Neo-Mercantilism Economic Theory - Essay Example

NEO-MERCANTILISM ECONOMIC THEORY Name of Student Institution affiliation NEO-MERCANTILISM ECONOMIC THEORY Neo- mercantilism is referred to a rebel economic doctrine. This is the first principle in international trade which advocates for setting of high tariffs and implementation of import restrictions in order to protect a country’s domestic industries. The theory fosters a country’s wealth accumulation and power building. Neo- mercantilism was first introduced in the early 19th century in Europe countries’ economies. With Neo- mercantilism economic theory fostering a great debate for past decades this paper highlights on some of the major standouts of this particular economic theory. Mercantilism economic theory is based on the principles that the prosperity of a nation depends on its capital supply which makes the global trade volume unchangeable. The theory also claims that a positive balance of trade between countries is the best option to increase the states held capital represented in bullion (Jin-Young Kim, 2007). It, therefore, advocate for implementation of government's control actions and regulation of commerce trade and economic activities in a country to protect its domestic industries. Therefore, this theory is built on the notion that maximum profits of a country can only be achieved if there are price and supply stability which will boost the maximum benefit of the prizes achieved whereas the exports should be expanded, and the imports reduced in an effort to control capital movement. This reveals the primary aim of the neo-mercantilist theory is to increase the level of foreign reserves that are in possession of a country. On the other hand, this will lead to the monetary and fiscal policies for a particular country to be more effective. The term “mercantile” was first coined by Adam Smith in reference to a country’s political-economic system where the exports are encouraged and the imports are restrained (Gee, 2009). The major primary concept of Neo- mercantilism is its assumption that a country’s wealth is dependent on its possession of precious metals like silver and gold. In the 18th century, these precious metals were the currency forms used in trade between countries. This, therefore, meant that the more a country exported goods, the more gold and silver precious metals it gained as a form of payment. On the other hand importing goods meant that there will be an outflow of the goals and silver from that particular country. Based on this concept most countries in this era strived to maximize their exports while minimizing on the imports. Thomas Mun, a mercantilism writer, claimed that; to sell more of a country’s produces or the ordinary way to increase a country’s wealth is through foreign trade. To support this claim, he also wrote that a country should be ready to sell more of its produce to strangers overseas and limit its intake of foreign goods (Cwik, 2011). This concept in modern day world can be interpreted to mean that a country should maximize on its exported goods and commodities while it discourages imports through the use of tariffs. The neo-mercantilist economy is characterised by the feature of import prohibition where a high tariffs and high taxes are imposed on imported goods. The other feature of a neo-mercantilist economy is a wide range of government subsidies to export products and industries in order to promote export in that particular country. Implementation of this policy will ensure that the application of the neo-mercantilist theory impacts a country’s economy positively. However, this will call for some assumptions to be made in order to have a smooth transition to this theory in any economy. The most significant assumption to aid in transitioning to this particular theory is assuming that the wealth in the world is quite finite. This will ensure that a country does not allow export of the precious metals; gold and silver which have monetary values. In line with this assumption, there is another assumption that relates to it; that the country’s wealth can only grow at the expense of other countries. This means that for the country to generate more wealth, it must be willing to export more that it imports. Maintaining this trade balance will enable the country to maximize its exports while limiting its imports (Jin-Young Kim, 2007). Despite this economic theory existing ages ago, it is still being used in some countries’ economies today. Neo-mercantilist theory of economy can be said to strike a balance of trade surplus as it equates a country’s economic power to political power in boosting exports while minimizing imports. China is one country in the modern day era that has been related to the neo-mercantilist economy. Over the years, China has been criticised for trying to manipulate its currency level by keeping it down deliberately in order to sell more goods to the foreign market especially the Unites States. This action severely limits the imports taken in by this particular country due to the ridiculously high prices they might incur. Through this action, China has been able to amass a considerable amount of wealth. In line with this, it can be claimed that China will eventually abandon this economic theory considering that most European Nations did he same a couple of decades ago in order to continue developing their wealth(Cwik, 2011).. Despite Adam Smith and David Hum being the founding fathers of the Neo-mercantilism economic theory they also offered some criticism of the theory. One major criticism of the theory is the fact that it was viewed as a “zero sum game” where; in order for one country to succeed it another had to lose. Adam Smith argued that trade should be a positive-sum game where all the parties either benefit or lose but not one party benefiting at the expense of the other(Gee, 2009). It is evident in the major principles of neo- mercantilism where in order for a particular country to succeed it had to do that at the expense of other countries where it was exporting its products to. Adam Smith criticises this principle based on the fact that wealth gaining through trade between nations ought to be a collective duty where every country contributes and plays its part but not an individual satisfying course. The other criticism of neo-mercantilism economic theory is the fact that it overemphasises the importance of gold and silver as monetary value but does not put any emphasis on money which is the currently used form of exchange. Adam Smith foresaw the fact that gold and silver would not be the existing form of monetary value in the future, therefore, he was adamant to praise this principle of this theory which highly valued gold and silver. He claimed that its theory on wealth was nonsensical and one which would last for a short while. Smith also argued that gold and silver are not the favourable forms of currencies due to the fact that they were scarce and not widely spread. This is evident due to the fact that there was a large accumulation of these currencies in nations that had surplus raw materials and resources while in the less endowed countries gold and silver was scarce. The other critic of this theory is the fact that it did not support favourable balance of trade in the economies where it was being applied to. Evidently neo-mercantilism economic theory does not support balance trade where the buyers and sellers would all benefit. In order for a particular nation to benefit in the neo- mercantilism economy he had to limit his imports while maximizing on exports. Therefore a country will be benefiting at the expense of another country in dire need of the products it has in possession. This theory has therefore causes frequent wars and conflict between nations where some nations feel like other nations are taking advantage of them(Jin-Young Kim, 2007). Smith also argued that neo-mercantilism economic theory has encouraged colonial expansion which resulted to some countries attaining independence quite late. On the other hand this theory widened the society gap of the rich and the poor where the rich were to the advantage since they would benefit at the expense of the poor. Smith blamed this theory to the current gap between the developed and the developing countries. It’s evident that neo-mercantilism economic theory is has more benefits to individual countries and people than it has to all in general. With wealth gain and development being a general goal to everyone it is true to say that this economic theory is unfair and brutal to the countries which are not endowed with raw materials and resourced. This leads to the conclusion that neo-mercantilism economic theory is not justifiable in any way. References Cwik, P. (2011). THE NEW NEO-MERCANTILISM: CURRENCY MANIPULATION AS A FORM OF PROTECTIONISM. Economic Affairs, 31(3), 7-11. http://dx.doi.org/10.1111/j.1468-0270.2011.02117.x Gee, T. (2009). The World System is Not Neo-Liberal: The Emergence of Structural Mercantilism. Critique, 37(2), 253-259. http://dx.doi.org/10.1080/03017600902760737 Jin-Young Kim,. (2007). From Neo-mercantilism to a Neo-liberal Commerce State?: a political economic meaning of the Korea-US FTA. 21Stcentrypoliticalsciencereview, 17(2), 149-165. http://dx.doi.org/10.17937/topsr.17.2.200709.149 Read More