One of the true horrors of my 10th grade World History course was trying to understand what the word "Mercantilism" really meant. I knew it was a policy of the imperialistic European nations of the 16th, 17th and18th centuries, mainly Spain and England, and I knew it was about world trade. But the idea that a country would limit exports and only import raw material to support what it desperately needed, made no sense to me, even in high school. This was especially true since I loved my Japanese stereo system.
Later, of course, I learned that Mercantilism as a theory of trade was discredited by the great English economist David Ricardo in 1817 with his theory of Comparative Advantages. Ricardo's theory essentially stated that a country should specialize in producing and exporting those goods -- and of course, now, services -- which it could produce and export most profitably and most competitively, and import the others.
But if you had listened to Bernie Sanders in his debate with Hillary Clinton (and Donald Trump and Ted Cruz have said similar things) on March 7 in Flint Michigan, he could have been repeating the words of one of the Spanish Kings during the age of exploration, glorifying mercantilist theory.
According to the Washington Post, Sanders said during the debate that, "Imports are VERY bad." And, "I will oppose all trade deals until our sun implodes." Also, "I suppose in theory, exports are ok, but they benefit large corporations, and so I am conflicted."
Bernie Sanders's problem with exports, "because they benefit large corporations," is more than somewhat astounding. Who does he thinks works in all the Boeing plants? Doesn't he realize that a large percent of Boeing shares are owned by various American retirement funds and individual American 401k plans? The reality is that the large export corporations are us -- all of us!
But putting aside Sanders's foolish comment on exports, what is even more troubling is the lack of understanding by Sanders, Trump and Cruz of both Ricardo's theory and the of changes that have taken place during the last 50 years in the American economy. As an example, ironically during the decade of the 1990s when the American economy was truly changing from a continental marketplace to a globalized economy, and imports were eating away at America's high labor cost industries, average unemployment fell in America from 7.5% at the start of the decade to 4.2%.
And of course the flat out use of imports as a scapegoat for the decline in employment in the American automobile industry is at best hyperbole and at worst playing on the fears of voters, because the truth is too difficult for a simple sound bite. The reality is that the American automobile industry in 2015 domestically manufactured 12,000,000 vehicles, double the quantity of the early 1950s when there were no imports. The true quandary in these figures is that the 2015 production numbers were done with the same number of direct workers as in 1953, approximately 900,000. A key difference appears to be automation. In 2014, 54% of all industrial robots ordered in North America went to the automobile industry.
Adding further complexity to a simplistic view of the US automobile industry -- and its implications for foreign trade -- is the fact that because of lower manufacturing costs, the U.S. has started to become an exporter of automobiles. This past August, Mercedes took over a former GM Hummer plant in Mishawaka, Indiana. Mercedes plans to use this plant to manufacture SUVs for export to China. In fact, according to the U.S. Department of Commerce, exports of US manufactured vehicles doubled from approximately 1,000,000 vehicles in 2009 to 2.1 million vehicles in 2014. During the same time period, exports of US manufactured vehicles to China went from 25,000 to 305,000.
A major economic function of imports in the globalized economy, which allows American manufacturers to produce more efficiently and simultaneously offers consumers more choices, was first postulated by Paul Krugman when he developed what is called the New Trade Theory in 1979. Krugman subsequently won the Nobel Prize for this in 2008. Whether again because it does not fit into a sound bite or because Sanders, Trump and Cruz's understanding of economics never progressed beyond mercantilism, Krugman's concepts are never acknowledged in their rhetoric.
Krugman asked the question, if Ricardo's comparative advantage is the reason for trade, then why are countries or blocs with similar characteristics each other's major trading partners? Take the European Union and the United States: we are each other's major trading partners, yet the EU produces the airbus, Volkswagens, and burgundy wines, and the US produces Boeing, Ford, and wines in Napa, so where is the comparative advantage?
Krugman's explanation for this is based on consumer preferences and economies of scale in production. By economies of scale he means the economic advantage a large company receives by producing a very large quantity of only a certain numbers of items and therefore in all probability having both a lower cost and a lower market price for these items. For example lets say Ford very efficiently only makes green, purple and blue cars and Volkswagen in very large production only makes red, black and white cars. It is not economically efficient for either company to make all the colors in their many production facilities. So, in this simple example: if an American consumer wants a black car at the best price he or she will buy a Volkswagen, while if a European consumer wants a blue car at the best price they will buy a Ford. In terms of countries and trading partners, each country specializes in producing efficiently a few brands of any given product type instead of inefficiently producing many choices.
Of course in world trade, there are winners and losers and the pain to the losers can be devastating. But for Sanders, Trump and Cruz to offer as a solution 16th century economic theories of the Spanish monarchy goes beyond the disingenuous. Possibly it is a shrewd political calculation but more than likely it is a demonstration of not understanding the modern American economy and how it fits into the globalized world.