Mercantilism: Followers and Influence on International Trade

Introduction:

The traditional view of neomercantilism suggests that countries implementing it are encouraging exports, discouraging imports, controlling capital movement, and centralizing currency decisions in the hands of a central government. While part of it is true, to fully understand the concept of neomercantilism and its implications we need to go back to the roots of mercantilism and how it was established. Because the answer to what neomercantilism is lies there.

Turning the history book, we will see that mercantilism was a concept created by merchants of the imperialist nations to promote their goods to the world in return for earning gold and silver to fill up their coffers. During that era, gold and silver were in the reserves of the country as an indicator of the nation's wealth. The promotion of the home industry meant more employment for the colonial nations as well. As a result, mercantilism was often argued to be part of a political economy as it was backed by the Crown and had geopolitical implications as well.

There lies no better example of mercantilism than the British invasion of India. The British East India Company was a team of merchants who had come to India to trade. However, that trade soon turned into a bloodless coup as huge sums of raw materials like spices and cotton were sent off to Great Britain, and in return, expensive low quality finished cotton clothes were sent back to India to sustain Great Britain's economy. “, mercantilism held that exports were beneficial to the nation while imports were detrimental”.

In addition to home industries getting promoted and the Crown's expansion getting met as well, mercantilism and colonialism came hand in hand. India was the largest producer of cotton in the world, but most of it was sent to Britain. “The country no longer spun or wove much of it and Dhaka which was the center of Muslin production turned to ruins as the master weavers became beggars. On the other hand, the low-quality British exports of textiles into India soared. By 1830 these had reached 60 million yards of cotton goods a year, in 1858 this mounted to 968 million yards.”.

While there were surely the benefits of exploiting India’s vast trading resources, there was also the underlying scope of acquiring power over the land. Once the East India Company held a strong grip on the country’s resources, they left no stones unturned in acquiring power over other countries through political and economic exploitation. The mercantilist practices implemented by the British Monarchy were to protect the producers in Britain and gain as much gold and silver as possible by exporting British-made goods. If we look at the modern world today and the practices of neomercantilism, we will notice that the structure remains the same with certain changes.

Protectionism:

There is no denying that trade between nations has become smoother and freer-flowing than ever before. However, there are still certain barriers imposed in the excuse of trade wars and “health and safety” standards to prevent goods from crossing borders. The example of the US and China’s trade war could be used as an example here. America’s application of imposing tariffs on Chinese imports was mainly to minimize imports and maximize exports as much as possible.

China’s Currency Manipulation And The Sino View Of Neomercantilism:

From the time that communist China opened its doors to international trade, it has been at the forefront of cheap manufacturing due to its low costs, huge labor pool, and strict government intervention. Out of all these factors, the government intervention and its measures are what has kept China the number one hub for cheap production after so many years and no one has been able to come close.

One key aspect of neomercantilism is the centralized currency decisions in the hands of a central government. There is no better example than China in this case as it has been deliberately devaluating its currency over time. The reason behind this is that letting it revalue will collide with the country’s macroeconomic objectives. A country with a fixed exchange rate and a strong (weak) external position typically would be reluctant to revalue (devalue) during a period of weak (strong) aggregate demand since revaluation (devaluation) would increase (decrease) the demand for imports and reduce (increase) the demand for exports thus reducing (increasing) already weak (strong) aggregate demand. 

Conclusion

This view that China’s devaluation of the currency and similar neo-mercantilist approaches has affected China solely is debatable. It can be argued that such neo-mercantilist policies create inefficiencies in the Chinese market and rising prices for consumers. To make manufactured goods, Chinese producers need to import oil from the USA. Due to the devaluation of the currency, Chinese producers end up paying more than usual. This eventually leads to higher costs of production that are added on to the consumers in the form of higher prices.

Neomercantilism measures are often taken to protect the county’s industries and to encourage the country’s exports all over the world. If we look at British policies in India, we will see that most of the mercantilist practices were done to gain control of the vast land and for geopolitical reasons. The gold and silver earned by the British from India were necessary to fuel the British Military so that they could keep control of India which was their crown jewel. After all these years and the fall of colonialism, this theory of needing mercantilism was needed to ensure military power and might be debunked. “It is not always necessary to accumulate gold and silver to enable a country to carry on foreign wars and maintain fleets and armies in distant countries. Fleets and armies are maintained, not with gold and silver, but with consumable goods. 

To elaborate on this Smith has favored free trade and justified that it was the wealth found in the market economy that was a precursor to the ability of a nation to project military power. This implied that free trade was necessary, and mercantilism or neomercantilism is never a fixed solution.