Does the pursuit of power and wealth still shape current economic foreign policy?
The term mercantilism was first coined by Adam Smith in 1776, when he described a “Mercantile System”, one which enriches a nation through restraining imports and increasing exports. A core belief behind this theory was that in order to acquire wealth, reserves of precious metals such as gold and silver; it was essential to maintain a favourable trade balance. This dates as far back as 1381, when the then King of England, Richard II, first created a commission to look into the nation’s trade balance and how to stimulate exports (Weber, 1981). The implementation of these rules helped England maintain a positive trade balance and hence accumulate large amounts of wealth.
However, Mercantilism is primarily concerned with the accumulation of power; this is because only once a nation has power can it start to legitimately build its wealth. In the 16th century the international market was seen as a very different model to that of the domestic market. With no global governing body conflicting nations would simply use military force to acquire wealth. Another belief was that trade was a zero sum game further decreasing the need for co-operation between nations with each power striving for self sufficiency through the acquisition of colonial empires.
To achieve this self-sufficiency states would act unitarily and rationally in their best interests. This included protectionist policies in order to promote domestic economies with many trying to form monopolies in emerging industries and protect existing industries in order to gain a competitive advantage in certain sectors over other nations (Weber, 1981). Therefore the anarchistic nature of inter-state relations meant protection of national interest laid firmly in the hands of the state. As a result many less powerful economies were forced into unfavourable positions effecting their autonomy and ability to promote their own interest.
Despite very little clarity from scholars at the time about whether mercantilism was beneficial as a whole (Magnusson 1994,1995. Thomas Mun 1928), we can assume that those that benefited (merchants and those with monopolies in manufacturing industries) were in favour of the pursuit of mercantilist policies and those who didn’t (the general population) were not. By this logic we can assume that today traders and monopoly business owners would support the policies of the time. However, is it possible to see the implementation of mercantilist policies in today’s economy?
Although there are clear disparities between 16th century mercantilist policies and 21st century liberal policies we are able to see some commonality between the two. Many nations still use protectionist policies to promote domestic industry, such as the Common Agriculture Policy, which subsidies agricultural production within the EU to maintain employment in sectors that would otherwise, due to comparative advantage, not exist due to cheaper production costs elsewhere. As a result of such subsidies consumers pay a higher price than they would naturally without a subsidy and government spending is increased in order to provide the money to subsidise farmers. This intervention in the market highlights how the state still plays a central role in promoting its national interests, in this case maintaining employment and therefore taxable capacity.
Current liberal policy is not as preoccupied with maintaining a trade balance surplus. It is now widely accepted that international trade is a positive sum game meaning both nations partaking in trade are able to benefit. As a result many countries, such as the UK and US, are now running large trade deficits. However, some nations are still keen to maintain a large trade surplus such as China. China in 2013 had a net trade surplus in goods and services of over $2.35 Billion (World Bank, 2016). China’s Yuan is now traded at around 6.5 Yuan per US Dollar, although a slight appreciation of the Yuan has occurred, it is deemed by many to still be greatly undervalued. In undervaluing its exchange rate China is able to operate a trade surplus similar to mercantilist policies of the 16th and 17th century this increases the competitiveness of exports (Rodrik 2013).
The US Dollar is now the demonization of wealth instead of precious metals and is used for pricing and trading in oil. Essentially this money is then recycled through the US financial system to the benefit of the US economy enabling them to run a large trade deficit and still build wealth. It is argued that the Iraq war 2003-2011 was started as a result (as well as other factors) of Sadam Hussein’s decision to price Iraqi oil in Euro’s instead of US Dollars (Zarlenga, 2010). Due to the US fear that other oil selling nations would follow suit and hence, the US dollar would lose it’s power, the US intervened using military force in order to assert their power over the wealth that they could have potentially lost. This would lead us to believe that mercantilist views still play a role in shaping modern foreign economic policy.
Multi-National Corporations (MNC’s), much like colonial powers during mercantilist times, force themselves on to less developed “weaker” nations in order to exploit their natural resources and markets. Many of these nations have little choice due to constraints placed on them by global governing bodies with regards to trade openness and government roles. Furthermore free trade agreements between nations allow firms to import cheaply from the developing nation similarly to that in the mercantilist period where maintaining a trade surplus was essential. Although it is not military power that is used to exploit these weaker economies, we can still see that more powerful actors within the global economy abuse their position to the detriment of weaker nations.
To summarize, the mercantilist policies of the 16th and 17th century involved nations concerned with accumulating power and wealth. Although it is not directly evident that these thoughts still shape current foreign economic policy it can be seen that nations are unwilling to sacrifice wealth to other nations and will assert power, may it be military or political, over others in order to assert control. Furthermore we see many countries conducting high levels of protectionism in order to protect domestic industries and help monopolies form. In the extreme case of China we can also see exchange rate manipulation in order to maintain positive net exports and continued export lead growth.
Magnusson, L. (1995). Mercantilism : Critical concepts in the history of economics / edited by Lars Magnusson. (Critical concepts in the history of economics). London ; New York: Routledge.
Magnusson, L. (1994). Mercantilism : The shaping of an economic language / Lars Magnusson. London: Routledge
Mun, T. (1928). Englands treasure by forraign trade / Thomas Mun. (Reprints of economic history classics ; 1). Oxford: Blackwell, for the Economic History Society.
Rodrik, D. (2013). The New Mercantilist Challenge. Project Syndicate. Retrieved from http://www.project-syndicate.org/
Weber, M. (1981). General economic history / Max Weber : With a new introduction by Ira J. Cohen. (Social science classics). New Brunswick, New Jersey: Transaction Books.
World Bank. (2016). World Development Indicators. Net trade in goods and services (BoP Current US$). Retrieved from http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators
Zarlenga, S. (2010). Was the Iraqi Shift to Euro Currency to “Real” Reason for War? Research & Articles, American Monetary Institute. Retrieved From http://www.monetary.org
Economics BA (2016) Swansea University
I arrived at Swansea in September 2013 and have thoroughly enjoyed my three years at the institution. Being at Swansea and learning from the great team of academic staff has only further boosted my interest in the field of economics. Having now completed my studies at Swansea University I am hoping to continue my learning undertaking a masters in BSc Development Economics at Birmingham University.
In the International Economic Policy module I learnt about different economic theories on international policy looking in depth at Mercantilism, Imperialism, Capitalism and Liberalism. Furthermore also covering current economic issues such as global hegemonic powers, economic crises and international trade. The mixture between economic theory and the analytical side of the module allowed for thoroughly interesting and engaging learning throughout the module.