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Avoiding neomercantilist fallacies when thinking about the FCPA

Readers of the FCPA Blog are no strangers to the heightened attention recently paid to the Foreign Corrupt Practices Act. Much of that attention, unfortunately, comes from a neomercantilist perspective.

Neomercantilism is the modern version of mercantilism, an economic policy that attempts to increase the wealth of a nation by managing trade and investment.

As I explain in a recent paper, neomercantilism is inherently flawed. Among other things, neomercantalists misunderstand the fundamental purpose of the FCPA — which is to strengthen and enhance the global market.

Neomercantilism assumes that a nation’s wealth increases when “its” business firms are more competitive than those of other nations. Neomercantilism appears in discussions of the FCPA whenever people talk about the Act’s effect on the “competitiveness” of U.S. businesses. This perspective shows up in both scholarly and policy discussions of the FCPA.

Neomercantilism has two inherent fallacies. First, neomercantilism assumes that business firms are neatly siloed within political borders. They aren’t. Business firms are embedded in large networks of capital, customers, suppliers and distributors that cross many borders. Second, neomercantilism implies that the global economy is a zero-sum game, in which nations win or lose. Again, not true. A well-functioning global economy grows, and so too can the share of any or all countries.

Which brings up the very serious problems in the way neomercantilists think about the Foreign Corrupt Practices Act. Congress very clearly, and correctly, intended the Act to protect and enhance the integrity of the global market. Congress understood that bribery does great damage to that market, and that people and business firms connected to the United States are active in and benefit from that market.

Congress also asked, in the 1988 amendments, that the executive pursue an international regime to control corruption. That request was robustly answered, and now the Act is only one part of a web of rules and laws and treaties. The only U.S. firms that would ever fall afoul of the FCPA are those engaged in transnational activities, and those are exactly the same firms that are subject to other parts of the international regime. The same is true of firms outside the United States, which are usually subject to the FCPA. Neomercantilists, who silo business into the borders of a country, think that the FCPA affects only U.S. firms, which is wrong, and that only the FCPA affects US firms, which is equally wrong.

Congress intended the FCPA to enhance the market, not to enhance or diminish the competitiveness of any particular firm. Congress intended for the FCPA to be part of a global anticorruption regime. To analyze the FCPA as a neomercantilist not only lacks intellectual rigor, but more importantly it also puts at risk the many benefits to be accrued by business firms and by everyone else through a strong market.

My paper is available at http://ssrn.com/abstract=2567940.

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Philip M. Nichols is the Class of 1940 Reunion Term Associate Professor of Legal Studies and Business Ethics at The Wharton School of the University of Pennsylvania.

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