trillion-plus hoard of foreign exchange reserves."

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5 Responses to “Carbonize Mercantilism!”

  1. ray l Says:

    Yesterday, I posted the following comment, on the same article of Dr. Krugman’s that is quoted here; but my comment is still awaiting moderation, so I thought I might put it here:

    “Your comment is awaiting moderation”

    According to Dr. Stiglitz, the developed nations gain $3 from trade for every aid dollar spent. The U.S. provides less aid than any other developed nation on a per capita basis (20th among O.E.C.D.) So it seems that U.S. citizens benefit more from world trade and currency considerations than any other nation. This seems supported by the simple fact that the U.S. standard of living has remained comparatively high even though consumption out paces production for decade after decade. So, accusations of China “manipulating” anything are hypocritical enough in a the current sense; but even worse when history is applied to this comparison.

    During the period when the U.S. had an advantage of low labor costs (1920s), mercantilism was not only the standard but was enabled by producing goods for Europe during WW1. And by 1929, after our version of mercantilism had run its course, the poverty rate had risen to 71% (before the crash!). The Chinese have instead done more to eliminate poverty than any nation in modern history. So why do U.S. economists continue with this linear hypocrisy?
    — ray l

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    • Patrice Ayme Says:

      Dear Ray 1: Right you are. I fully agree with the accusation of hypocrisy against some USA economist regarding mercantilism.

      The USA has a long history of mercantilism, and enjoyed its fruits for generations, while Europe had given it up. People have forgotten that, prior to World War One, international trade was roughly as developed as now (in proportion to world GDP). That was mostly happening in Europe. It is true that, during WWI, the French republic taught American industry to make high precision assembly line work, to mass produce the 75mm guns which were the main stay of the French army (French industrial capability was not enough). That was a case not of folie a deux, but fully honorable bi-mercantilism for defense purposes… Ford’s Model T was next, similarly produced, and the USA fully opened up in the 1920s, as you said using its cheaper labor (and profusion of oil).

      A lot of US standards of living have to do, as you say, with political maneuvering, and strategic advantage gained in the past. China is a big nothing as far as leading the international dance. The USA and the EU are everything. Since the EU has become more and more reasonable, the onus for increasing reason further is completely on the USA. Not on China. Further, the USA ought to remind itself that, when it diverged from Britain and France, to focus on its little self advancement, terrible things happened. This later reason is the only one why the Europeans are in Afghanistan: to humor American craziness…

      PA

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  2. ray l Says:

    Patrice,

    An interesting but often overlooked adjunct to your comment is that the labor values that allowed “the economy that roared” were the result of a vast effort of manipulation. The central dynamic was to continue agricultural production levels that were apt during the war, for 2 growing seasons after the war’s end. This at a time after the USDA had established agencies to facilitate production increases to meet demand in anticipation of the war; but it proved to be easier to increase production, dramatically; than it was to simply restrict production. By 1921 there was a collapse of prices. By 1929 (before crash), the average farm income had dropped to 25% of what it was 10 years earlier (real). And then of course things got worse from there (after crash).

    As agricultural values fell the National Association of Manufacturers were pushing forward their “yellow dog campaign”. Labor union participation fell sharply. The supply of labor which had been ample during the war due to unprecedented immigration levels was then in a state of extensive oversupply with the addition of the returning soldiers, and with vastly fewer opportunities in agriculture.

    By 1929 (before crash), 71% of the U.S. population was living below the poverty line. And to this day, we are unable to admit what really caused the Great Depression. Which is why there is so much folly regarding our current circumstances, which, have similar origins. But via much more urbane tactics, now farm subsidies have eliminated the need for gluts, and subsidies allow labor values to be controlled globally while simultaneously creating trade dependencies. And in the U.S. the cost of labor is more a recruitment concern that must be balanced against consumption levels (the Viet Nam era shows what happens when the working poor are not kept poor). But somehow we manage to ignore so much of this. We have nearly removed the word “exploitation” from the vernacular here in the States. And now we are accusing the Chinese of Mercantilism — delusions of grandeur.

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    • Patrice Ayme Says:

      Ray I:
      There was certainly, as you say, a deliberate manipulation of the economy in the 1920s. Mainstream thinking now admits this, although it would refuse to extent the same observation to recent times, where the manipulations are even more enormous. What strikes me now is that progressive, leftist thinking is completely out of ideas and analysis (OK, maybe people such as you and me represent the new progress oriented thinking!). This was not the case in the past; the crisis of the 1920s, or the great depression of the end of the 19C had been preceded by generations of progressive thinkers (Marx, Proudhon, etc.)

      Anyway, accusing China, while having set it up that way, reminds me of what happened with Hitler (FDR complained about Hitler, with lots of verbiage, and doing nothing about the German dictator, knowing full well that American plutocracy made Hitler strong, assertive, and arrogant).
      Thanks for the enlightening remark
      PA

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  3. Groowakdoksow Says:

    Awesome site! Love it!! Will be looking forward to the next post – thxs.

    Like

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