MERCANTILISM IS BACK

By Jean-Louis Caccomo, Economist at the university of Perpignan (France), Board Advisor.)

1-GENERAL AGREEMENT ON TARIFFS AND TRADE

In the beginning, the General Agreement on Tariffs and Trade, created just after the Second World War in 1946, reflected a desire to draw a lesson from the conflicts of the inter war period. It was widely understood that the war resulted from the rise of nationalism, the exacerbations of mercantilist tensions, and the attempt at economic self-sufficiency by warlike nations. The German war economy tended toward autarchy. Germany refused to rely on the countries it would later attack. Some will argue that such an economy managed to reduce unemployment. But at what price? No one is unemployed in a prison; unemployment (that was then called idleness) was forbidden in the USSR. What is important is not jobs but the freedom to create wealth. It was widely held that the inter war fragmentation of the world economy degenerated into armed conflict. The attempt to create an open trade environment, it was believed, would be conducive to more pacific international relations.

The GATT emerged as the means of promoting "free trade", deemed to be essential to peace. Its purpose was to persuade countries to dismantle their protectionist systems (each country was willing to do so only if ensured that the other ones would do the same). And it worked rather well. The post war period was peaceful and trade, as well as growth, increased. Europe was rebuilt and caught up with the US, as did Japan, a country that became one of the wealthiest in the world within 30 years. The emerging countries (NIC) showed, as they took part to international trade, that poverty was no Southern fatality and growth no Western property. In fact, the same people who, in the West, deplore poverty in the South, became apprehensive when such countries got wealthier (will they steal our industry and jobs?). GATT acted step by step: the "Kennedy Round" (achieved in 1967), the "Tokyo Round" (achieved in 1979) and more recently the "Uruguay Round" (achieved in 1993). From negotiation to negotiation (these "Rounds") tariffs reduced gradually but substantially in many industrial sectors, and more countries joined the agreement.

Difficulties arose when negotiations reached such sensitive subjects as agriculture and services. During such conferences as Punta del Est (September 1986) and Montreal (1988) States became more involved in regulating trade even though they were supposed to reduce their influence in international trade according to the GATT. Agriculture, for example, is widely considered to be a State matter since this sector gets subsidized and prices are controlled by the national administrations. When the GATT was transformed into World Trade Organization-a body designed to regulate international trade-it was a step toward mercantilism.

1-GATT - 2-WTO

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2-WORLD TRADE ORGANIZATION

The WTO goal was not to bring about free trade but rather to set up a mechanism of enforcement that would tempt countries toward reprisal and regimentation and litigation. But the very idea of regulating trade leads to complicating international relations.

Today, activist groups constantly inveigh against the WTO, on grounds that it represents a "savage liberalism" that Washington would impose on the global economy. Were the world truly liberal, such organisations-which are really "international administrations" financed by public money-would never exist. They are part of the general impulse to "regulate" the world economy. From an economist's point of view, such administrations are not necessary; exchange alone will regulate the economy. Exchanges enable opposing interests -buyers vs. sellers, employers vs. employees, lenders vs. borrowers--to coordinate supply and demand. Such equilibriums are as dynamic history. Economic actors' interests inevitably appear in conflict in the short run: what is given to the wage earner at a time t is simultaneously being taken from the share-holder or the owner. Yet, they turn out to be complementary in the long run: in order for one to be employed, enterprises must be created; to create enterprises, people have to contribute their skills or capital.

Because exchanges regulate the economy, regulating the regulator does not make any sense. This same philosophy is then applied at the international level, since human beings, not countries, make exchanges. Countries do not act, people do. Saying "France exported" or "China sold to Paris" is distorted language. In reality, individuals who live in France and constitute an enterprise called Renault have created cars that have been bought by consumers living in Spain. Hence, an American Senator will be reproached by Californian farmers for the economic competition caused by cheaper Mexican tomatoes. In the same way, French farmers lobbied to impose "community preference", a policy which forces German people to buy in priority agricultural goods produced within the EU (i.e. in France). It might seem beneficial to promote local economy. Yet, what would our living standing standard be like if we were to live solely on what we produce? I live in Perpignan: should I only drink Catalan wine? I can buy wine produced in my area if I do like it, yet I am also free (depending on my tastes and my budget) to buy Bordeaux or Italian wine. Trade derives from freedom and prosperity from trade. Local economy will grow if American people discover and buy wine from my area.

The latest negotiations between governments at WTO have shown that mercantilism is back. Mercantilism is the denial of liberalism. Mercantilism regards the economy as a zero-sum game (what one country/individual earns is lost by another country/individual). They transpose their visions of antagonistic political forces to the economy, turning economic exchanges into economic wars the way they turn the ideas of different religions into religious wars. Protectionism is self-infliction, in peace time, of the measures our enemies would impose on us in wartime. Imposing a blockade or a state of siege on a city or a country is the best way to force it to surrender. It aims at stifling the enemy by forbidding trade. Such "imposed protectionism" is a powerful weapon which usually leads to stagnation. The opposite-free trade-produces prosperity.

This applies to all economic activity. From an economic standpoint, services are like goods: they are both produced by trade. Hence services may create markets. If producers and consumers ask the State to take part into such exchanges, the State will be forced to defend one side against the other. It will have to choose since it can neither promise to raise and reduce prices at the same time nor guarantee an equilibrium since the very notion of equilibrium is only meaningful when markets are free. The only feasible regulation and the only answer a real statesman should give is: "The State lets you trade freely !" The market transforms conflicts of interests into complementarities. For producers to exist, they need consumers; for consumers to subsist, they need producers. Producers and consumers share a common interest, the general interest, when concluding a deal: they must find an equilibrium price. If the State acts in favor of any corporation (of producers) or lobby (of consumers), force and economic war replace trade.

1-GATT - 2-WTO

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