China”s Mercantilism: Meeting the Threat

By Shlomo Maital   

   My country Israel has been flooded with Chinese electric vehicles:  BYD, Geely and seven or eight other brands.  They are high quality, cheap, and aggressively marketed – supported by heavy Chinese government subsidies.  These cars are a reflection of China’s new economic policy, which is based on an outmoded economic theory known as ‘mercantilism’.

      Mercantilism is a nationalist economic policy that is designed to maximize the exports and minimize the imports for an economy. In other words, it seeks to maximize the accumulation of resources within the country and use those resources for one-sided trade.   In Napoleonic France, Napoleon’s government sold goods to Britain even during the Napoleonic Wars, on the theory that an export surplus that accumulated gold strengthened France.  This led in part to Napoleon’s defeat at Waterloo.

       China is now flooding the world with its cheap exports, backed by heavy government subsidies.  The US China tariff is circumvented, when Chinese firms locate plants in Mexico, add a small amount of value to Chinese parts – and do an end run around the tariff.  This policy has re-ignited China’s economy, replacing demand previously lost to low consumer spending and low domestic investment, especially in housing and construction.

        The US needs to tighten its import tariffs, basing them not on country of origin (Mexico) but on value-added of components.  Europe is now considering a China tariff, after being flooded with Chinese EV’s.  These tariffs, of course, violate World Trade Organization rules.  But China, after being admitted to the WTO, never followed them.  The Chinee market is far from open to Western expoerts, while Western markets were largely open to Chinese goods. 

          Mercantilism is a failed policy.  At some point, China cannot continue to run a huge export surplus, by subsidies and by buying up US dollars  (via US Treasury bonds) to keep them from losing value and thus making imports expensive.

           The US made a huge mistake, driven by profit and greed, by offshoring its manufacturing to China.  It is now trying to reverse this, by near-shoring – bringing back plants, if not to the US, then to nearby friendly countries like Mexico.  Mexico may, as a result, enjoy a huge economic boom.  So far, building efficient semiconductor plants in the US, supported by government funding, has been far from successful —  the skilled manpower to support it just is not there.

          One wonders why China believes it can continue to reap economic benefits from the West, while aligning with autocrats in Russia and Iran and North Korea. 

         The new US president, after the election, must tell China clearly:   You can’t.  You cannot rip us off in trade, while being a bad actor threatening world peace.  We’re on to you.