The recent sparring between Democratic hopefuls Barak Obama and Hillary Clinton over NAFTA reflects more than a battle for position with a core political constituency. Both have advocated reopening the environmental and labor provisions of the trade agreement in order to redress perceived unevenness in the playing field that resulted.
Setting aside the merits of the candidates’ positions on NAFTA, their stances reflect an emerging trend among politicians to undermine trade agreements through the use of administrative mechanisms.
Officially, free trade remains the dominant philosophy in international commerce. Multilateral institutions like the World Trade Organization (WTO) are tasked with ensuring that trade flourishes, uninhibited by tariffs, import restrictions or arbitrary standards.
But beneath the free trade veneer, many governments have developed strategies for protecting homegrown industries against foreign competition. These governments seek to restrain unwelcome foreign direct investments through a new strategy that could best be described as regulatory mercantilism.
The term ‘mercantilism’ describes a body of economic thought prevalent during the 16th and 17th centuries. Mercantilists advocated high trade barriers to protect domestic industries from foreign competition. The idea has reared its head periodically ever since, particularly in times of crisis like the Great Depression.
Modern-day free traders believe that thriving international trade increases general global prosperity – a rising tide lifts all boats. Their mercantilist opponents believe that free trade agreements mask “unfair” trading practices that allow some countries’ industries to prosper at the expense of indigenous competitors. If a neighbor’s boat is rising, mercantilists believe theirs must be sinking.
So what tempts contemporary governments to engage in discredited mercantilist practices? The fact is that all governments, democratic and autocratic alike, rely on political constituencies. When those constituencies believe they are suffering as a result of free trade pacts, governments look for ways to selectively reverse the impact of those agreements.
The actions of the WTO and the formation of large free trade zones like the European Union and NAFTA have effectively eliminated tariffs and import quotas, the most time-honored mechanisms for inhibiting foreign competition. As a result, governments must resort to newer, less blatant administrative mechanisms to undo the unpalatable consequences of the trade agreements they have entered.
DIFFERENT COUNTRIES AND REGIONS employ a diverse mix of mercantilist mechanisms to hobble foreign competitors and inhibit unwanted foreign investment. The United States has shown a penchant for exporting standards, such as the “enforceable” environmental and labor standards Senators Clinton and Obama now trumpet.
The United States has also proven skittish about allowing Chinese investment in signifi cant American firms. China National Offshore Oil Company’s bid for Union Oil in 2005 unleashed a storm of political criticism that ultimately led to the offer’s retraction, despite no case being offered as to how the deal impinged US national interests. More recently, the government used the Committee on Foreign Investment in the United States (CFIUS) process to block Huawei from taking a 16.5 % passive stake in Bain Capital’s proposed acquisition of 3Com.
Other countries prefer different regulatory mercantilist mechanisms. Under Putin, Russia used environmental regulations as a lever to pry major concessions out of British and Japanese oil companies. The EU has employed antitrust lawsuits to inhibit the creation of potentially formidable competitors to European manufacturers, hobbling American technology frontrunners like Microsoft and blocking the proposed merger of GE and Honeywell in 2001. The EU member states embrace the same tactics, for example when France attempted to force Apple to open its iTunes system by making it compatible with competitors’ MP3 players. For its part, China has sought to give its own companies an advantage by forcing the adoption of Chinese versions of global standards for new versions of Internet Protocol and wireless technologies.
THE GROWTH OF SOVEREIGN WEALTH FUNDS promises to stoke these mercantilist fires.
On February 9th, the International Herald Tribune noted that experts predict such funds could control more than $15 trillion in capital by the year 2018. Governments are trying to juggle competing priorities. Given fears of a liquidity crisis in the capital markets, countries are loathe to turn away would-be investors with such deep pockets. On the other hand, they recognize the potential for a xenophobic backlash should the sovereign wealth funds attempt to exercise political influence through their investments. Thus the European Commission welcomes investments from sovereign wealth funds with one hand while simultaneously urging transparency, openness and the voluntary adoption of best practice codes with the other.
The blossoming of regulatory mercantilism has important implications for the future of globalization and for the strategies of multinational corporations. The repeated failure to reach agreement at the Doha Round of global trade negotiations is only the most obvious sign of the continued resistance to freer markets. Even when visible barriers to trade are whittled away, politicians and bureaucrats erect new impediments to the very trade enabled by treaties approved by their governments.
Policymakers and executives alike must recognize that regulatory mercantilism lurks as a growing threat to potential to free trade. Corporate executives would be imprudent to rely exclusively on the formal rules of international trade set down by lawyers and accountants. The formal rules are table stakes. Governments are finding ways to overturn rules they view as inconsistent with their national strategies and priorities.
Given these conditions, CEOs must operate strategically in a way that pacifies those decision makers who control the informal rules. They must develop their organizations’ abilities to anticipate and avoid regulatory mercantilist traps. Success depends not on being lucky enough to receive fair treatment from foreign governments, but rather on having a sound strategy for dealing the myriad constituencies – politicians, the press, NGOs and public opinion – who often cooperate to obstruct the progress of free trade.
Of course, we Americans want to have our General Tso’s Chicken and eat it too. We complain that China inhibits investment in its service sector, while at the same time allowing our politicians to block China National Offshore Oil Company’s bid for Los Angeles-based Union Oil.
If the United States practiced what it preached more consistently on free trade, our own companies might have better luck arguing for open access to markets abroad. Free trade has lifted countless millions from poverty around the world. A little less regulatory mercantilism from all the major economic powers could help ensure that the tide really does lift all boats.