Mercantilist: International Trade and Basic Free Trade

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1. Read the Country Focus (on page 164 in hill’s textbook) on “Is China a Neo-Mercantilist Nation?” a) Are the claims that China is following a neo-mercantilist policy valid?” why or why not? Yes, the claims that China is following a neo-mercantilist policy are valid because China has been trying to maintain a trade surplus (which is the definition of neo mercantilist); placing high import tariffs on certain goods (refer to qtn 3). Besides, the cheap currency encourages domestic investments, discouraging imports and also leads to cheap capital exports. What I found from the internet:

China's commercial engagement with the rest of the world is largely scripted from mercantile theory: export boosting policies that are meant to stimulate a balance of payment in China's favour, ie, manipulating their currency to keep it artificially devalued in support of cheap capital exports and a mechanism of forced high savings, which in effect promotes policies that subsidises Chinese manufacturers (to lower their cost of production and hence cheaper products to increase exports and domestic demand of such domestic goods) at the expense of their own households and manufacturing jobs in the consumption-crazed US-and-eurozone - a process that leaves China's state-coffers endowed in huge surplus reserves. b) What incentive does China have to open its markets to foreign products? Why might China resist such a move? Incentives:

By opening its markets to foreign products, China can exploit its comparative advantage and specialize in the production of goods that it produces most efficiently and to buy good that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself. Hence, companies in China can lower their overall cost structure or improve the quality and functionality of their product offering, allowing them to compete more effectively. Besides, globalization is becoming increasingly prevalent in the world, creating incentives for markets all over the world. If China is neo-mercantilist, it will anger potential trade partners because it will exclude their goods from free access to the mercantilist country’s markets. And eventually, China will find it difficult to export if it imposes oppressive quotas and tariffs on its imports. And these ‘beggar thy neighbor’ retaliatory trade policies will lead to countries progressively raising trade barriers against each other. The consumers in China will have access to either “cheaper” goods from other countries or more “sophisticated” goods from other countries, in a way improving their standard of living. Furthermore, there are some commodities that China do not have, such as oil, and hence the country will have no choice but to increase its imports of such commodities that its lacks but this is also beneficial to the consumers in China as they will not face any lack of commodities or high prices of such commodities due to the low supply and high demand. Why might China resist such a move?

Many of the barriers to international trade took the form of high tariffs on imports of manufactured goods, which is what China did. The typical aim of such tariffs was to protect domestic industries from unfair foreign competition and protect jobs and industries. Infant industry argument: China is a developing country and hence resisting such a move might be necessary to grow the GDP of the country and raise the standard of living of the people in the nation by creating more jobs through domestic demand of domestically produced goods and services. China might want to gain economic power and be a global leader.

2. Drawing upon the New Trade Theory, outline the case for govt policies that would build national competitive advantage in biotechnology. What kind of policies would you recommend that the govt adopt? Are these policies at variance with the basic free trade philosophy?

* New Trade theory
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