‘Back to Mercantilism’

November 9, 1964

The imposition by the new Labor government of a “temporary” 15 percent surcharge on imports and tax incentives for exports is a disruptive and reactionary step. In the long run it can have only harmful consequences for Britain and the world.

The first effect must be to increase the cost of living for Britons. They will pay some 15 percent more for all the goods they buy from abroad (except foodstuffs, industrial raw materials, and unprocessed tobacco, which are exempt from the surtax). The very purpose of this measure is to discourage and cut down imports. But this means that it will adversely affect all the manufactured exports to Britain of all other countries. To that extent it must hurt and disrupt the export trade and export industries of these countries.

It will of course hurt our own export industries. It will hurt the export industries of the Common Market countries—France, West Germany, Belgium, Holland, Luxembourg, and Italy. It will hurt the export industries even of Britain’s partners in the European Free Trade Association (how ironic that name now sounds)—Austria, Denmark, Norway, Portugal, Sweden, and Switzerland.

SELF-DEFEATING

Immediately after imposing the import surcharge, the Labor government blandly proposed to these partners that they all start speeding up their reciprocal tariff cuts. The British even generously added that they would speed up tariff cuts on the EFTA products even if other members failed to follow suit. But it is estimated that the import surcharges, in effect, double Britain’s tariff walls. Why didn’t the new government simply exempt its EFTA partners from the surcharge in the first place?

It is possible and even probable that the Common Market countries and others will retaliate against the British move by raising their own tariff wall or subsidizing their own exports. The whole policy, in that case, will become self-defeating, and postpone still further the hope for any return to sanity in international trade.

The British excuse for this move was that there is a heavy deficit in their balance of payments and that, as one dispatch put it, they were “bleeding to death” financially. But they had brought this on themselves chiefly by the policy of continuous monetary expansion combined with cheap money. The sure way for a country to get a deficit in its balance of payments is to combine excessive monetary inflation with a pegged rate for its currency. What makes the British case even more serious than ours is that the equipment or methods in many of its industries are antiquated and inefficient.

PRECEDENT OF CANADA

The first and chief cure for the British balance-of-payments crisis would have been to halt its monetary expansion and its cheap-money policies. But, like ourselves, it is afraid to do this partly through political timidity and partly because of the now fashionable idea that cheap money and continuous monetary expansion are necessary to maintain full employment. The Labor government even gave “assurances” that Britain has “no intention” of raising its bank rate. This means that it considers interest rates purely a political decision.

As long, however, as monetary expansion and cheap-money policies are continued, the import super-tariff and export subsidies will have at best a short-run effect. On May 2, 1962 Canada dropped its dollar value to 92½ cents, compared with 95¼ cents the day before and $1.05 in 1959. This meant that overnight its imports were more expensive and its exports cheaper. Yet within two months Canada had a hemorrhage in its balance of payments and lost a third of its reserves. Its continued monetary expansion had brought on a flight of capital.

The United States is in no position to criticize the British action. We wanted them to keep money cheap to help us keep our own inflation going. Their import surcharge is the equivalent of our own “interest equalization” tax. Both are reactionary protectionist steps based on mercantilist fallacies exploded two centuries ago. Both are accompanied by hypocritical lip service to international cooperation and freedom of trade and capital movements. Both, ironically, are done by self-styled “liberal” and “labor” governments.