Mercantilism, which is the earliest theory
pertaining to International Trade, was the dominant economic doctrine in the 16th,
17th and 18th centuries, and is often discussed with
reference to colonialism as Mercantilism is considered to be a result of
Colonialization. In the past, this was based on the premise that national
wealth and power were best served by increasing exports and collecting precious
metals in return. Therefore, a country’s economy was mainly controlled by the
state, chiefly through corporations and trading companies. Through this
approach the main intention of nation states was to increase their power by
sustaining a positive balance of trade.
With the passage of time, Mercantilism
was rejected by scholars such as Adam Smith and David Ricardo who promoted free
trade among nations. However, today once
again states are already beginning and/or are considering the use of inward
looking protectionist trade policies as they begin to discover certain flaws in
following an extremely liberal trade policy. Hence we see several leading
economies in the world moving towards more neo-mercantilist trade policies in
order to maintain their power in the international system.
When examining the relevance of Mercantilism to
contemporary global trade, it is important to pay attention to the following
characteristics of Mercantilism:
·
State-led economy
·
Export based economy with minimum imports (balance
of trade theory) and implementing high tax and tariff policies when importing
goods to countries (a nationalist approach)
·
The concept of bullionism
·
Maximising the use of domestic resources
·
Provision of subsidies for profitable
industries.
In this Mercantilist approach to trade, states
possessed the supreme power over trade and the state formulated economic
policies in such a way that they can reap the maximum advantage by accumulating
more wealth and thereby becoming more powerful as a nation. Hence it is a
zero-sum game which is more advantageous to developed economies. The primary
method of calculation of wealth of a country was by looking at its gold and
silver reserves which was known as bullionism and this was one manner utilised
by Western imperialists to accumulate wealth. Mercantilists firmly believed
that the more gold a country possessed, the more powerful and wealthier it
was. Certain imperial powers also had
navigation acts which restricted the ability of other nation to trade with the
colonies that were under the rule of these imperial powers.
Along with this, they also followed a favourable
balance of trade in which the economy was mainly export oriented with a minimum
number of imports. To support this policy, they implemented high rates of taxes
and tariffs for imports and at the same time the government provided with
subsidies for local manufacturers. This led to the strengthening of local
producers and discouraged imports from other countries. Hence the Mercantilist
approach was a nationalist economic policy.
While from an initial overview it seems as if this
theory is quite obsolete, when we carefully examine the current economic
situation of the world we can see that several countries, specifically
developed economies, still prefer and try to utilise Mercantilist approaches to
trade under the guise of capitalism and free trade. However, unlike in the
past, the concept of bullionism is not so prominent in modern mercantilism
because today there are more sophisticated ways of calculating a country’s
wealth like the Gross Domestic Production (GDP), Gross National Production
(GNP), etc.
However,
even after centuries, although it is not as popular as it used to be during the
colonial period, the essence of Mercantilism, i.e. maximising net exports in
order to prosper the national economy, remains the same. Just like companies
such as the British East India Company enjoyed the trade monopoly, in the
modern era also it is observed that several global powers have held monopoly
for certain goods. For example, the Organization for Petroleum Exporting
Countries (OPEC), has maintained the monopoly for crude oil up until recent
past. Although this is a regional organization which goes beyond the national
boundaries of one particular country, they have made sure that no other country
or trade union outside their region can compete with them when controlling the
global price for crude oil. Through this these countries make sure that the
middle eastern oil rich countries remain powerful actors in the arena of global
trade, particularly in oil exports. Hence, going along the lines of the realist
school of thought, all these attempts of states are to maximise their power by
becoming economically and politically strong.
Apart from regional cartels like OPEC, most of the
world’s richest countries who claim to be fully committed to free trade and
trade unions, are very much Mercantilist in some of their economic policies.
One such example is China, who claims to have a state driven capitalist
economy. Although at a superficial level this is what can be observed, China,
in fact has underlying protectionist resolutions in each economic and trade
related decision they venture into. They have purposely undervalued their
currency and they deliberately subsidise the goods they export to other countries
so that they will have a trade surplus. Anti-dumping, one of the most
detrimental instruments of protection, is another famous technique used by
countries like China in order to drive other firms out of the market and create
a kind of monopoly in the global market regarding several trade items.
When we look into the Latin American region, we find
Mexico as a perfect example of modern day Mercantilist economy. An ideal
example from Mexico is Telmex, a Mexican telephone company which was initially
owned by the government and later in the 1990s it was privatised and this was
essentially a state grant of the telephone monopoly to a private business. Even
today, Telmex enjoys telephone monopoly and the adverse result of this is that
the company does not take sufficient endeavours to improve the quality of their
service and satisfy the consumers. In order to avoid budding companies entering
into the market, Telmax engages in lobbying politicians, controlling regulatory
bodies, proposing favourable laws, etc. (Conroy, 2005). Situations such as this
limit the options for consumers. It is true that the local companies prosper
through these measures, but the consumers who are on the receiving end are at
disadvantage because they are deprived of being exposed to other options
available and choosing what perfectly suits their taste.
Even though Free Trade Agreements (FTAs) have
actually made trade with developed countries more accessible for the developed
world, mercantilism approaches within these trade agreements are still visible.
The best example for this is the South Asian Free Trade Agreement (SAFTA). Even
though the FTA made trade between India and Sri Lanka is much compatible,
non-tariff barriers have made the trade agreement ineffective and inefficient. On
the other hand, the trade agreement has made India reap more benefits with the
strategy of white list and this is quite similar to what could be seen during
the Mercantilist era. Such examples depict the fact that even though free trade
exists between countries, it has failed and still fails to lift off the trade
gaps and close the technological and development barriers which could be seen
within developed and developing nations. The Doha Round and the Bali package
are other examples where the developing countries’ needs have not been
addressed by the developed countries. This also proves that countries
especially developed nations prefer mercantilism approach compared to
developing nations who prefer free trade agreements.
Furthermore, Chinese One
Belt One Road (OBOR) and the United States President withdrawing from regional
trade agreements such as the Transatlantic Trade Investment Partnership (TTIP)
and Trans Pacific Partnership (TPP) clearly define the diversified strategies
countries tend to follow. Developed nations such as United States prefer a
protectionist, more conservative and demand driven trade policies. The idea
behind this is Mercantilism where the president tries to strengthen the local
entrepreneurs in the means of smart trade. On the other hand, China develops a
theory of an open market system which underlies political dominance over the
region. The strengths in the two economies has actually led to such policies.
For example, the Chinese open their markets because of the fact that they have
surplus of cheap labour and US because of their high unemployment rate.
Therefore, one cannot simply say that Mercantilism
is an obsolete economic concept because the essence of mercantilism is seen in
global trade even in this globalized, technologically advanced 21st
world market. In fact, the tendency of going back to Mercantilism by developed
economies is on the rise. Therefore, Mercantilism is still a prominent approach
in contemporary global trade and will continue to remain relevant as long as
nation states exist.
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- Guest Commentary : Harini Fernando
