Whether Free or Fair Trade, Corporate Mercantlism Rules the Day - Peter W .B . Phillips

8/13/2019 Whether Free or Fair Trade, Corporate Mercantlism Rules the Day - Peter W .B . Phillips

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ANALYSIS

Whether Free or Fair Trade,

Corporate Mercantilism Rules the Day

The world has gone “ free trade”

mad. There appears to be almost

universal public agreement these

days that the world must reduce the barriers to trade in order to return to

economic growth and prosperity. It is

hard to pick up the business section

of a newspaper or to scan the covers

of news magazines without seeing

mention of ongoing or proposed inter-national trade negotiations, either

among Canada, Mexico and the

United States, in the European Com-

munity or at the General Agreement

on Tariffs and Trade (GATT).

Despite apparent unanimity about

the goal o f free trade, managed trade

is the rule. Indeed, mercantilism

thrives and has adapted to the eco-

nomic world of the 1990s. Corpora-

tions have replaced nations as the

driving force behind efforts to manage

the international trade system.

Corporate mercantilism propelled by

the multinational enterprise is the

prevailing model.

‘‘Slaves o f defun ct ec onom ists’ ’

Mercantilism is a term that historically

was applied to the trading practices

of European countries during the

sixteenth, seventeenth, and eigh-

teenth centuries. Trade surpluseswere sought through the use of

tariffs and nontariff barriers (NTBs)

to discourage imports, and by

subsidies to encourage exports.

The popularity of mercantilism has

ebbed and flowed over the centuries

and appeared to be in total retreat

with the multilateral negotiation of

the GATT following the Second

World War. Although mercantilist

practices multiplied in the 1980s ascountries used NTBs and state

subsidies, the start of the GATT

round in 1986 appeared to signal that

the days of these practices were

numbered.But neither the logic nor evidence

conclusively supports this view.

Free trade negotiations are always

based on the assertion tha t “ we arenot rich enough to ignore free

trade.” Economic theory suggests

that the free flow of goods across

international boundaries leads to the

maximum wellbeing of all nations.

This, however, is only true in a perfect

world. In reality, the organization

and operation of a world economy

leads to perverse results. The theory

assumes that trade is between

countries and companies; in practice,

international trade is increasingly between subsidiaries and affiliates

of multinational corporations. Further-

more, history does not support the

hypothesis that tradeopening efforts

will be conducted for the public

good. In fact, trade negotiations are

based on national interests of countries,

which are the private interests thatare made effective by domestic

bargains between the government

and industry. “ Free trade” is there-

fore a poor basis for negotiatinginternational trade rules.

John Maynard Keynes, the British

economist who pioneered a new

approach to manage the macroeco-

nomy, wrote in 1936 that “ practical

men, who believe themselves to be

quite exempt from any intellectual

influences, are usually the slaves of

some defunct economist.” In this

case, the ‘ ‘free trad ers’ ’ (academics,

and business and government leaders)

are the slaves of eighteenth century

classical economists and their ‘ ‘aca-demic scribblings” on the theory of

gains from trade.

Convent iona l t h ink ing andstrategizing around international

trade negotiations flows directly from

the seminal work prepared in the

eighteenth century by David Ricardo,one of England’s first economic theo-rists. His theory of the gains from

trade, elaborated in chapter seven of

The Principles ofPolitical Economy

and Taxation published in 1817,

hypothesizes that each country

could ben efit if it specializes in the

production of those produc ts for

which it has comparative advantage.

He argued that national comparative

advantage depends on the endow-

ments of the factors of production—land, labour, and c apital. In short,

countries endowed relatively highly

with fertile land could better their

standard of living by producing

fieldbased crops and trading those

crops for manufactures, while those

endowed with ample labour should

concentrate in the production of

laborintensive goods (such as tex-

tiles). Countries could then better

their standard of living by trading.

Ricardo went on to show in hisnowfamous example of Portugal

and England that in that period

Portugal should concentrate on

producing wine and England cloth,

even though Portugal had a clear

absolute advantage in both products.

