Mercantilism is an economic system that promotes self-sufficiency through a favorable balance of trade built to acknowledge national power. The mercantilism system is focused on accumulating resources and wealth while maintaining a positive trade balance with other nations. The economic system is based on minimizing imports and maximizing exports, and therefore it is regarded as a form of economic protectionism. Mercantilism is an old system dating back to the 16th century and primarily practiced in Europe. Therefore people view it as an outdated theory that has been replaced by the market economy controlled by forces of demand and supply. Today, mercantilism refers to economic policies and tariffs used by countries to restrict and control the importation of foreign goods.
The purpose of mercantilism was to create wealth and build a powerful state (LaHaye, 2021). The term ‘mercantile system’ was developed by Adam Smith to describe a theory of political system that was meant to make a country wealthy by encouraging exports and restricting imports. The mercantile nationalism was mainly popular among the Western and European countries through their thoughts and policies between the 16th and 18th centuries. The main reason for having these policies was to achieve a favorable balance of trade that would maintain domestic employment and bring silver and gold into their country (LaHaye, 2021). The mercantile system was different from the agricultural system because it served the interests of producers and merchants, including the companies such as the British Each India Company, which was encouraged ad supported by the government.
The economic rationale of the mercantile system in the 16th century was to consolidate regional power centers by creating large and competitive nation-states. Other factors that led to the establishment of the mercantilism system was the increase in usage of monetary systems such as silver and gold relative to barter trade; increase in breadth and volume of work; the growth of European industry and commerce close to agriculture; and the establishment of colonies outside Europe (LaHaye, 2021).
The military conflict between countries dominated the mercantile period. The navies and armies of the main protagonist were created to become full-time professional forces. Therefore, each country was focused on an economic objective of gaining control of a sufficient amount of hard currency to support and fund the military that would neutralize and prevent attacks from other nations. More so, the military would help in expanding the territorial boundaries. The mercantile policies promoted a good relationship between the mercantile classes and the government. Since the mercantile classes paid taxes and levies to the government to support the military, the government, in return, was supposed to implement policies that would protect business interests against foreign competitors. Therefore, the government created different procedures such as granting pensions and titles to successful producers, establishing monopolies over local and colonial markets, exempting new companies from guild taxes and rules, and providing capital to new markets (LaHaye, 2021). The government created favorable trading policies such as assisting local companies by imposing prohibitions, quotas, and tariffs on imports of commodities that competed with local producers (LaHaye, 2021). In addition, the government imposed restrictions on the exportation of capital equipment and tools and the emigration of skilled workers that would allow foreign companies to compete in the manufacturing of goods and services (LaHaye, 2021). Simultaneously, diplomats would encourage foreign manufacturing companies to move and do business in diplomats’ nations.
During the mercantile era, transporting commodities from one country to another was an important economic activity. The shipment of gold from African and Asian countries into Portugal and Spain and the growth of the colonies created the need to gain control of the oceans, and it was considered an essential aspect of national power.
Most people in the mercantile period suggested or believed that the main benefit of foreign trade was importing silver and gold. According to this idea, the gifts to one country were matched by cost from the other country that exported silver and gold, and there were no net gains from trade. Governments engaged in war frequently used the strategy of draining one another of valuable silver and gold, which were considered the direct and desirable benefits of trade. However, Adam Smith refuted the idea of the mercantile theory by introducing the modern economic theory.
Many scholars have criticized the mercantile doctrine. Adam Smith suggested that free trade between nations benefits both parties. He indicates that specialization in the production of manufactured goods promotes economies of scale, which in turn improves growth and efficiency. And lastly, Adam Smith argued that the interactive relationship between industry and government was hazardous to the general public. The mercantile policies were created and developed to benefit the business class and the government compared to the free markets that included the entire population.
Modern day Mercantilism
The modern world is dominated by advanced theories that promote international trade. And therefore, there is a need to evaluate the practice of mercantilism in contemporary society that is meant to satisfy political interests through economic desires. In an article written by Robert Artison, he argues that China’s innovation policy of mercantilism has emphasized the welfare of long-term producers by establishing an economic system of limited trade and self-sufficiency (Autarky) (Balu, 2020). Today, the mercantilism policy promotes the political agenda and slightly influences the financial systems controlling property rights.
