On the dangerous return of the mercantilism

By Mahmoud Mohieldin

The developing countries must act with all the means at their disposal against protectionist restrictions on international trade and investment, writes Mahmoud Mohieldin

For reasons connected with the devastating impacts of climate change and the recent protectionist measures of industrial nations that fear the loss of their competitive edge in advanced technology and related fields, the developing economies are facing major challenges in international trade and their ability to attract foreign investment. These have required their governments to implement urgent measures and mechanisms for mutual coordination.

The developing nations need to prepare for the new business practices associated with the CHIPS and Science Act adopted by the US Congress in 2022 and the Inflation Reduction Act of the same year that is intended to spur domestically oriented investments in energy security, climate change programmes, and the green economy.

The implementation of these acts will have far-reaching repercussions, which according to Nobel Prize-winning economist Mike Spence will affect main areas of science, technology and associated human resources, global supply chains due to the transfer of certain industrial components and their supply chains to the US and its partners, as well as trade with China due to US restrictions on trade, investment, and technological cooperation with China.

At the same time, the EU has signalled its resolve to step up measures to reduce greenhouse gas emissions. As this goal entails restructuring greenhouse gas producing European industries and having them pay higher carbon prices to induce them to make changes, the EU has felt it necessary to insulate these industries against competition from their counterparts outside Europe that are not subject to similar carbon prices.

Thus, the EU Commission has introduced its Carbon Border Adjustment Mechanism (CBAM), which imposes an additional levy on a range of carbon-intensive goods, essentially shifting carbon prices onto the shoulders of foreign producers. This unprecedented measure, which will start coming into force on 1 October, will affect the exports of the developing nations, especially steel, fertilisers, energy derivatives, cement and aluminium.

The declared motives for such measures are many, but it is impossible to escape the fact that they coincide with mounting geopolitical tensions and the growing influence of political currents that espouse protectionist and isolationist outlooks. One cannot help but be reminded of the mercantilists whose views dominated European economic and trade policies from the 16th to the 18th centuries. They held that wealth is finite and that the state should accumulate as much of it as possible through restrictions on imports and the expansion of markets, as well as through gaining control over raw materials and building reserves of gold, then considered the standard of wealth.

In order to bring about these ends, all means were possible, including war, foreign occupation, and slavery.

At the end of the 18th century, Adam Smith, the father of modern economics, refuted the mercantilists’ ideas and demonstrated the advantages of free trade, specialisation, and the division of labour for accumulating wealth. Since the middle of the last century, the industrialised economies have also urged free trade, the lifting of restrictions on the flow of capital, and a global system of rules to govern economic transactions. International organisations were established and binding agreements concluded in a manner consistent with the other arrangements of the post-World War II period.

After all, the victor not only gets to write history, but he also gets to set the rules of the game of nations so as to ensure the permanence of his victory in all circumstances apart from another war. This policy seemed to work until the critical moment when the traditional powers began to feel that their perpetual advantage and cumulative rewards were being jeopardised by new regional and international powers that had achieved economic progress through hard work and in accordance with the accepted rules of the game.

At this point, the architects of the rules began to break them and rebel against the system that they themselves had created. As a result, trade, investment, and the management of capital in the world today are being conducted in ways that are very far from the rules and principles that make up the texts of international agreements on trade and investment. Worse still, economic and financial instruments and mechanisms have been weaponised for offensive or defensive purposes.

The liberalisation of trade and investment brought great rewards for countries adept at implementing it. International economic growth rates and volumes of trade have increased 20-fold since the 1960s. The number of people suffering from severe poverty has dropped four-fold to 15 per cent of the global population since the 1990s. The managing directors of the world trade organisation (WTO) and International Monetary Fund (IMF) cited such successes in a recent co-authored article to illustrate what is being threatened by the current deterioration of international cooperation and trade.

With every international crisis that could throttle the flow of international trade, countries have imposed restrictions on imports and exports, claiming that these are only temporary. But afterwards, the protectionist restrictions have remained in place and more have been added to them. Many of the restrictions placed on trade and investment at the time of the 2008 world financial crisis are still in place, and on top of them have come further restrictions against the backdrop of the Covid-19 pandemic and the war in Ukraine. All this goes to show that there is nothing more permanent than temporary measures.

Perhaps some will respond to the managing directors of the IMF and WTO appeal on behalf of cooperation and the free flow of trade and the advantages this brings in terms of productivity, employment, economic growth through exports, and insulating economies from shock through the diversification of sources for goods and services. However, it is the neo-mercantilists who should really heed the message. At the same time, the developing countries should not just sit back and blame the rule-breakers and bemoan their double standards, especially now that times are moving from bad to worse and double standards are becoming multiple standards.

The first thing the developing countries need to do is to submit the evidence of their current and potential losses at the international organisations concerned so as to remind them of their responsibilities, demonstrate the harm done, and demand remedy accordingly. Second, they should expand arrangements under the “new regionalism” among the emerging markets and developing economies in order to spur mutual trade and investment.

Third, they should remain on guard against arrangements taken out in the name of climate action but that effectively target them in the context of the new protectionism. Fourth, they need to reduce their heavy reliance on international loans to fund development and climate projects and push more determinedly for financing through investment and grants.

Borrowing, even on concessional terms, should be kept as a last resort and only for vital projects of the highest priority.

* This article first appeared in Arabic in Wednesday’s edition of Asharq Al-Awsat. The english version first appeared on ahramonline: https://english.ahram.org.eg/NewsContentP/50/502980/AlAhram-Weekly/On-the-dangerous-return-of-the-mercantilism.aspx. It is republished here with permission.