Mercantilism is alive and well in the mainland and Canada

PUBLISHED : Tuesday, 12 October, 2010, 12:00am
UPDATED : Tuesday, 12 October, 2010, 12:00am

Saskatchewan's advisers urged the Canadian province not to oppose a takeover of Potash Corp by BHP Billiton, and said a Chinese bid - if one emerges - could hurt their budget more.

SCMP, October 6

Mercantilism: An economic system to increase a nation's wealth by government regulation of all of the nation's commercial interests.

Google dictionary

Iremember mercantilism as one of those thing you were sure to be asked about in an exam question in high school, the sort of thing you memorise for an exam and forget immediately afterwards.

The teacher effectively told us so anyway. He said we were already living in a post-capitalist, post-mercantilist world (as a frustrated academic he had more posts than a fishing pier) and the most I got out of it was that mercantilism is the same as communism except that in communism you substitute the word 'government' with the word 'peoples'. Either way most people stay poor.

But the teacher was wrong. Mercantilism is not past and gone. It is alive and the dominant theory of economic reality in both China and Canada today. The major difference between the two is only that in China they keep you poor by paying you low wages while in Canada they keep you poor by charging you high taxes.

As evidence of the continued prevalence of mercantilism, I offer you the fracas over ownership of this big fertiliser producer in the Canadian province of Saskatchewan. The Canadian mercantilists say that Saskatchewan should approve a bid for Potash Corp by BHP Billiton because there is a danger that state-backed firms in China will buy it.

Beijing wants the potash for its agricultural sector but shouldn't be allowed to own the company, so the reasoning goes, because as soon as it has control it will strip Saskatchewan of all the potash and ship the stuff home to China at an artificially depressed contract price.

It would be better, say these people, to let BHP Billiton buy the company, even at too low a bid price, because that way Saskatchewan at least gets something for the potash. (Required disclaimer here: I'm a BHP shareholder.) The thinking runs along the same mercantilist lines in Beijing, I'm sure, except for the intention to commit such outright piracy.

The authorities simply believe ownership of Potash Corp will help secure China's fertiliser supplies and this would also be a good way of buying more than US government debt with US$2.5 trillion of foreign reserves.

It's a rerun of the hot story in early summer that China would buy out BHP Billiton to secure iron ore supplies in Australia.

There is one major difference, however. Australian voters are happy to sell their country's iron ore for no more than payment of ordinary corporate taxes and were even happy recently to countenance a palace revolution in a Labor government (Labor, no less!) when the incumbent prime minister suggested that mining companies should pay more for their lucrative access to a national asset.

You won't easily find such gullibility in Canada, certainly not among the prairie farmers of Saskatchewan. Let a Chinese state-backed company fix an artificially low price for potash and there will be an immediate change of provincial government followed by an immediate halt to potash extraction. Provincial governments have clout in Canada.

It is either that or the royalties that Potash Corp already pays the provincial government will be jerked suddenly upwards. If Saskatchewan voters think they are being ripped off by foreigners (which includes most of the rest of Canada), they will instantly install a socialist government of a redness that would make even Karl Marx call for time out. They have done it before.

And perhaps this is the natural way of things in what really is a post-mercantilist world. With modern communications, modern commodities markets and the present tonnage of the world's bulk cargo fleet, who really needs to own the means of commodities production?

If you want potash you bid for it at the market price. If you want more than you can get at the market price, you bid the market price up. You will get it that way for sure. Money and the supply of what money wants always meet. They do so more quickly now than they ever have.

It's an old-fashioned way of thinking in Beijing to buy foreign producers of essential commodities in order to ensure China's supply of these commodities. The right price for these commodities will serve the purpose much more effectively.

Equally, it's an old fashioned way of thinking to resist China's ownership of commodities producers on fears that China will then extract everything and pay nothing for it. Local government can easily regulate extraction rates, licence purchases and royalty payments. You hear that down in Australia? You don't have to be sucker punched by your own government.

Let's return mercantilism to the high school textbooks.