Mercantilism Redux

"Greed is good." -- Gordon Gecko

   The buzzword of the week is "economic nationalism," preached by those hoping to lead to U.S. to new dreams of prosperity.
   But like mercantilism, the doctrine praised in the colonial era as the best way to prosperity, it is really a one-way street, as resources are drained from a colony to enrich the master country.
   In reviving that failed economic strategy but giving it a new name, the new U.S. administration makes an appeal couched in patriotic, free-market terms that mask a strategy of domination of smaller countries by a larger economic power.
   The underlying thinking is this: "We get to sell to your country freely but you can sell to our country only on our terms." A corollary to that is, "Whoever has the most gold at the end, wins."
   The problem, of course, is what known in Economics 101 as a "beggar thy neighbor" policy, which means the successful country reduces its trade partner to poverty and beggary.
   That may work well for a short while, but soon the so-called winning country has nowhere to sell its products because the former customers have no money.
   The strategies now being followed in Washington propose high tariffs (import taxes) on goods brought to America, but no taxes on goods exported from America. That way, the thinking goes, U.S. firms have an advantage and can increase their profits even as they offer more jobs and higher wages to American workers.
   However, that thinking ignores the likelihood of retaliatory tariffs by competing countries. In addition, high import tariffs only lead to higher prices to consumers, either on goods brought in from other countries or on goods made in America. Or both.
   On top of all that, according to a new study from the Federal Reserve Bank of New York, higher prices on imports "result in higher domestic prices by both importing and non-importing firms." For example, the Fed study noted, "if there were a tax on imported steel, local steel producers can also increase their prices and stay competitive," further increasing costs for U.S. consumers.
   And an unintended consequence of the proposed border tax is that it will depress rather than stimulate exports. Why? Since both imports and exports are priced in U.S. dollars, a tax exemption on exports "will mostly boost exporters' profit margins rather than increase their export sales."
   In addition, an appreciation in the value of the U.S. dollar will bring higher prices in foreign currencies, counterbalancing any benefit of an export tax exemption. Trading partners will then take their business elsewhere, resulting in lower U.S. export sales.
   The whole strategy may benefit a few companies for a short time, but eventually higher prices to domestic and foreign customers coupled with reduced demand will hurt everyone.
   But will the moguls care? Probably not, since they will have pocketed the extra cash and found a way to blame others, claiming they "should have saved for some rainy days."