Communism, Mercantilism and China...

Two op-ed articles in today's FT (behind their paywall, unfortunately), got me to thinking.

The one, from Ilene Grabel and Ha-Joon Chang, argues for capital controls as a good thing for growth (ignoring, of course, the historical dimension of the days when capital controls also prevented growth), while Gideon Rachman argues that China can no longer plead poverty when foreigners criticize Chinese economic policy.

What both fail to understand is that China is and remains a communist country, which in terms of economic policy is dominated by two major traits: one, an obsession with preventing foreign meddling in their economy (because foreigners can't be controlled the way that domestic investors can) and two, a fundamental belief in the benefits and advantages of a closed economy, closed in the sense that the ownership of the means of production is fundamentally closed to anyone not of that country.

In either case - and indeed in both -  the fundamental problem is that such systems do not survive contact with an otherwise open and uncontrolled (and uncontrollable) world economy. The Chinese leadership apparently truly does not understand how the free and uncontrolled economy works - otherwise they would allow their currency to float - and, more importantly, nor do they care.

I'll quote from Rachman:

The Chinese government insists that foreigners have no legitimate interest in the country's political development.

He needs to expand on that: foreigners, in the eyes of the Chinese government, have no legitimate interest in China whatsoever: their interests are politically illegitimate (trying to destabilize the country for political purposes) or are an attempt to force the Chinese to pay for their economic errors and woes.

Ignoring the arguments for and against for the moment, the key point is that the Chinese government (and probably a large majority of Chinese) are economic illiterates: they do not understand that economic imbalances always lead to economic corrections that have unintended consequences.

Always. There is no way to finesse this, no way to manipulate and bully trade partners into continuing one-sided trade patterns. You can do this for a while - even decades - but you make the problem worse, rather than better. Controlling exchange rates means that a normal and completely natural change is prevented, resulting in sharp and disruptive changes, more often than not resulting in crisis and damage to those trying to control what cannot, in the long run, be controlled.

Communist ideology, given the dependence of Marx' international trade thought on Fichte's idea of self-sufficiency (taken to extreme in the Korean ideology of juche) where the government controls international relations and the value of money, is first and fundamentally a mercantilist philosophy, a zero-sum game where the best trade policy is one that destroys your foreign competitors and allows full employment in your country, supplying the world with goods priced at monopoly pricing levels (not currently the case, as competition remains, but most assuredly the goal). The world's economic history is littered with fixed exchange rate regimes that invariably fail. This will be no different.

Chinese trade and economic policies don't make much sense otherwise.

We are facing a return to poor and destructive economic policies if these trends extend and become mainstream policy. Free and unencumbered international trade in goods is first and foremost something that provides consumers with greatest value for their money: reverting away from this neo-liberal ideal means that consumers will pay more and receive less for their money.



Hence, and with little or no apology:

Consumers of the world unite, you have nothing to lose but your chains.