run according to mercantilist principles. By holding selling prices at a point such
that other countries could not justify capital investment in a sector, a predatory
country could eventually dominate that sector. Our strict adherence to the free
market and the constraints imposed by short-term profitability have
contributed to the erosion of our technological leadership and market share in
industries targeted by our competitors. Many examples fit a common pattern,
sketched in Adam Smith’s The Roaring 80s:
Japan has a network of networks. There is not only MITI, there is the
Industrial Structure Council, the Telecommunications Council, and similar
councils, all of which study key industries. The councils have leaders not just
from business and government but from consumer groups, labor unions, the
press, and universities.… The result is to socialize the risk, to take it from the
individual firm and spread it, which makes it easier to have long-term goals.
The long-term goal can be to have a dominant position in an industry. One
example cited frequently is supercomputers.
The American side of the story is a familiar one, the genius inventor and the
better mousetrap. In this case the genius inventor is Seymour Cray, who left
Control Data to start his own firm in the 1970s. No one else could come close to
the Cray machines for speed and price, and with no Japanese supercomputers
on the market, Cray sold two machines to the Japanese. But in 1981, MITI
announced a program to develop a supercomputer. Cray’s prospective
customers in Japan seemed to disappear instantly.…Two years later the
Japanese had their supercomputers ready and the makers of supercomputers
began an export drive by cutting prices dramatically. (p. 140-1.)
Free market economists would argue that this is perfectly acceptable. If
competing countries wish to subsidize their exports to us, that is to our benefit.
The more they subsidize their exports, the less we have to pay for our imports.
That is good for us, not for them.
Such a response misses the point. Predatory pricing is hardly the result of a
charitable desire to subsidize consumers. Rather, its aim is to price competitors
out of the market, at which point the survivor can exact monopolistic prices.
Monopolistic profits will outweigh the losses suffered during predatory pricing.
Ultimately the consumer will pay more.
The standard reply has been that any attempt to raise prices to excessive
levels would create a price umbrella, allowing new competition to enter the
market. But this, too, misses the point, for it assumes an ease of entry that fails to
reflect reality. CEOs of semiconductor producers have estimated it would cost at
least $1 billion for a new company to enter the semiconductor industry.
Even that may understate the cost of entry into a technology intensive
sector. For technology is a moving target, and by the time one has paid the entry
price to develop staff, supply networks, production facilities, and marketing, the
state of the art may have advanced. If one is not already at the cutting edge of
technology, it is difficult to discern the direction of its movement. This increases
the risk of focusing one’s investment in the wrong area, targeting yesterday’s
most profitable sectors rather than tomorrow’s.
In short, a significant technological lead — and most targeted industries
are technology intensive — may be insurmountable. So even if we were to
acquiesce to the assumption that free trade is the best possible system —
provided everyone would adhere to it — a laissez faire country may be at a
disadvantage if others adopt predatory policies. And others might well adopt
such policies. Even if mercantilism were to lower global output, enlightened selfinterest
might drive a country to seek a larger share at the expense of others.
Alternatively, in a world of uncertain political and economic alliances, a country
may decide to retain production capability in vital sectors, even if that requires
violating free market precepts.
Read More : FREE TRADE VS. MERCANTILISM
