A forthcoming research paper from IGP examines the rise of trade barriers between the U.S. and China in the digital economy. (We presented a first draft of the research at our conference on Comparative Analysis of Platform Governance in the U.S. and China. (A recording is available.)
Our analysis uncovered a pattern in the way the U.S. and China are interacting in the digital economy. We call that pattern digital neo-mercantilism. The term is a mouthful and may seem obscurantist, so it is important to explain why we think it is appropriate and enlightening to use that label.
Look in the mirror
Reason number one is that American policy analysts are fond of calling China mercantilist. Their use of the label implies that China is an unfair trader that protects its own markets while benefiting from the openness of U.S. markets. While there is some validity to this claim, its proponents overlook how many Chinese markets have been open to U.S. investors, and how capital integration and a division of labor between the two countries have been of enormous benefit to both. Indeed, those who most loudly accuse China of mercantilism tend to be exactly the people who advocate tariffs, industrial policy subsidies and national security barriers of our own. It is not at all clear that freer trade with China is their ultimate goal; they seem more interested in power competition than economic competition. In other words, both sides are practicing mercantilists. And this leads to the important realization that mercantilism is an interaction pattern among nation-states, not simply a bad policy pursued by one bad actor.
Fusing state and economy
Reason number two is deeper and more historically grounded. This is not primarily a trade issue. The current US-China conflict brings into play trade policy, tech policy, foreign policy, military strategy, cybersecurity policy, industrial policy, intellectual property rights, and science, technology and innovation policy. The concept of digital neo-mercantilism integrates all these areas of U.S.-China interaction by conceiving of them as a conflict between two systems of political economy striving for relative geopolitical power. In their pursuit of a power advantage, both China and the U.S. recognize that some level of economic interdependence and trade is beneficial and even necessary; but both also recognize that economic interdependence can be a vulnerability in their power competition. Both also realize that they can exploit interdependencies to their own advantage. In their analysis of “weaponized interdependence,” Geoffrey Gertz and Miles Evers come close to identifying one of the central assumptions of neo-mercantilism without using the term. They assert, “close, cooperative relations between businesses and the government act as a force multiplier—state power increases when firms are aligned with state goals and are eager and willing to work hand-in-hand with the government to achieve them.” This fusion of economic and strategic aims is not, as Gertz and Evers imply, an inevitable outcome of the current situation, nor is it the only possible policy response. Its implication that markets and the actions of firms can be easily aligned with the strategic aims of states without undermining or destroying the productivity and efficiency of the markets is almost certainly false. But this exemplifies the set of ideas and policies promoted and used by the people who are currently in power in the U.S. and China. And that set of ideas and policies is best described as neo-mercantilism.
We call this way of thinking digital neo-mercantilism because both sides (but especially the U.S.) assign special importance to the ICT sector. Digitization, they assert, is changing the parameters of what is required to play a dominant role in the global order. We are, they assert, in a “race” – in 5G, in chips, in AI – and must “win” this race (whatever that means). Still, the powerful capabilities of big data, AI, software, networks and information processing that they covet create new forms of global interdependence. Neo-mercantilists in both countries see these interdependencies as generating new threats from foreign systems of political economy, as well as new opportunities to gain relative advantages in power and wealth.
The U.S. assault on Huawei perfectly exemplifies the strategy of weaponizing interdependence. The U.S. saw a potential threat in the emergence of a major Chinese telecom infrastructure vendor with a global presence, and sought to create political pressure against the use of its products. That succeeded in the U.S. but failed in the rest of the world. So the U.S. pre-empted Huawei’s further rise by exploiting its dependence on American semiconductor technology. American economic dominance in a strategic sector was used to advance the government’s geopolitical objectives. China’s attempt to shield itself from foreign information services and from foreign ownership and operation of cloud services is a more defensive approach to the same problem. Again, it’s clear that both the U.S. and China are practicing digital neo-mercantilism, and the U.S. may be the more aggressive of the two.
Those unfamiliar with the entire historical context of mercantilism may get the wrong impression from our use of the term. Most commonly, mercantilism would be seen narrowly as a type of trade policy focused on economic objectives. The term mercantilism comes from Adam Smith’s critique of “the mercantile system” in Book 3 of The Wealth of Nations. Smith saw mercantilism as a misguided economic policy that created barriers to exchange that undermined growth and the division of labor, falsely equated money with wealth, and failed to understand how the exchange rates of precious metals effectively regulated international trade balances and surpluses. Smith assigned the blame for these fallacies not only to bad ideas, but to commercial interest groups (merchants) who exploited bad ideas to obtain protection and rents.
Our conception of neo-mercantilism draws on a deeper and more political understanding of classical mercantilism. The economic historian Magnussen (2015 p. 48) has redefined historical mercantilism as
“… a series of discussions that tried to grapple [with] a rapid[ly] developing world of commerce and the effects it had on politics and communities in Europe during the early modern period. It was a world of strife within empires and old political formulations as well as between what later became nation-states in order to establish power and recognition.”
The change in “political formulations” refers to changes in power relations, and specifically the formation of larger territorial states that governed larger market areas. This necessitated the development of more organized and large-scale trading relations among them, but trade formation was closely engaged with state formation. This is why the German historicist scholar Schmoller (1896) claimed that mercantilism was “state-making and national economy making at the same time,” and why James Steuart, who Magnussen calls “the last mercantilist,” (2015, p. 121) noted in 1767 that “The abilities of a statesman are discovered in directing and conducting what I call the delicacy of national [industrial] competition.”
This fusion of the economy with the political and military interests of the state is the defining characteristic of mercantilism, and explains why we think the neo-mercantilist label fits the U.S. – China situation.
A third reason for adopting this term is that it is a fun counterfoil to the term “neo-liberalism.” This overused term is rampant among the dominant schools of political-economic thought in academia. In that context, neo-liberalism (and its evil twin on the right, globalism) have become the semantic equivalent of a dirty word. One can achieve higher levels of profundity if one can attribute any or all of the world’s problems to the insidious forces of neo-liberalism. But what is the alternative to neo-liberalism? What will improve the world in ways that neo-liberalism, despite its astonishing success at raising levels of wealth in China, India, and many other developing countries; at huge and rapid increases in telecommunications access; at creating and advancing ICTs and the internet, could not?
By identifying this new pattern of neo-mercantilism in the world, we make it clear that it is time for the intellectuals to stop flogging a dead horse. The age of free trade and market liberalization has clearly passed. We are in an era of neo-mercantilism. Now let’s see how we like the alternative.