By specializing and trading for the

products they did not produce , both

Portugal and England could increase

their wellbeing.

January-February 1992/Challenge


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Classical paradigm now invalid

This classical paradigm assumes

perfect competition. Perfect competi-

tion assumes a homogeneous product,

free entry to and exit from the sector,

constant (or at least largely equal)

returns to scale, full information,

rational actors, and a large number

of firms. Furthermore, the theory

assumes trade is largely between

different firms in different countries.

Provided these conditions hold, it

would be irrational for countries to

erect trade barriers in the form of

tariffs or nontariff measures.

The logical consequence of the

theory is that states should unilater-

ally remove their trade barriers

because they would be unquestion-

ably better off than otherwise. In

reality, governments are extremely

slow to negotiate changes to their

trade and tariff rules. And it is

companies which now lead the

charge to reduce barriers to trade in

services and flows of intellectual and

financial capital.

Concerns with free trade are valid;

the problem with the theory of gains

from trade lies in its assumptions. In

short, the classical economic paradigm

is no longer valid, if it ever was.

During the 1970s and 1980s, the

world economy was transformed by the

expansion of trade and the operation

of large transnational corporations.

The traded share of national GDP

continued to rise in almost all

national economies while many

transnational corporations now

often produce components o f single

products in different countries and

only assemble them in the destina-

tion market— in socalled “ screw

driver’ ’ plants. This production system

depends critically on the continua-

tion of trade and financial flows.

By 1972, much intraindustry trade

was within single firms—automo-

tive f irms, commodity trading

houses (see International Regimes,

S. Krasner, editor, Cornell Univer-

sity Press, 1983, p. 261). Since that

time, corporate concentration has

increased, particularly vertical

integra tion in production of specific

p roducts su ch as au to m obil es,

electronics equipment, and food

from the extraction of the primary

products up through the processing

and marketing of the final product.DeAnne Julius, Chief Economist at

Shell International Petroleum in

London, England, recalculating trade

balances for the United States and

Japan for 1986 on an ownership basis

and comparing them with conven-

tional estimates, shows how mislead-

ing conventional measures can be

(The Economist, December 22, 1990,

p. 45). Whereas national accounts

show that the United States appears

to have gross trade of only about $600

billion, in reality the global trade by

U.S.owned companies totaled $2.7

trillion. In contrast, Japanese owned

companies accounted for $450 billion

international trade, rather than the

$260 billion indicated by the national

accounts. Companies are more

dependen t on international trade than

countries and, as such, now are the

driving force for “ freer” trade.

The assumption o f perfect compe-

tition that underlies the theory of

gains from trade is no longer valid.

As such, the search for “ free” trade

between states is not a sound basis

for international trade negotiations.

Most trade is not between unrelated

firms but now is more the result of

an administrative decision by a

corporate manager based on the

maximization of aftertax profits in

its subsidiaries (regardless of the costs

or benefits to any single subsidiary

in one country). Therefore, there is

no reason to suspect that trade liber-

alization will yield greater gains

from trade. The more likely outcom e

of reduced tariffs and elimination of

trade barriers will be further expan-

sion of multinational corporations

(MNCs) and greater concentration

of economic wealth and power.

Because trade now is within

companies rather than between

countries, comparative advantage

no longer based on the initial fact

endowment of land, labor an

capital. Instead, William Clin

economist at the Institute of Intern

tional Economics in Washingto

argues that for many industrial secto

“ comparative advantage is madnot given.” (See Managing Tra

R e lati ons in th e 1980s: Issu

In vo lv ed in the GATT Ministeri

Meeting o f 1982, S. Rubin and

Graham, editors, Rowman & Alle

1984, p. 26.) As production an

trade become further captive of t

multinational companies, the oper

tion of the financial m arkets and th

underlying economic climate

separate countries will determin

the balance sheet of those countrieIftheclimate becomes less welcomin

MNCs simply shift their productio

and profits to more accommodatin

regions and countries, leaving th

former host countries in a financi

and economic bind.

