There are no limits to Chinese mercantilism

There appear to be no limits to the set of Chinese economic policies labelled by some as “mercantilism”. The top economic power, the US, has been hoping in recent years that the Chinese economy would slow down and not pass it, but America’s hopes are futile. After the US caused a global economic meltdown, expectations by learned commentators for a long term Chinese slump, including this one in On Line Opinion, have been proven wrong. China is taking care of its people through its domestic market and a stimulus package.

China again achieved high growth, 8.7 per cent in 2009, rising to 10.7 per cent in the last quarter of 2009. While several experts predict limits on China’s expansion I see no limits in the short term. In the medium to long term (five-plus years) China could resolve potentially limiting factors such as limited food supply, rising population, pollution, limited water, minerals, energy and limited military power projection by pursuing expansionist policies.

As a developing country (albeit huge) China has a right to use mercantilist economic policies to build up its economy. It has responsibility for almost a quarter of the world’s population, most living in poor conditions by our standards. Accusations that China has used mercantilist policies come from mercantilist countries of the past.

All countries still practice mercantilism or protectionism to some degree particularly in the areas of immigration restrictions, competition policy, farming subsidies, product safety, business zoning and foreign ownership policies.

The term “mercantilism” is rather archaic and rarely used. It conjures up visions of European man-o-war trading broadsides, fighting over spice islands. Wikipedia defines mercantilism in definite economic protectionist terms.

While this definition is fairly cumbersome I see the main theme as national policies to protect one’s economy. National governments with under-developed economies, like China, decide that it is advantageous to restrict imports, promote exports and closely control the currency to prevent outflows of wealth. All this encourages the build-up of wealth in a country to finance industrialisation. As agricultural workers gradually move off the land to higher paying industrial and service sector jobs a country is on firmer ground to move from mercantilist policies to a free market “developed” economy. China already has a growing free trade sector especially in machinery and high technology equipment such as computers and aircraft.

Mercantilism first emerged in the west in France and Britain in the 16 century, mainly in the form of import restrictions. Britain was particularly successful in encouraging exports though using its armed and merchant naval power. Markets in spices, tea, slaves and coffee were acquired by deals, treaties and force then manipulated to maximise benefits to Britain. Britain steadily became the world trading superpower.

Accusations of the mercantilism depend on who gains. In the 18th century the American colonials swore that British mercantilism was immoral. As a protest against Britain’s tea monopoly they threw tea overboard in 1773 (Boston Tea Party). Yet America’s first set of comprehensive economic policies, formulated by Alexander Hamilton, first US Secretary of the Treasury, stressed that mercantilism was good for America as it protected its economy from what was labelled “free trade” threats in particular, from Britain. For the next 100 years up until the early 20th century protectionism was the guiding policy in the US.

Why then is the US complaining about Chinese mercantilism? The basic, unexpressed, US fear is that China will pass the US economically within the next 10 years. On a GDP purchasing power parity (PPP) basis the gap between China and the US is closing. In 2009 US GDP was $US14.3 trillion (one trillion is one thousand billion) with China in second position at $US8.7 trillion. In 2014 the International Monetary Fund (IMF) forecasts that the gap will have closed with the US at $US17.4 trillion and China soaring upward to $15 trillion. Using such data US forecasters predict the Chinese economy may pass the US by 2020. Some also see the Chinese yuan or renminbi one day replacing the US dollar as the world’s reserve currency.

Added to US concerns is that it sees China as having ample growth potential in terms of arable land (more per head of population than 80 other countries), self sufficiency in agriculture and a large rural population (43 per cent) whose steady move (as cheap labour) to the cities is supporting industrial economic growth.

So what possible limits might there be to China’s mercantilist economic policies? In the short term, out to 2015, there are no physical limits. Limits become more tangible in the medium term 2015-2025 and long term 2025+. In the medium-long term China’s rising population, rising standard of living, possible decline in the amount of arable land, rising pollution and rising use of water, energy and mineral resources may present limits or they may, in fact, be challenges that can be overcome.

Ways to overcome these potential limits might include: encouraging business immigration out of China to staff Chinese multinationals overseas (such as in Australia); more efficient fertilisers, irrigation and crop strains to boost the food supply; greater use of industrial air filters; increased waste water purification schemes and desalination plants; expansion of China’s population southwards into the poorly defended border countries of Burma and Laos as well as into underpopulated western China; greater reliance on Australian uranium and thorium for advanced nuclear reactors; and more intensive trade to supply China’s mineral, energy and industrial needs.