A trade surplus nation for the century before the 1980’s, the US had been the world’s leading industrial power since 1900 and a net creditor since World War I. The apparent reversal of all of these positions in less than a decade has elicited both consternation and controversy. By early 1989, a Washington Post/ABC News poll revealed that a majority of Americans (54 percent) rated Japan “the strongest economic power in the world today,” compared to only 29 percent who thought the US still held that title. To cope with these developments, policy analysts reach for models of international economics that fit their prejudices. Unfortunately, many conservatives have picked the wrong model, opting for a “feel good” globalism derived from liberal economic theory.

The intellectual confusion over international trade was in evidence at a conference I attended in Washington sponsored by the Institute for Research on the Economics of Taxation. IRET has done a splendid job promoting “supply-side” policies for the domestic economy. However, their topic, “US Foreign Tax Policy and the Global Economy,” moved into areas beyond their normal reach.

James Roirdan of Mobil Corp. opened the seminar by stating the classic globalist position: “Environmentalists have taught us that the world is borderless. . . . What is true for the environment is also true for business.”

The flow of trade and investment, another speaker argued, between the US and Japan was no different from what takes place between Massachusetts and Connecticut. This may be true in a narrow accounting sense, but what about the larger implications, the ones that really count? That the movement of a factory from Massachusetts to Connecticut depresses the local economy in the former while stimulating that of the latter is beyond doubt. That is why state governors spend so much time courting corporations. This is not a national problem because one state’s gain offsets the other’s loss within the national economy. But if that factory relocates outside American borders, the positive and negative effects no longer cancel each other out. They occur in separate societies.

Fortunately, most of the other speakers were well aware of the fierce rivalry that characterizes world markets. Their problem was how to square this with their liberal “free trade” assumptions. Speaker after speaker opened with a ritualistic attack on “mercantilism” and “economic nationalism” before turning his attention to ways of helping American firms defeat their foreign rivals—the very goal of mercantilists and economic nationalists!

Despite the attempt to link mercantilism with isolationism, just the opposite is true. Mercantilism was the policy of governments that recognized the opportunities opened by sea-trade with Asia and the discovery of the New World. Each country wanted its merchants and industrialists to capture as large a share of the available wealth, resources, and markets as possible. It was a philosophy of national capitalism born of dynamism. As Carl J. Freidrich once said of mercantilism, “It may, indeed, be called the most comprehensive theory of the emergent modern state.” Thus when IRET speakers urged American business to expand into new markets and to develop new products in order to expand their share of the international economy, and for changes to be made in tax policy to aid this expansion, they were speaking as mercantilists without knowing it.

Barry Rogstad, president of the American Business Conference and Abraham Krasnoff, CEO of Pall Corp., were the most aggressive examples of unconscious mercantilism. Their theme was “we must fight everywhere to win anywhere.” Both emphasized the need for American firms to penetrate the home market of rivals in order to weaken them by denying them a secure base. The value of a large domestic market to achieve economies of scale and to support advances along the learning curve is substantial. From this base, firms are able to expand into export markets.

This strategy has been used with devastating effect by foreign companies in the US market, yet neither speaker addressed this problem. They could not see that the logic for attacking foreign markets also held for the need to protect domestic markets. Rogstad came close when he allowed that “dominance at home leads to dominance overseas.” And Krasnoff noted this truism as the reasoning behind the rising barriers to US exports around the world. He was particularly worried about the economic integration of Eu rope set for 1992. The Europeans are seeking a large “internal” market their industries can dominate. They wish to create an advantage, not throw one away as the US has done.

The pressure of competition forces people to abandon ideologies based on abstractions. Performance and results become the uncompromising standards of policy. Conservatives have long recognized the theoretical errors that underline the economic failure of socialism, but have been less able to see it within their own camp. Slowly, however, the requirements of industrial policy and strategic trade are making themselves felt. It is time to break the paralyzing spell cast by liberal globalism and advance the position of the US in the centuries-old struggle for economic advantage.