Free Trade, Neo-Mercantilism, and the “Rules” of International Trade

President Obama shakes hands in the Oval Office with Xi Jinping, the current Vice President (and presumptive next President) of China.

President Obama welcomed Xi Jinping, China’s “president in waiting,” to the White House this week for a high profile visit.  Obama warned the visiting leader that China must play by the rules of international trade, a comment reflecting American concerns about Chinese currency manipulation, intellectual property transgressions, and other barriers to free trade.  But economic analyst Clyde Prestowitz questions the wisdom of Obama’s “lecture” in his latest blog post:

“It sounded right and fair and slightly tough as it was carefully crafted to do by top White House political advisers, and the president may even believe it. But he shouldn’t have said it.”

Why shouldn’t Obama have criticized China for not playing by the rules?  Prestowitz argues that there are no universally agreed upon rules for international trade; rather, there are (at least) two different games being played simultaneously, by different actors, with different sets of rules.  Some states embrace economic liberalism, or free-market capitalism, which emphasizes comparative advantage, free trade, and limited government intervention in economic affairs.  Others–particularly those who are not benefiting from the trend toward greater globalization and free trade–favor mercantilist policies, which emphasize national wealth and the protection of domestic industries from foreign competition through tariffs and other trade barriers.  Prestowitz spells out which parts of the world are playing each game: 

“The global economy is, in fact, sharply divided between those who are playing the free trade game and those who are playing some form of mercantilism. Of course, there is a spectrum of attitudes and policies, but roughly speaking the Anglo/American countries, North America, and parts of Europe are playing free trade. Most of Asia, much of South America, the Middle East, Germany and parts of Europe are playing neo-mercantilism. It’s like watching tennis players trying to play a game with football players. It doesn’t work, and insisting on playing by the rules doesn’t help, because both sets of teams are playing by the rules — of their game.”

What do you think?  Are America and Europe really playing by their own rules of free trade?  Is free trade or mercantilism (or some combination of the two) a better approach for achieving prosperity?  Does America have the right to tell China how to play the game of international trade?

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