Key Points
- Mercantilism is a international trade’s theory that belief the wealth of the world is fixed.
- A nation wealth depend on accumulated precious metals earned from exports. Conversely, import goods from other countries would result in an outflow of country’s wealth.
- To put it simply, for the mercantilist export is good, import is bad.
- Mercantilism was using in Europe during mid 16th and late 18th centuries.
- The mercantilist sees international trade as a zero-sum game, where a country gain when another loss.
What Is Mercantilism?
Mercantilism is an economic philosophy that belief the wealth of the world is fixed. So, a national wealth and healthy commerce depend on accumulated precious metals such as gold and silver. The main principle of mercantilism was that it was in a country’s best interests to maintain a trade surplus by maximizing exports and minimizing imports.
The theory of mercantilism viewed international trade as a zero-sum game, where a situation that a country must lose in order for another country to gain. To put it simply, the import country will lose precious metals to export country.
At that time, gold and silver were the currency of trade between countries. A country could earn gold and silver by exporting goods. Conversely, importing goods from other countries would result in an outflow of gold and silver to those countries. A nation that experienced deficit would see its gold and silver outflowing and become poorer.
To increase wealth, a country needs to maintain trade surplus by export more than import. Similarly, the government policies simultaneously promote exports and discourage imports.
History of Mercantilism
The mercantilism is the oldest theory of international trade, which emerged in England in the mid 16th century and ended in the late 17th century. Because the view of trade as a zero-sum game is a flaw of the mercantilism.
By viewing international trade as a zero-sum game, these countries will be aimed to restrict imports as much as possible. If a nation accumulates a lot of precious metals such as gold and silver, the mercantilist nation would think the nation is wealthy, even its citizens not really wealthy.
But zero-sum game usually doesn’t work well in real life. Mercantilism leads to the conflict between trade partners and between colonies and their mother nation. As a result, the commercial rivalry results in military rivalry. This is the reason why the mercantilism was replaced by the theory of Absolute Advantage by Adam Smith in 1776.
However, mercantilism is not really an extinct theory. The mercantilism is the direct ancestor of modern-day protectionism, which is the idea that government protects domestic industries from imports and promotes exports to make trade surplus.
In other words, the protectionism policies is a present-day mercantilism. The modern-day mercantilist policies include import tariffs, subsidizing domestic production, devaluation of the currency to help the exporters, and other trade barriers.
A very simple example of mercantilism is the restrictions between the trade of the United State and China in 21st century, especially during the day of president Donal Trump and Xi Jinping (2017 to 2021).
