Mercantilism : Has it lost its relevance?

Mercantilism which is the earliest theory pertaining to International Trade, was the dominant economic doctrine in the 16th, 17th and 18th centuries, which is often discussed with reference to colonialism as Mercantilism is considered to be a result of Colonization. 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 to use 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, state 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.

Though 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, Telemax 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.

In the early 21st century, amidst the rise of globalization, countries started signing Free Trade Agreements (FTAs). Those who strongly support free trade, advocate for unilateral trade reforms over FTAs and claim that it is a common mistake to think that FTAs are the primary solution to expand trade. FTAs are a very narrow view of how trade works and it is a very mercantilist view of trade in which emphasis is given to exchanging export concessions (Sally,2017). Although the existence of FTAs had allowed smaller countries access to large markets, mercantilist approaches within these trade agreements are clearly visible. India Sri Lanka Free Trade Agreement (ISFTA) provides a great example for this scenario. Even though the FTA had expanded trade between India and Sri Lanka, there exists a lot of non-tariff barriers (NTBs) which reflects the inefficiency of the agreement. 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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