Mercantilism was the major economic system of trade that was in operation from around the 16th century to 18th century. There was the belief that the volume of wealth in the world does not change. This system was established on the idea that wealth and power were best served by improving exports and obtaining more precious metals (Pettinger, 2017). This system can be described as a bankrupt theory and therefore inappropriate for the modern world. The principal tenet of this system that a nation should uphold its trade surplus even if using government intervention to limit the imports. It is considered bankrupt for two reasons. First, it does not play within the rules of globalization which has become essential in the current world. Instituting a mercantilism trade policy would mean losing trace partners since there would be the exclusion of their products from accessing the markets of the mercantilist nation. Second, this trade policy would also hurt the consumers in the mercantilist nation since they would lack access to products of higher quality and cheaper from other countries (Pettinger, 2017). This paper will discuss the tenets of the mercantilist system and evaluate why it is a bankrupt theory inappropriate for the modern world.
Mercantilism operates on three main tenets which include maintaining the balance of trade surplus, importation of raw materials while exporting finished goods and protecting the domestic currency. According to the mercantilism policy, the exports should always be more than the imports. This means that a nation sells more than it purchases. The second tenet is that a mercantilist imports raw materials and then exports finished goods (Pettinger, 2017). The reason behind this is that finished commodities have already undergone value addition. The raw materials have undergone a process in which there is the addition of technology, labor, and layers of profits. This system also operates by protecting the domestic currency. This is done through taxation of imports, use of restrictions, quotas, and other applicable trade barriers. It works to uphold the favorable balance of trade and safeguarding the local currency.
Mercantilism is considered a bankrupt theory since it is inconsistent with the concept of globalization has become prevalent internationally. Maintaining trade surplus in the current globalization policy is difficult. For instance, since the United States adopted various policies such as the North American Free Trade Agreement, such gains from mercantilism are reserved. Instead of working to maintain a trade surplus, it has become essential to import foreign products that are cheap than to safeguard the American jobs (Richman, & Richman, 2010). Additionally, the government has facilitated this flow by reducing trade barriers and eliminating taxes on imported commodities. Mercantilism impedes on the growth of the global economy by pushing the producers to makers commodities that do not necessarily have a comparative advantage. Assessing from an economic aspect, mercantilism leads to overproduction of commodities possessing high opportunity cost. For instance, if their trade restrictions prevent importation of clothing, there might be a diversion of resources for the production. The clothing is quite costly to produce due to the high wages demanded by the skilled labor force. Looking at this, the returns from costly clothing will be lower than results that should have been experienced from more appropriate activities (Wang & Zou, 2011). The economic growth of the nation with restrictions is reduced and a nation with low-skilled labor loses opportunities to sell their products resulting in a lower rate of growth.
Looking at the mercantilism policy, the government tries to regulate the performance of the economy and trade to enhance the domestic industry. This is an expense of other nations and trade partners. It is mostly associated with restriction of imports and protection of domestic industries. These policies can potentially anger potential trade partners since there will be exclusion from free access to the markets of the mercantilist nation. Since the country will impose oppressive quotas and tariffs on the imports from other nations, these countries might impose restrictions which will prevent exports (Wang & Zou, 2011). This means that most countries would not be willing to trade with a country that implements mercantilism policies. Ultimately, there is an impediment of the global trade and development of all trade partners is reduced.
Globalization promotes free trade which has various advantages for individuals, businesses, and countries as opposed to when mercantilism trade policies are instituted. Mercantilism policies usually hurt the country's economy since it hurts the individual consumers so as to benefit the producers of that country (Richman, & Richman, 2010). The sole objective of the production in a country is consumption which means that the interests of the producers should only be considered to the extent there is the promotion of the interests of the consumers. However, in a mercantile system, the interests of the consumers are sacrificed to further those of the consumers. This means it puts more consideration on production as opposed to consumption as the outcome of the country's industry and commerce. Additionally, since there no imports, the consumers have limited access to cheaper products from other countries which means the ordinary consumer will suffer (Richman, & Richman, 2010).
As earlier indicated, mercantilism presents a case of exports being a virtue and imports being a vice. In the current trade, environment entails globalization of supply chains for commodities which means mercantilism is a bankrupt theory with no relevance in the present economy. It is essential to note that there is an increasing number of enterprises and not countries that must import components in order to export the final commodities in the global value chains (Richman, & Richman, 2010). It is imperative to note that countries do not compete against one another in trade, but it is companies that get involved in collective trade projects. This shows the essence of having imports and companies get involved in trade and not nations.
From the above discussion, it can be concluded that mercantilism is not appropriate for the modern world of commerce. There has been the evaluation of the main tenets of mercantilism which entail maintaining the balance of trade surplus, importation of raw materials while exporting finished goods and protecting the domestic currency. From this, there has been a discussion that these principles are not applicable in this age of globalization. For instance, preventing imports may anger other potential trade partners which means that a country with a mercantile system may lack a place for its imports. Additionally, this system hurts the consumers by giving priority to the producers. This means that consumer lack cheaper and products of higher quality from other countries. Lastly, in the globalized supply chain, it would be impossible to operate in a mercantile system. This is because companies need to import components from other nations in order to exports their finished products. It, therefore, means that this system is a bankrupt theory and it is not appropriate for the modern world.
Pettinger, T. (2017). Mercantilism theory and examples. Economicshelp.org. Retrieved 3 May 2018, from https://www.economicshelp.org/blog/17553/trade/mercantilism-theory-and-examples/
Richman, J., & Richman, H. (2010). The Scaled Tariff: A Mechanism for Combating Mercantilism and Producing Balanced Trade. Retrieved 3 May 2018, from https://ageconsearch.umn.edu/bitstream/166344/2/Richman%20Richman%20and%20Richman%20ECJILTP.pdf
Wang, G., & Zou, H. (2011). Mercantilism, Foreign Asset Accumulation and Macroeconomic Policy. Retrieved 3 May 2018, from https://mpra.ub.uni-muenchen.de/34519/1/MPRA_paper_34519.pdf
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