Mercantilism Definition Theory History Examples

Mercantilism Definition

Many European nations, including Great Britain and France, were among the firsts to adopt the practice between the 16th and 18th centuries. Under the mercantilism policy, a mother country established colonies in other nations to import cheaper raw materials and export finished products back to them in exchange for gold and silver. In addition to regulating international trade, these countries imposed tariffs, reduced trade deficitsTrade DeficitsWhen the total sum of goods or services that a country imports from other countries is higher than the total sum of goods or services that a country exports to other countries, this is referred to as a trade deficit, which is the opposite of the balance of trade theory.read more, offered subsidies, formed monopolies, and created trade surpluses to expand their precious metals reserves.

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Key Takeaways

Mercantilism defines an economic policy or trade practice that countries adopt to grow their wealth and power by maintaining a favorable balance in trade through increased exports and decreased imports.During the 16th and the 18th centuries, European nations like Great Britain and France used this policy to import cheaper raw materials from their colonies and export finished products to them in exchange for gold and silver coins.Maintaining a favorable balance in tradeBalance In TradeThe balance of trade (BOT) is the country’s exports minus its imports. BOT is one of the significant components for any current economic asset as it measures a country’s net income earned on global investments.read more indicates a zero-sum situation where one country’s loss is necessary for another’s gain.In mercantilistic trading, merchants and the government worked together to accumulate wealth by restricting imports of foreign-made goods. But capitalism focuses on wealth creation by allowing private companies to export their goods with minimum or no government involvement.

History

This economic systemEconomic SystemThere are four prominent types of economic systems in the world based on their characteristics. It includes traditional economy, command economy, market economy and mixed economy. read more of international commerce existed from the 16th century to the 18th century. At that time, gold and silver holdings were the measures of a nation’s wealth. It was the era of the emergence and dominance of nation-states (self-governing countries) and the end of feudalism in Europe. The focus of mercantilism theory was to develop the European economy based on trade.

The concept was introduced in the era of industrializationIndustrializationIndustrialization refers to the transformation of a manual labor-based economy to a machine labor-driven industrial society.read more and capitalism and heavily relied on colonialism. This economic arrangement also acted as economic protectionism as the national government intervened in trade policy creation to protect domestic industries from foreign competitors. The accumulated wealth helped build the national infrastructure, especially business and military. It thus made the mother nation self-sufficient in every aspect.

In short, its emphasis was to maintain a favorable trade balance between the mother nation and mercantilism colonies. Since manufacturing activities were strictly prohibited in these colonies, they served as target export markets for the monopolistic mother country.

Mercantilism In Great Britain

Great Britain was at the forefront of implementing mercantilism policy in its efforts to become a self-sufficient economy. The nation established colonies to overcome challenges in economic growth due to a lack of natural resources. The mother country imported raw materials from these colonies at cheaper rates. And then it exported manufactured products to them. This export trading was carried out in gold, silver, or other metal currencies, which added to the national wealth.

Although the process maintained a favorable balance in trade, mercantilism colonies incurred a huge loss. However, Great Britain compensated for this loss by providing them military security across the borders.

Though the mercantilistic trade practice dominated Great Britain, it influenced every part of the world over time. In the modern world, the concept only applies to restrictions on importing foreign products through tariffs, subsidies, currency devaluationCurrency DevaluationCurrency devaluation is deliberately done in order to adjust the established exchange rates by the government and it is mostly done in the cases of fixed currencies. This mechanism is used by economies with a semi-fixed or fixed exchange rate, and it should not be confused with depreciation.read more, etc.

Examples

Let us consider the following mercantilism examples to understand the concept better:

Example 1

The mother nation A imports coffee beans and varieties of tea leaves from its colonies Nation B and C, at a comparatively cheaper rate. Though nations B and C know that the deal will lead to a considerable loss, they still agree to continue with it as they require military support from the mother country. Moreover, the mother nation has restricted the two colonies from interacting or trading with each other.

Nation A not only received huge profits by manufacturing and selling finished products to its colonies, but it also empowered itself in terms of precious metals it received in return. On the other hand, colonists suffered losses by losing resources and wealth continuously while paying tariffs on imported manufactured goods.

Example 2

The mercantilistic trade policy changed over time, even after its end in the 18th century. Here is an example of one of its modern forms, Techno-nationalism, also known as a new strain of mercantilist thinking.

Much like the classic mercantilism theory, where national power and wealth were interconnected, techno-nationalism connects technological advancements to national security and economic growth.

Many countries are adopting this policy to gain a competitive advantage in geopolitics and international tradeInternational TradeInternational Trade refers to the trading or exchange of goods and or services across international borders. read more. For instance, China has forbidden all its government institutions and agencies from using computers and software imported from foreign nations. Similarly, the United States and Russia are exploring techno-nationalism to counterbalance China’s aggressive state-centric capitalism.

Mercantilism vs Capitalism

Mercantilism is a systematic trade practice wherein merchants collaborate with the government to accumulate wealth and resources by restricting imports of foreign-made products. Capitalism emphasizes wealth creation by letting private companies export their goods with minimum or no government involvement.

Instead of the government, privately owned enterprises control the trade and industry of a nation through capitalism. But in mercantilistic trade practice, the government regulates international trade and the national economy. While the former targets business or industrial expansion, the latter aims at increasing exports of traded goods. Also, tariff rates are relatively low in capitalism compared to mercantilistic trade.

The Columbian exchange acted as the landmark for the mercantilists during the 15th and 16th centuries. But it gradually created pressure on colonialists that delivered raw materials to their mother country at cheaper rates. In return, they bought finished products at significant prices while making tariff payments for the imports. As a result, colonists felt exploited while working for the benefit of their mother country.

With capitalism gaining dominance during that era, these colonists were encouraged to export their products directly to the interested buyers and enjoy the private share of the major productions. This system of operating privately with little to no government involvement allowed companies to work for their self-interest rather than paying another nation.

Though profits or wealth, in both trade practices, were distributed in the countryside, it could hardly reach the rural areas. In addition, under capitalism, the owners made the peasants work under harsh conditions, exploited them, and paid them lower wages.