How Mercantilism Worked
Mercantilism—a form of economic nationalism—funds corporate, military, and national growth. It advocates trade policies that protect domestic industries. In mercantilism, the government strengthens the private owners of the factors of production. These four factors of production are:
EntrepreneurshipCapital goodsNatural resourcesLabor
Mercantilism establishes monopolies, grants tax-free status, and grants pensions to favored industries. It imposes tariffs on imports. It also prohibits the emigration of skilled labor, capital, and tools. It doesn’t allow anything that could help foreign companies.
Example of Mercantilism
Mercantilism was the dominant economic system in Europe between 1500 and 1800. Countries all wanted to export more than they imported. In return, they received gold. It powered the evolution of nation-states out of feudalism. Holland, France, Spain, and England competed on the economic and military fronts. These countries created skilled labor forces and armed forces to defend them. Merchants supported national governments to help them beat foreign competitors. An example was The British East India Company which defeated the princes of India with 260,000 mercenaries. It then plundered their riches as the British government protected the company’s interests. Many members of Parliament owned stock in the company. As a result, the company’s victories lined lawmakers’ pockets. Mercantilism depended upon colonialism, as the government would use military power to subdue foreign lands. Businesses then exploited natural and human resources found there. The profits fueled further expansion, benefiting both the merchants and the nation. Mercantilism also worked hand-in-hand with the international gold standard. Countries paid each other in gold for exports. The nations with the most gold were therefore the richest. They could hire mercenaries and explorers to expand their empires. As a result, nations sought trade surpluses with which to amass gold, rather than a deficit. Successful mercantilist nations developed strong merchant marines and imposed high port taxes and regulations on foreign ships arriving with goods to sell. England, for example, required all imports from Europe to come in its own vessels, or in a vessel registered in the country where the goods originated.
Mercantilism vs Capitalism
Adam Smith argued against mercantilism with his 1776 publication of The Wealth of Nations. He argued that foreign trade strengthens the economies of both countries involved, as long as each trading partner specializes in what it produces best, giving it a comparative advantage. He also explained that a government that put business ahead of its people would not last. Smith’s economic theories coincided with the rise of democracy in North America and Europe. In 1791, mercantilism was breaking down, but free trade hadn’t yet developed. Most countries still regulated trade to enhance domestic growth. Then-U.S. Treasury Secretary Alexander Hamilton was a proponent of mercantilism. He advocated government subsidies to protect infant industries necessary to the national interest. The industries needed government support until they were strong enough to compete with established foreign industries and producers. Hamilton also proposed tariffs to reduce competition in those areas. Fascism and totalitarianism adopted mercantilism in the 1930s and 1940s. After the stock market crash of 1929, many nations turned toward trade protectionism to save industry and jobs. They responded to the Great Depression with tariffs and trade restrictions.
Mercantilism Today: Neomercantilism
World War II’s devastation forced Allied nations into desiring global cooperation. They created the World Bank, the United Nations, and the World Trade Organization. They saw mercantilism as dangerous and globalization as the alternative. But not all nations agree that trade liberalization is in their interests. Both Russia and China continue to promote a form of mercantilism. In fact, neomercantilism fit with those nations’ formerly communist governments. They relied on centrally planned command economies that allowed them to regulate foreign trade. They also controlled their balance of payments and foreign reserves. Their leaders selected which industries to promote. They engaged in currency wars to give their exports lower pricing power. For example, China bought U.S. Treasurys to fuel its trade with the U.S. As a result, China became one of the largest foreign owners of U.S. debt.
Significance of Mercantilism Today
Mercantilism laid the foundation for today’s nationalist and protectionist economic policies. Nations felt they lost power as a result of globalism and the interdependence fostered by free trade. In response, leaders like U.S. President Donald Trump advocated expansionary fiscal policies, such as tax cuts, to help businesses. He also argued for bilateral trade agreements between two countries, rather than multilateral agreements between many countries. Mercantilism opposes immigration because it takes jobs away from domestic workers. Trump’s immigration policies followed this mindset. In 2018, Trump’s mercantilist mindset contributed to his launch of a trade war against China. Trump imposed tariffs on Chinese imports, and China responded with its own policies that hurt U.S. exports. Despite announcing a “Phase 1” deal to end the trade war in 2020, President Trump left office without ending the trade war. In fact, with roughly a week left as president, the Trump administration imposed a new round of trade restrictions covering tomato and cotton products from China, citing concerns over slave labor in China.