N ew , m uta te d m ercanti li sm

Business and government unite

efforts under the free trade bann

during the 1980s. Now in the 199there is a surfeit of exercises designe

to lower trade barriers and increas

the flow of goods and service

between countries. If one looks car

fully at the past and current rounds

the GATT, it is apparent that me

cantilism has mutated: nation

mercantilism has been replaced b

corporate mercantilism. As the

expanded operations globally, MNC

have sought to strengthen the

co rpo ra te supp ly connec t ion

abroad—bankers, insurers, tran

porters and input suppliers.

For evidence, one need look n

further than the United States neg

tiating stance at the current round

the GATT. The United States ha

announced that, in addition to low

tariffs and NTBs and a better disput

settlement system, it also seeks fr

trade in services, rigorous rules o

Challenge!'January-February 1992


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intellectual property rights, and re-

duction in barriers to capital flows.

The theory of the gains from trade

is based on the production and trade of

goods, with trade flows determined

by factor endowments. If the United

States were able to secure liberalized

trade in services, intellectual property,and capital, it would materially

undercut the economic basis for

international trade. The theory of

gains holds that as the endowment of

factors of production is equalized

across all countries, the com parative

advantages would diminish. Theo-

retically, then, as this process contin-ued, there would be progressively

less to gain from international trade.

But in practice, an examination of

U.S. objectives from the corporate perspective demonstrates these make

perfect sense in the context of the

emerging corporate mercantilism.

Corporations worldwide have been

cooperating to develop vertically

integrated enterprises, where one

family of related or friendly companies

controls the entire production, distri-

bution, marketing and financing system

for products. In other words, these

enterp r i ses— whether Japanese

keiretsu, the now legally tolerated

“ corporate alliances” in the UnitedStates, or consortia of European busi-

nesses supported by the European

Community—seek to control products

from the ground to the consumer, and

beyond to financing and servicing.

Some Canadian commentators estimate

that foreignowned companies oper-

ating in Canada already purchase

about 80 percent of their business

services from their parent companies

or affiliates.

These corporate enterprises havetaken strategic decisions to become

involved in influencing trade nego-

tiations in order to level the barriers

that inhibit corporate alliances. This

involvement ranges from lobbying

government e i ther di rect ly or

through business associations to the

provision o f managers or consultants

to assist governments with the trade

negotiations or public encourage-

ment o f support for trade goals. This

support is widespread throughout

the business community.

In short, that is corporate m ercan-

tilism.

Corporate agenda may dominate

From an economic perspective, to

search for intellectual property

rights, free the flow of investment

and open trade in services are not

justi fied. If the GA TT is forced to

encompass these issues, the efforts

to realize the gains from trade byresolving the agricultural trade wars,

lowering tariffs, and controlling

NT Bs might be jeopardized.

Furthermore, the citizens of many

nation states would lose as national

economic progress gets overwhelmed bythe corporate mercantilist agenda.

Many economists agree that in the fast

moving economic world, the most

mobile factors of production gain the

most (or lose the least) from economic

change. In other words, highly skilled

labor (mostly firstworld business

managers and professionals) and

capital are the big winners of change.

Currently, companies are partly

restricted from shuffling their operations between countries by restrictions on

the movement of labor, capital, and

services. This effectively spreads the

gains (and losses) between all factors of

production. If companies are allowed

to operate freely in all markets, then

they will be able to play off one country

against another. In this situation, if

countries were to attempt to imple-

ment progressive (or regressive) social

or economic development programs,

companies would be able to movequickly. In short order, the corporate

agenda would rule,

GATT should stick to what it was

designed to do, namely work toward

realizing the gains from trade.

Peter W.B. Phillips

Economist , Regina , Canada

author of Wheal , Europe, an d the GATT

The Grea t Market Debate in Soviet

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Whether Free or Fair Trade, Corporate Mercantlism Rules the Day - Peter W .B . Phillips