2.1 Mercantilism and Neo-Mercantilism

Mercantilism dominated European economics from the 16th to 18th centuries. It focused on accumulating wealth through precious metals, promoting exports, and state intervention in the economy. Colonialism and trade monopolies were key strategies.

Modern neo-mercantilism echoes these ideas in today's global economy. Countries like China use subsidies and currency manipulation, while others impose tariffs to protect industries. These practices can lead to trade tensions and economic inefficiencies.

Mercantilism and Its Principles

Principles of mercantilism

Top images from around the web for Principles of mercantilism

• 

  apeuropeangallery - 17th Century View original

  Is this image relevant?

• 

  Introduction to Mercantilism | Marginal Revolution University View original

  Is this image relevant?

• 

  File:Salem shipping colonial color.jpg - Wikipedia View original

  Is this image relevant?

• 

  apeuropeangallery - 17th Century View original

  Is this image relevant?

• 

  Introduction to Mercantilism | Marginal Revolution University View original

  Is this image relevant?

1 of 3

Top images from around the web for Principles of mercantilism

• 

  apeuropeangallery - 17th Century View original

  Is this image relevant?

• 

  Introduction to Mercantilism | Marginal Revolution University View original

  Is this image relevant?

• 

  File:Salem shipping colonial color.jpg - Wikipedia View original

  Is this image relevant?

• 

  apeuropeangallery - 17th Century View original

  Is this image relevant?

• 

  Introduction to Mercantilism | Marginal Revolution University View original

  Is this image relevant?

1 of 3

• Mercantilism is an economic theory and practice that dominated Europe from the 16th to the 18th centuries
  • Emerged during the Age of Exploration (voyages of Christopher Columbus, Vasco da Gama) and the rise of nation-states (France, England, Spain)
• Wealth of a nation is determined by its holdings of precious metals (gold, silver)
  • Accumulating gold and silver seen as key to increasing national power and prestige
• Favorable balance of trade is essential for accumulating wealth
  • Exports should exceed imports to bring in more gold and silver
  • Trade surpluses viewed as sign of economic strength
• State intervention in the economy is necessary to promote national interests
  • Government policies aimed at protecting domestic industries and promoting exports
• Colonialism and the establishment of trade monopolies are encouraged to secure resources and markets
  • European powers established colonies (Americas, Asia, Africa) to extract raw materials and create captive markets for finished goods

State's role in mercantilism

• The state plays a central role in mercantilist policies by:
  • Imposing tariffs and quotas on imports to protect domestic industries
    • High tariffs on foreign goods to make them more expensive and less competitive
  • Providing subsidies and other incentives to encourage exports
    • Financial support for domestic producers to help them compete in international markets
  • Establishing colonies to secure raw materials (cotton, sugar, tobacco) and markets for finished goods (textiles, manufactured products)
  • Granting trade monopolies to favored companies or individuals
    • Exclusive rights to trade in certain regions or products (British East India Company, Dutch East India Company)
  • Regulating the flow of precious metals through the economy
    • Restricting the export of gold and silver to keep wealth within the country
• The ultimate goal of state intervention is to increase the nation's wealth and power relative to other nations
  • Economic policies seen as key to political and military strength

Impact of mercantilist practices

• Mercantilist practices had both positive and negative impacts on international trade and economic development:
  • Positive impacts:
    • Encouraged the growth of domestic industries and manufacturing
      • Protectionist policies helped nurture infant industries (textiles, shipbuilding)
    • Promoted the accumulation of wealth and the rise of powerful nation-states
      • Increased gold and silver reserves funded military expansion and political influence
  • Negative impacts:
    • Led to trade disputes and military conflicts between nations
      • Rivalry over colonies and trade routes fueled wars (Anglo-Dutch Wars, Seven Years' War)
    • Exploited colonies and hindered their economic development
      • Colonies treated as sources of raw materials and markets rather than equal trading partners
    • Created inefficiencies in the global allocation of resources
      • Protectionist policies prevented countries from specializing in areas of comparative advantage
• The legacy of mercantilism can still be seen in modern debates over trade policies and economic nationalism
  • Arguments for protecting domestic industries and promoting exports echo mercantilist principles

Neo-Mercantilism in the Modern Economy

Neo-mercantilism in modern economy

• Neo-mercantilism refers to the adoption of mercantilist-like policies in the modern era, such as:
  • China's use of state subsidies, currency manipulation, and intellectual property theft to boost exports and limit imports
    • Government support for state-owned enterprises and strategic industries (steel, telecommunications)
    • Artificially low exchange rate for the yuan to make Chinese goods more competitive
  • The US-China trade war, which involved tariffs and other trade barriers to protect domestic industries
    • US tariffs on Chinese imports to reduce trade deficit and pressure China to change economic practices
  • Japan's use of non-tariff barriers and state support for key industries during its rapid economic growth in the 20th century
    • Government guidance and financial support for strategic sectors (automobiles, electronics)
    • Informal barriers to imports (complex regulations, distribution networks)
  • The European Union's Common Agricultural Policy, which provides subsidies to European farmers and imposes tariffs on agricultural imports
    • Financial support for EU farmers to ensure food security and maintain rural communities
    • High tariffs on agricultural imports to protect domestic producers
• While neo-mercantilist policies can provide short-term benefits for individual nations, they can also lead to trade tensions and economic inefficiencies in the global economy
  • Protectionist measures can invite retaliation and escalate into trade wars
  • State intervention can distort market signals and lead to misallocation of resources