China’s model boosted the trade surplus by accumulating the foreign exchange reserves, and therefore creating an export-driven policy. China has focused on its firms and given less attention to foreign established companies. This strategy has allowed the country to achieve a more significant advantage in technology and innovation. The increase in exports in China has allowed the government to pile up the United States dollars in its reserves. This was viewed as a currency manipulation in the middle of the trade wars with U.S governments (Balu, 2020). The ruling political party in China uses the mercantile policy to protect its local and international interests. China does not have a harmonious relationship with the World Trade Organization because of its growth trajectory and sophisticated economic policies. Recently, China has prohibited the import of barley and beef from Australia, which is seen as one of the mercantile policies used by the Chines president. China has indicated many characteristics of mercantile nationalism compared to other countries in the world. However, other countries in the world are using similar policies. The former president of the United States, Donald Trump, argued that the government was losing money due to importing commodities from the outside.
Furthermore, Trump argued that the government was spending so much money outside countries, and those funds were used in supporting foreign competitors and making them more affluent than the business owners in America (Balu, 2020). In 2018, the Trump administration imposed taxes and heavy tariffs on goods and services from China and other countries; it led to an increase in trade wars between China and the United States. The two countries threatened to increase taxes and tariffs on imports from each nation. The Trump administration created a set of demands, including calling on the Chinese government to open its domestic markets for United States goods and services. In response, the Chinese government asked the U.S to share their technology and innovative ideas with the Chinese companies. Since China has made an effort to command the global economy through the mercantile policy but has failed, there is no sign that the government is likely to abandon the policy soon.
The agenda of the Trump administration tried to introduce mercantilism policies in the United States and other parts of the world. President Trump made an effort of renegotiating the North America Free Tade Agreement (NAFTA) that was made in the Obama administration. The policy of mercantilism does not support immigration because it is believed that jobs will be taken away from domestic employees (Balu, 2020). This rule of doing business applies to employers too. Therefore, the United States government fought to reduce immigrants and protect the local workers from losing employment.
The idea of mercantilism has also been dominant in Asian countries such as India. Although India has not purely adopted mercantilism policies, the national plan in the country reflects the doctrine of mercantilism. To protect the country’s political interest, India walked out of the Regional Comprehensive Economic Partnership that offered a free trade area. More so, India has increased its foreign exchange reserves, a similar strategy used by the Chinese government. These strategies show that mercantilism policies are still dominant in India and other Asian countries.
In conclusion, the current economic system has not been doing business somewhat. Due to the social and political changes, most of the trading policies around the world maintain the characteristics of the mercantilism doctrine. Emerging economies have adopted these policies to protect themselves from developed nations (Balu, 2020). Therefore, the emerging economies are taking the defense position by restricting imports from developed countries to protect their local businesses and manufacturers. Most countries around the world, including India, are trying to adopt China’s model of growth and development, which is deeply based on the mercantilism policy. As a result, the domestic policies and vision for trade have affected the global trade and movement of goods and services from one region to another. The primary purpose of the mercantilism policy is to lobby companies to remain close and under government control. Then, the government creates inward-looking trading policies that encourage exporting goods and services. In the actual sense, mercantilism policies only benefit a few people in government and business owners, but they try to hide under the banner of national interest. Governments that practice the policy of mercantilism provides several justifications. First, they claim that the tariffs are a response to domestic subsidies. For example, the Chinese government suggested that restriction on importing steel was meant to protect domestic manufacturers from unfair competition. Secondly, tariffs are issued to help in supporting and developing new companies. And lastly, taxes are used to protect against dumping where some countries may get rid of unprofitable goods by offering low prices to encourage exporters.
Balu, M. (2020). Mercantilism in the 21st century: an introspection. Asia Power Watch. https://asiapowerwatch.com/mercantilism-in-the-21st-century-an- introspection/
LaHaye, L. (2021). Mercantilism. Econlib. https://www.econlib.org/library/Enc/Mercantilism