Mercantilism is an economic concept which believes that the wealth of a nation could only be achieved through government controls and regulation of trade, commerce and economic activities. It was an economic system that was practised in the 16th to 18th centuries. The underlying principle of mercantilism was to achieve a positive balance of trade (trade surplus) by encouraging exports of home-made products and markedly restricting importation through imposition of tariffs and stringent regulation. Its use was favoured by writers such as Jean-Baptiste Colbert, who at a time served as the French Finance Minister. A classical description of this approach could be seen in a statement contained in the document Discourse in the Common Weal of this Realm of England in 1549, where a warning was put out for England not to impoverish itself and enrich strangers. This, the document stated, could only be achieved by “not buying more from them than we sell to them”.
The end game of this policy was to achieve a situation of wealth by increasing the amount of gold and silver trading in the mercantilist nation’s treasury, and at the same time restricting avenues through which these metals were exported. Mechanisms put in place to achieve this included the prohibition of transactions using these precious metals by private citizens.
Features of a Mercantilist Economy
1) Import prohibition of certain goods using imposition of high tariffs, government legislation or very high taxes/import duties.
2) A wide range of government subsidies on export industries to promote the country’s export-based policy.
3) Policies of nationalism.
4) Accumulation of assets in gold and silver, and prohibition of private accumulation, use or export of these items.
5) One-way trade with colonies, and importation of gold and raw materials from these sources.
A negative effect of mercantilism was that it encouraged plenty of warfare, since the only way open to get wealth that could not be obtained by trade was to forcefully take it from another country. Conquered territories were made to pay hefty tributes in gold and had their natural resources plundered.
Many analysts are also quick to point out that the colonization of territories like Africa and what constitutes Latin America and the West Indies can also be likened to a form of mercantilism.
Mercantilism in today’s global economy
Mercantilism was severely opposed by core capitalist proponents such as Adam Smith and Dave Ricardo, who were proponents of free trade or laissez-faire economic systems of trade. Even though the late 18th century is regarded widely as a period when mercantilism fell out of favour, critics are quick to point out that countries like Japan that rely heavily on exports for their revenue and which has taken steps like currency devaluation to achieve this aim, are indeed, practising a modern form of mercantilism.
China is another country where modern-day mercantilism is flourishing. After the declaration by Deng Xiaoping to his countrymen in the 80's that “to get rich is glorious”, the Chinese government led an industrial revolution that involved the setting up of industries to produce just about anything that could be produced, and exporting same to markets in the Americas, Europe and Africa. Combined with a deliberate government policy of a fixed exchange rate for the Chinese Yuan, which has effectively kept the currency permanently undervalued when compared to Western currencies, the government’s exports have largely accounted for its $1 trillion foreign reserves and its massive trade surplus. Today, the US is one of China’s biggest debtors. Negotiations to get the Chinese government to open up its markets to foreign goods are yet to yield the desired results.
We have also seen failed attempts at mercantilism by countries like Nigeria which are primarily import oriented, but which still have several import prohibitions without a concurrent increase in the production capacity of export-oriented industries to balance the equation.
eToro Openbook provides you with all the advantages of social trading. You can now see who is trading what, follow the top performers and imitate the best traders. Experience what social trading is all about. Sign up at eToro today!