INTERNATIONAL ECONOMICS ASSIGNMENT

RICHA GUPTA
01721630719

Is Mercantilism still alive? Can we call it Economic Nationalism 2.0? Support your answers
with relevant examples? Also, provide suggestions to reduce Mercantilism in the present
scenario.
Mercantilism is the theory of economic nationalism to build a wealthy and powerful state. The
term was coined by Adam Smith as a “mercantile system” to describe the system of a political
economy that sought to enrich the country by restraining imports and encouraging exports. The
advent of industrialization and capitalism set the stage for mercantilism. This system was
dominated in Western Europe from the early sixteenth to the late eighteenth centuries. The goal
of these countries was to achieve a favorable balance of trade that would bring gold and silver
into the country and maintain domestic employment.
Mercantilism was depended upon colonialism as each government’s primary objective was to
command a sufficient quantity of hard currency to support a military that would deter attacks by
other countries and aid in its territorial expansion by conquering foreign lands. Most of the
mercantile policies were the outgrowth of the relationship between the governments and the
mercantile classes. In exchange for paying levies and taxes to support the armies, the mercantile
influenced the government to enact policies that would protect their businesses against foreign
competition. This was done by strengthening the private owners of the factors of production by
establishing monopolies, grants tax-free status, and providing pension grants to favored
industries. The mercantile system served the interests of merchants and producers such as the
British East India Company whose activities were both protected and encouraged by the state.
This idea was refuted by Adam Smith in his famous book “The Wealth of Nations”. He argued
that trade when freely initiated is beneficial for both parties. He also argued that specialization in
production allows for economies of scale which results in improved efficiency and growth.
Finally, Smith also said that the collusive relationship between the government and the industry
was harmful to the general public. While the mercantilist policies were designed to benefit the
government and the commercial class, the doctrines of democracy and laissez-faire interpreted
economic welfare in a far wider sense which led to the disfigurement of mercantilism.
World War II’s devastation scared allied nations into desiring global cooperation. This led to the
creation of the Bretton Woods system; the World Bank and IMF, the United Nations, and the
GATT later came to know as the World Trade Organization. Everyone saw mercantilism as
dangerous and globalization as its salvation. Globalization is the increased flow of goods,
services, capital, and people across borders around the world. This enabled countries to deploy
resources to the highest productive resources. Until these assumptions about globalization were
wrong-footed by the 2008 financial crisis, many of the political leaders and leading economists
like Jagdish Bhagwati and Jeffrey Sachs were all praised for globalization. Robert Rubin, the US
Secretary of the Treasury from 1995-1999 was quoted saying that, “People from all around the
globe have benefitted enormously from globalization and open markets, and market-based
systems have proliferated across the world. Kofi Annan in 2000 was quoted as saying that,
“Open markets offer the only realistic hope of pulling billions of people in developing countries
out of abject poverty while sustaining prosperity in the industrialized world”.
However, globalization could not please every nation in the long term. In the United States, the
median wage has stagnated since the mid-1970s even though the real per capita income of the
countries has more than doubled during this period. The question that arises is, “Why do people
get left behind in this process?” The answer is that the cost of retraining to fit the newly skilled
jobs created by globalization is high, which causes many earlier employed individuals to either
be unemployed or get employed in low-paying jobs such as, security guards, shelf-stackers in
supermarkets, etc. This indicates that the result of bad globalization is a rise in economic
inequality. Over two-thirds of the world countries have experienced a dramatic increase in
inequality since the 1980s. Evidence shows that a few decades after World War II, the world
economy grew at a rate of 2.6%, which after globalization led to the market growth rate of only
1.4%. Regions like Latin America and Sub-Saharan Africa who diligently implemented the neo-
liberalized globalized policies have witnessed a collapse in the brave-new world (1980-2010)
with growth rates from 3.1% and 1.6% falling to 0.8% and 0.2% respectively. China experienced
hundreds of thousands of industrial strikes, local riots, and demonstrations. All these factors have
led to the re-emergence of mercantilist policies.
Mercantilism laid the foundation for today’s nationalism and protectionism. Nations felt that
they lost power as a result of globalism and the interdependence of free trade. The Great
Recession aggravated a tendency towards mercantilism in capitalist countries. For instance, in
2014, India elected Hindu nationalist Narendra Modi. In 2016, the United States chose populist
Donald Trump for the presidency. Trump’s policies follow a form of neo-mercantilism. Trump
advocates expansionary fiscal policies, such as tax cuts to help businesses. He argues for bilateral
trade agreements that are between two countries, wants to enforce unilateral trade agreements.
This allows a stronger nation to force a weaker nation to adopt trade policies that favor it. These
are all signs of economic nationalism and mercantilism. Mercantilism opposes immigration
because it takes jobs away from domestic workers. Trump’s immigration policies follow
mercantilism. Similarly, India’s Make in India mission and PM Modi’s Atma-Nirbhar motto
leads nations back to the lines of mercantilism.
However, presently the world is going through a pandemic. Challenges such as novel
coronavirus are global and cannot be adequately addressed by domestic structural policies alone.
If the global supply chains would not have been there in place it will be difficult for countries to
send medical supplies across the oceans. If effective communication channels would not have
been in place the research and information on the virus could not be shared effectively. Due to
the infrastructure set up during globalization nations were able to tackle this pandemic with
cooperation and coordination. Therefore, national policies must be complemented by more
effective international cooperation to achieve shared goals. This can be done by promoting
regional economic unions by transforming SAARC and ASEAN into economic unions which
will lead to no trade barriers within these countries and fewer barriers for the world. Global
institutions such as WTO should be strengthened with more authority and responsibility. At
national level trade policies should be guided by evidence and not sentiments.