The rise of innovation mercantilism: and the threat to the global economy.

• Author: Atkinson, Robert D.

In 1944, representatives from forty-four nations met in Bretton Woods, New Hampshire, to make financial arrangements for the postwar world. It was then that the plans for the World Bank and the International Monetary Fund were created, with the General Agreements on Trade and Tariffs created two years later. This newly designed global trading system worked more or less well for about half a century. But as that era's commodity-based manufacturing system evolved into today's specialized innovation economy, the strains on the Bretton Woods framework have become pronounced.

These strains have been exacerbated by the embrace by a growing number of nations of a new kind of protectionism that seeks to expand domestic innovation capacity and technology exports by manipulating the trading system. As countries increasingly vie to achieve the highest levels of innovation-based economic growth and to attract, grow, and scale the innovative enterprises of the future, an increasing number have turned to "innovation mercantilist" policies that come at the expense of competitor nations and the detriment of global innovation. Collectively these polices represent a major threat to the integrity of the global trading system and they demand a coherent and bold response from free-trading nations and multilateral trade and development organizations.

Innovation mercantilist policies come in three types: localization barriers to trade, indigenous innovation policies, and general mercantilist measures (see figure). Localization barriers to trade seek to pressure foreign enterprises to localize economic activity. These include policies such as local content requirements, local production as a condition of market access, forced technology or intellectual property transfer, forced offsets, and compulsory licensing. Indigenous innovation favors domestic enterprises by making it more difficult for foreign enterprises to compete locally, such as by introducing domestic technology standards, onerous regulatory certification requirements, discriminatory government procurement requirements, or limits on foreign sales or foreign direct investment. Finally, general mercantilist policies, such as currency manipulation, export and production subsidies, and high tariffs, endeavor to boost production by increasing exports and/or reducing imports but they are indifferent as to whether they affect domestic or foreign enterprises.

Innovation mercantilism holds a strong appeal for...